You can be found to be running a franchise business even if you are not calling it a “Franchise”!

Management consultant Peter Drucker once said, “If you can’t measure it, you can’t manage it.” Our Domestic Trade, Cooperatives and Consumerism Ministry (“the Ministry”) must have applied this well-known management principle in its plan to monitor the progress of the franchise industry in Malaysia. As you may know, the Malaysian franchise industry is regulated by the Franchise Act 1998 (“the Act”). The provisions of the Act apply to the sale of any franchise (whether local or foreign) in Malaysia, where the franchised business operates in Malaysia. All franchisors must register their franchise with the Franchise Registry before he or she can make an offer to sell the franchise to a third party.

As only “franchisors” are required to be registered with the Registry and not “franchisees”, the Ministry proposed to amend the Act to include the mandatory requirement for “franchisees” to be registered as well. According to Minister Datuk Seri Ismail Sabri Yaakob, “the amendment was necessary because the Ministry could not get a clear picture of the earnings of the franchisees as most of them were not registered with the Ministry.”

Following this, the Franchise (Amendment) Bill 2012 (“the Bill”) was tabled for the first reading by Deputy Domestic Trade, Cooperatives and Consumerism Minister Rohani Abdul Karim at the Dewan Rakyat in June this year. There are salient changes brought forth by the Bill. For instance, the Act currently only requires franchisors to register their franchise with the Registry before an offer to sell the franchise is made to another person. With the amendments, a franchisor will now have to register his franchise before he even starts to operate his franchise.

What does this mean in a practical context? Let us visit the effect of this amendment through some case studies.

Case Study 1:

If a local businessman, Khan, intends to start selling franchises for his café in the future but has yet to get his house in order (i.e., have standard operating procedures ironed out, competent staff hired and trained, accounting systems in place, etc) – is Khan considered to be “operating a franchise” and does he need to register his “franchise”?

The simple answer to this is “No”. A “franchise” is defined in the Act to mean an agreement between two parties where one party grants the other the right to operate a business according to a system and rights to use the Intellectual Property of the franchisor. In a “franchise”, the franchisor possesses the right to administer continuous control during the term over the franchisee’s business operations to ensure it is carried out according to the predetermined system. Based on the above definition (which is a truncated version of the defi nition from the Act), Khan is not operating a franchise. He is merely running his own business. There is no “franchisor” or “franchisee”. Khan can continue to build his business with the intention to franchise his business at a later date. Only when Khan decides that his business is ready to be franchised and begins discussions with potential investors who are interested to take up a franchise or become a franchisee, then that will be considered “an offer to sell a franchise” and Khan will be caught by the Act. Therefore, prior to that discussion, Khan should register his business with the Franchise Registry.

Case Study 2:

Matthew is a Malaysian who has bought a franchise from an American ice cream parlour. He is the Master Franchisee for the Malaysian market and his franchise agreement allows him to sell franchises to other interested parties in Malaysia. However Matthew is not keen to explore that option as yet and prefers to operate his own ice cream parlours under the franchise. Is Matthew considered to be “operating a franchise” and does he need to register his “franchise”?

I guess that since the brief definition of a “franchise” has been laid out for the readers above, this would be an easy question to answer. Is there a franchise agreement between two parties? Yes. Does he intend to operate the franchise in Malaysia? Yes. Although it appears as if Matthew has to register his franchise as he “is operating a franchise” – that is not the case. Remember – he is operating a franchise as a “franchisee” and not as a “franchisor”.

Under the old Act, only franchisors are required to register their franchises and as Matthew was considered a “franchisee” and not a “franchisor”, he would not need to register his franchise. Only when he becomes a “franchisor” by virtue of selling sub-franchises to other franchisees, does he fall within the Act and registration becomes compulsory.

However with the changes introduced by the Ministry, the amended Act requires all “franchisees” to register their business with the Registry regardless of whether they have been granted a franchise from a local or foreign franchise. Matthew will therefore be caught within the amended Act and will need to register his franchise before commencing his business.

Another major change brought by the amended Act is the imposition of heavy penalties. Under the old Act, the maximum penalty one can face for not adhering to the provisions of the Act is RM50,000. Under the amended Act, the maximum penalty that can be imposed on a company is RM500,000 and the maximum penalty on an individual is RM250,000 or jail term of three years or both (financial penalty plus the jail term). The heavy penalty is intended to serve as a strong deterrent to franchisors and franchisees from conducting franchise businesses in Malaysia without registering their businesses with the Registry.

Further to the above, the amended Act clearly states that it is an offence to hold out a business as a franchise. The amended Act states the following in verbatim: A person who assumes or uses in relation to its business, the term “franchise” or any of its derivatives or any other words indicating the carrying on of a franchise business, including the use of the word “franchise” or any abbreviation thereof as part of the name or title in documents, agreements, books, advertisements or publications, without approval of registration by the Registrar under section 8 commits an offence.

The inclusion above renders any arrangement between two parties that is akin to a franchise business registrable under the Franchise Registry notwithstanding what the arrangement is called. Regardless of whether it is called a Licensing Agreement, a Distributorship Agreement or an Agency Agreement, if the arrangement between the parties is that of a franchise business, then the parties to the agreement have to register their business with the Registry.

Although there are other changes to the Act, the above ones are the most salient ones that both franchisors and franchisees need to be aware of. The changes that may be viewed as onerous and not business-friendly by those in the industry, are found to be necessary by the Domestic Trade, Cooperatives and Consumerism Ministry to analyse the earnings of the franchise industry in Malaysia which is currently not reflected accurately.

The Bill has been approved and is currently awaiting publication in the Government gazette. Officials at the Ministry have informed us that it is likely that the Act will be enforced as early as January 2013.

Geetha KGeetha K. is the Director of Trademark and Industrial Designs Division at KASS International. She has extensive experience in handling all aspects of trademarks and designs in various industries, including pharmaceutical, food & beverage, property development, automotive and apparel industries, and manages local, regional and international portfolios. She drafts franchise agreements, assists with the registration of franchises and advises Franchisors and Franchisees. She has also written articles for various local and overseas publications, such as the Institute of Trade Mark Attorneys (ITMA) magazine. Her comments on case law in Malaysia and Singapore have also been quoted in publications abroad such as Asia IP magazine and Managing Intellectual Property magazine, a Euromoney Publication (UK). If you have any queries or need more information, please visit www.kass.com.my or drop an e-mail to ipr@kass.com.my.

Leave a reply

Your email address will not be published. Required fields are marked *