Franchising | Performance of the Franchisor's Registration Obligations and Analysis of Legal Risks
Published:
2024-11-21
The filing system is an important system in commercial franchising, with multiple functions and roles. Contract filing is also a crucial part of the franchisor's business activities. The "Regulations on the Administration of Commercial Franchising" and the "Administrative Measures for Commercial Franchising Filing (2023 Revision)" provide detailed regulations on filing. However, in practice, franchisors often overlook the filing process, leading to legal risks. This article elaborates on how franchisors should fulfill their filing obligations and the risks associated with failing to do so.
The filing system is an important system in commercial franchising, with multiple functions and roles. Contract filing is also an important link in the franchisor's business activities. The "Regulations on the Administration of Commercial Franchising" and the "Measures for the Administration of Commercial Franchising Filing (2023 Revision)" provide detailed regulations on filing. However, in practice, franchisors often neglect the filing process, leading to legal risks. This article elaborates on how franchisors should fulfill their filing obligations and the risks of not fulfilling these obligations.
I. Legislative Purpose of the Filing System
1. The need for regulatory oversight by functional departments
Franchisors are required to file for franchising, which facilitates effective supervision and management of franchisors' business activities by the competent authorities, helps to timely grasp relevant information about franchisors, and formulates policies for franchising activities in a targeted manner.
2. The need to maintain market order and promote the healthy development of franchising
The filing system publicizes relevant information about franchisors, allowing the public to effectively supervise and ensuring the healthy and stable development of the franchising order.
3. The need to reduce operational risks for franchisees and protect their interests
Before franchisees join a brand for franchising, they will investigate the franchisor. The filing system helps franchisees understand the basic situation of the franchisor, avoiding blind investment decisions and reducing operational risks.
4. The need for franchisors to standardize operations and enhance market competitiveness
Filing by franchisors reflects their standardized and legal operations, which can expand the market influence of franchisors and enhance competitiveness.
II. Precautions for Franchisor Filing
1. Filing Authority
For commercial franchising activities conducted within the province, autonomous region, or municipality directly under the central government, the filing should be made to the business administration department of the people's government of the franchisor's location; for franchising activities across provinces, autonomous regions, or municipalities, filing should be made to the Ministry of Commerce.
2. Filing Method
Filing should be done through the national network filing system established by the Ministry of Commerce.
3. Time Limit Requirements
Filing should be applied to the filing authority within 15 days from the date of signing the first franchising contract with franchisees in China. At the same time, franchisors should report the status of franchising contracts signed, revoked, terminated, or renewed in the previous year to the filing authority by March 31 each year.
4. Material Requirements
According to Article 6 of the Measures for the Administration of Commercial Franchising Filing (2023 Revision), franchisors need to submit 11 types of materials, including basic information on commercial franchising and the distribution of all franchisee stores in China, as well as other materials deemed necessary by the filing authority.
5. Filing Changes
If there are changes in the franchisor's business registration information, operational resource information, or the distribution of all franchisee stores in China, the filing changes should be made within 30 days from the date of change.
6. Filing Revocation
If a franchisor has canceled its business registration, had its business license revoked, concealed relevant information, or provided false information causing significant impact, the filing authority may revoke the filing.
III. Legal Consequences of Franchisors Not Filing According to Law
The direct legal consequence of a franchisor not filing according to law is administrative punishment.
1. If a franchisor fails to file as required, the business administration department will order the franchisor to file within a specified time and impose a fine of between 10,000 and 50,000 yuan; if the filing is still not done after the deadline, a fine of between 50,000 and 100,000 yuan will be imposed, and it will be announced.
2. If a franchisor fails to report the status of franchising contracts for the previous year to the filing authority as required, the business administration department will order correction and may impose a fine of less than 10,000 yuan; if the circumstances are serious, a fine of between 10,000 and 50,000 yuan will be imposed, and it will be announced.
On September 26, 2023, the Shanghai Municipal Market Supervision Administration issued Administrative Penalty Decision No. 322023000190: The party Yi Cheng (Shanghai) Enterprise Management Co., Ltd. conducted franchising activities for the "Escape Garden" tea brand in the form of a "regional agency and regional operation contract." On February 23, 2021, the party signed the first franchising contract but failed to file with the business administration department from the date of contract signing until the case occurred, resulting in a fine of 20,000 yuan.
