The Supreme People’s Court has released seven typical cases involving commercial franchising, highlighting judicial efforts to regulate the sector and promote its sound and orderly development.
Commercial franchising, commonly known as chain franchising, is a business model in which an enterprise possessing operational resources such as registered trademarks, corporate logos, patents or proprietary technologies licenses those resources to other business operators under a contract.
Franchisees conduct business under a unified operating model and pay fees to the franchisor. The model is commonly found in sectors closely related to people's everyday lives, including catering, retail, hospitality, education and training, express delivery and logistics, and beauty services.
Courts nationwide have handled a growing number of disputes arising from occasions where some franchisors exaggerate their claims or pursue unchecked expansion, while some franchisees overlook risks and make investment decisions without sufficient due diligence.
Against this background, the seven cases were released to provide guidance for the honest and compliant operation of market entities.
The cases clarify how courts determine whether a contractual relationship constitutes commercial franchising. To evade regulatory requirements, some franchisors divide a franchise agreement into several contracts or present it as another type of agreement.
In one of the cases, the court looked beyond the form of the contract and examined the parties’ actual rights and obligations. Finding that the relationship bore the legal characteristics of commercial franchising, it determined that a franchise agreement had been formed.
They showcase courts’ efforts to protect the legitimate rights and interests of franchisees. Information asymmetry and unequal bargaining power can place franchisees at a disadvantage and lead to an imbalance of rights and obligations.
In one case, the court held that a franchisee’s right to unilaterally terminate an agreement during a “cooling-off period” is a statutory right, even where the contract contains no such clause. The right may be exercised within a reasonable period before the franchised business resources have been put to actual use.
In another case, the court supported the franchisee’s request to terminate the agreement after the franchisor’s filing was revoked during the term of the contract, as this had significantly weakened its ability to perform its obligations.
The cases underscore franchisors’ statutory obligations. Franchisors must abide by the Civil Code and the Regulations on the Administration of Commercial Franchising, among other laws and regulations, while conducting business operations.
In one case, the court held a franchise agreement invalid because the franchisor was an individual business operator rather than an enterprise, and therefore lacked the statutory qualifications to act as a franchisor. The ruling has helped curb unauthorized franchising activities by unqualified entities.
In another case, the court rescinded a franchise contract after finding that the franchisor had misled the franchisee through false advertising, which constituted fraud. The ruling has effectively curbed deceptive franchising schemes.
The cases also demonstrate courts’ firm action against illegal and criminal activities in the franchising sector. Administrative law enforcement and criminal justice measures have been applied to crack down on pyramid selling, fraud and improper marketing practices.
The court upheld an administrative penalty imposed on a franchisor in one case that had engaged in franchising without meeting the statutory requirement of operating at least two directly owned outlets for more than one year.
In another, defendants without franchising qualifications or franchising resources induced victims to enter into franchise agreements and pay franchise fees. The court found them guilty of contract fraud, helping prevent disputes at the source and encouraging market entities to operate with integrity and in accordance with the law.
Going forward, courts around the country will continue to refine adjudication rules for commercial franchising cases while performing their adjudicative roles, and contribute to the building of a world-class business environment that is market-oriented, law-based and up to international standards.
