The regulation of franchises in Spain as opposed to in the United States has important differences, despite the origin of the franchise contract in the United States and its later adoption by Spanish legislation. The following article analyses the regulations for franchises in both countries, focusing on the differences.
Franchise regulation in the United States
In the United States, franchises are regulated at both the federal and state level. A the federal level, the basic legislation is included in the so-called “FTC Franchise Rule,” or the “FTC Rule”, established by the Federal Trade Commission (FTC).
The FTC Rule provides a definition of a franchise based on three essential elements:
- The existence of a registered trademark
- The franchisor maintaining significant control over the franchise
- The obligation to provide economic compensation to the franchisor in order to use the franchise
In addition to establishing the definition of a franchise, the FTC Rule requires the franchisor to create a disclosure document, called the “franchise disclosure document” (FDD), which must include up to 23 specific types of information (including basic information about the business, its history of litigation and bankruptcy, charges, economic conditions, and information about trademarks and intellectual property). The FDD must be available to potential franchisees at least 14 calendar days before the signing of the franchise contract. This guarantees the maximum transparency between the parties. No prior registration or approval by any authority is required to carry out the franchise contract.
At the state level, some states require a greater disclosure of information, as well as the registration of the franchise in a special franchise registry. Accordingly, at least 18 states have legislated on this matter, regulating aspects such as the termination of the contract, non-compete agreements, or the control of promotional content.
The primary purpose of state regulation is to correct the unequal bargaining power between franchisors and franchisees, achieved through the incorporation of measures like the “good cause” requirement for the termination of the contract.
Regulation of franchises in Spain
In Spain, the franchise contract is considered atypical. At the national level, franchises are regulated by Real Decree 201/2010, of February 26, which regulates the exercise of franchise commercial activity and the communication of information to the franchise registry- and article 62 on Retail Trade law 7/1996.
The three essential elements of the franchise contract in Spain are:
- The assignment of the use of a trademark, or corporate image, or uniform presentation of premises or means of transportation
- The transfer of technical knowledge or “know how”
- The commercial and/or technical support from the franchisor
According to Art. 5 of Real Decree 201/2010, physical or legal persons that intend to develop a franchise in Spain must communicate its information, within three months from the initiation of the activity, either to the Autonomous Community registry where the activity is carried out or, when the Autonomous Community does not establish the need for the communication of such information, to the franchise registry of the Ministry of Tourism and Trade. Failure to register will involve a significant economic sanction.
Nonetheless, this registration requirement does not apply to franchises established in other member States of the European Union that operate under the freedom to provide services, but without a permanent establishment in Spain.
Registration in the registry must include, at a minimum, the following aspects:
- Information related to the franchisors
- Designation of industrial and intellectual property rights
- Description of the franchise´s business objective, including the number of franchisees
Additionally, the franchisor is required to provide detailed information of its network of franchises to the franchisee at least 20 days prior to the signing of the contract.
In general, given the adoption of Anglo-Saxon franchise legislation by Spanish authorities, Spanish franchise regulations and franchise regulations in the United States have similarities in their general structure. These include the importance of having a registered trademark, and the requirement that the franchisor provide the franchisee with the aforementioned information to guarantee transparency of the franchise and the legal security of the franchisees.
Nevertheless, after years of franchise development as an atypical contract in Spain, many significant differences have arisen between the two structures which are important to know.
Notable differences required by Spanish legislation include the transfer of “know how” and technical knowledge as essential elements of the franchise, as well as the franchisor’s obligation to actively collaborate in the promotional activities of the franchise. Furthermore, the existence of a public franchise registry, where the franchisor must periodically update information in order to provide greater legal security to operations, should be taken into account. On this point it should be noted that several states in the United States have also introduced the obligation of prior registration in their legislation.
The regulation of franchises in Spain is different from that of the United States in several respects, a fact that American franchisors must take into account when developing their activity in Spain.
This article is not considered as legal advice