On July 30, 2024, the Huangshi Municipal Market Supervision Administration issued Administrative Penalty Decision No. 147: The party Huangshi Ouyou Cultural Communication Co., Ltd. signed the "Ouyou Dance Franchise Contract" with the franchisee (Zhu Min) on May 21, 2022. The party conducted franchise business without applying for commercial franchising filing. On April 28, 2024, the Municipal Bureau of Commerce delivered a "Notice of Rectification within a Time Limit" to the party, which submitted relevant materials to apply for filing, but the Municipal Bureau of Commerce deemed that the filing conditions were not met. By the end of the case investigation, the party had not obtained commercial franchising filing, resulting in a fine of 15,000 yuan.
On June 4, 2024, the Beijing Municipal Market Supervision Administration issued Administrative Penalty Decision No. 167. The party Zhongjiao Le'en Education Technology (Beijing) Co., Ltd. used the "New Voice Line - Language Art -" trademark as a business resource and authorized other operators to use it in written contracts, requiring payment of corresponding fees. The party failed to file with the business administration department within 15 days from the date of signing the first franchising contract; after being ordered to correct, the party applied for filing to the business administration department on March 25, 2024, which was more than one year from the date of signing the first franchising contract, resulting in a fine of 32,000 yuan.
IV. The Impact of Franchisors Not Filing According to Law on Contract Validity
If a franchisor fails to file with the business administration department as required by law, what impact does it have on the validity of the franchising contract? Judicial practice generally believes that the provisions of the "Regulations on the Administration of Commercial Franchising" regarding franchisor filing are intended to facilitate the supervision of franchisors by the business administration department and the public, to standardize the franchisor's business behavior, and do not negate the validity of the franchising contract. In essence, it belongs to mandatory management regulations rather than mandatory validity regulations. The franchisor's failure to file does not affect the validity of the franchising contract.
The People's Court of Yueqing City, Zhejiang Province (2023) Zhe 0382 Min Chu No. 11396 Civil Judgment states: Regarding franchisor filing, Article 8 of the "Regulations on the Administration of Commercial Franchising" stipulates that franchisors should file with the business administration department within 15 days from the date of signing the first franchising contract according to the provisions of this regulation. This regulation is a mandatory management regulation, and if the franchisor does not file, it will not automatically affect the validity of the franchising contract.
The People's Court of Qingpu District, Shanghai (2023) Hu 0118 Min Chu 10335 Civil Judgment states: The court believes that Article 8 of the "Regulations on the Administration of Commercial Franchising" stipulates that "the franchisor shall, within 15 days from the date of the first signing of the franchise contract, file with the competent business department in accordance with the provisions of these regulations." This provision is a mandatory regulatory norm. If the franchisor does not file, it does not directly affect the validity of the civil contract, nor is it a separate basis for terminating the contract. The claim made by Xiyuelai Company is not accepted by this court.
The Intermediate People's Court of Zhanjiang City, Guangdong Province (2023) Yue 08 Min Zhong 3712 Civil Judgment states: The provision in Article 8 of the "Regulations on the Administration of Commercial Franchising" that "the franchisor shall, within 15 days from the date of the first signing of the franchise contract, file with the competent business department in accordance with these regulations" is a regulatory norm, and the franchisor's failure to file does not affect the validity of the franchise contract.
However, in judicial practice, there are still a very small number of judgments that determine that the franchise contract is invalid or that the termination of the contract is affected when the franchisor has not filed, which is worth noting. For example, the People's Court of Mudan District, Heze City (2021) Lu 1702 Min Chu 3108 Civil Judgment determined: Article 8 of the "Regulations on the Administration of Commercial Franchising" stipulates that the franchisor should file, but the plaintiff, Heze City Kuka Youth Science and Technology Education Center, did not provide relevant evidence. Therefore, the plaintiff did not have the qualification of a franchisor when signing the contract with Zhou Yinfeng on December 26, 2019. The "Agreement" signed by both parties is an invalid contract and has no legal binding force from the beginning (this judgment was revoked by the Intermediate People's Court of Heze City in the civil ruling (2021) Lu 17 Min Zhong 4889). Furthermore, the People's Court of Huishan District, Wuxi City (2022) Su 0206 Min Chu 1749 Civil Judgment determined that the fact that Rongxin Company did not disclose the non-filing situation to Yang Hui had a certain impact on the final termination of the contract, and the judgment terminated the contract in question (this judgment was overturned by the Intermediate People's Court of Wuxi City in the civil judgment (2023) Su 02 Min Zhong 235, which stated that for the non-filing, Rongxin Company should bear corresponding administrative responsibilities, but it does not necessarily lead to the legal consequences of invalidity or termination of the contract in question. The fact that Rongxin Company did not file is unrelated to the termination of the contract in question).
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