Legally Implementing a Franchise in Russia

Ekaterina Karlova
LL.M.
Beiten Burkhardt

Although the Russian equivalent of the word franchising is widely used in practice, literature and even court judgments, Russian legislation does not contain such a term or its definition. Nevertheless, this does not mean that franchising relations are not legally regulated in Russia.

Traditionally, franchising means that one party — the owner of the business — provides another party with the right to implement its business model by using its trademark, know-how, commercial designation and other intellectual property objects.

In Russian legislation, legally implementing franchising relations is specified in Chapter 54 of the Civil Code of the Russian Federation, named commercial concession. Therefore, according to Russian law, franchising relations should be legally implemented in the form of an agreement on commercial concession (widely known as a franchising agreement).

The main characteristic of a franchising agreement is that it allows the entire scope of relations that may arise between parties in relation to provision of the right to use the business model to be regulated. In particular, all conditions of business management, rights and obligations of the parties, payment system, limitation of the parties’ rights and termination of the agreement are included.

As far as a franchising agreement entitles one of the parties to use intellectual property objects and means of individualization, such as a trademark, know-how, or commercial designation, it could be argued that franchising agreements have a lot in common with licensing agreements providing the right to use intellectual property objects. However, a franchising agreement has its own peculiarities and cannot be replaced by a licensing agreement. The main specific features of a franchising agreement are connected with its subject matter according to which the user (or franchisee) obtains the right to use the scope of exclusive rights belonging to the right holder (franchisor).

While a franchising agreement regulates the wide scope of relations connected with the transfer of the right to use a business model and can even have elements of a sales agreement, agreement on provision of services and some others, there are several mandatory requirements with which a franchising agreement should comply in order to be valid. Among such requirements are agreement of the parties on material conditions and formal requirements on execution of the agreement. Material conditions include agreement of the parties on the subject matter and price.

Pursuant to the amendments to the Civil Code of the Russian Federation that came into force as of January 1, 2008, the subject matter of the franchising agreement has been substantially changed, and currently the subject matter of the franchising agreement includes the rights to use a trademark, service mark and any other objects of exclusive rights, in particular commercial designation and know-how. The most controversial element of the subject matter of the franchising agreement — the right to use the firm name — has been excluded. An interpretation of article 1027 of the Civil Code of the Russian Federation is that the subject matter of the franchising agreement should contain an obligatory provision on granting the right to use the trademark, service mark, commercial designation and know-how. Another material condition of the franchising agreement is dependent on the price to be paid to use the scope of exclusive rights, meaning that the right to use the scope of exclusive rights cannot be granted on a free-of-charge basis.

Finally, for a franchising agreement to be valid, formal requirements have to be observed, namely the franchising agreement has to be executed in written form and registered with the federal executive authority on intellectual property (Rospatent).