Mexico Amends Its Franchise Law

On Jan. 26, 2006, an amendment to the Mexican Industrial Property Law (Ley de la Propiedad Industrial) (“IPL”) became effective. The new amendment mandates new requirements for presale franchise disclosure and for franchise agreements. To comply with the law, most franchisors will need to change their existing forms of franchise agreements used in Mexico.

Franchise Agreement Requirement

The new amendment is primarily devoted to issues that must be addressed in franchise agreements. Franchise agreements must be written and must contain information concerning:

1) Geographical area where the franchisee may operate;

2) Location, minimum size, and investment characteristics of the infrastructure relating to the premises that the franchisor requires;

3) Franchisor's policies relating to inventory, marketing, and advertising that are related to products that may be purchased and suppliers that may be used by the franchisee;

4) Franchisor's policies and procedures relating to reimbursement of monies paid by the franchisee, financing, and other economic terms of the relationship;

5) Applicable criteria and methods to determine a franchisee's profit and/or commission margins;

6) Technical and operational training required of the franchisee's personnel, as well as the method or manner in which franchisor will provide technical assistance to franchisees;

7) Criteria, methods, and procedures employed to supervise and evaluate the quality of services that are to be provided by the franchisee and the franchisor;

8) Whether the franchisee may subfranchise and, if so, the applicable terms and conditions;

9) Events of termination of the franchise agreement; and

10) Circumstances under which the parties may mutually agree to amend the franchise agreement.

Disclosure Standards

Under the new legislation, franchisors are required to provide a presale disclosure document to prospective franchisees at least 30 days before the parties execute a franchise agreement. The prior franchise law did not provide a timetable for presale disclosure. Franchisees who receive disclosures that are inaccurate may sue the franchisor for damages within 1 year after they sign the franchise agreement, and they also may void their franchise agreements at any time. The law authorizes the Mexican Institute of Industrial Property (“IMPI”) to take administrative action against franchisors who violate the law.

Prohibited Practices

Unless otherwise agreed in the franchise agreement, (i) a franchisee is under no obligation to sell its assets to the franchisor or any third party upon the termination of the franchise agreement, and (ii) a franchisee has no obligation to sell or transfer the shares of its company or franchisor involved in the organization and operation of its business, except to guarantee compliance with image standards of the franchise as provided in the agreement.

The new amendment prohibits franchisees from disclosing the franchisor's confidential information during and after the term of the franchise agreement.

Finally, neither a franchisor nor a franchisee may unilaterally terminate or rescind a franchise agreement unless the term provided is indefinite, or there is just cause for termination. Failure to follow the franchise agreement's standards for termination is a violation of the law.

Interpretation of the New Amendments

The ambiguous language used to describe certain requirements in the franchise agreement (ie, investment characteristics of infrastructure and criteria and methods to determine a franchisee's profit and/or commission margins) does not provide practitioners with sufficient guidance regarding how to comply with the new requirements. In addition, the legislation contains a troubling stated purpose: ” … to guarantee non-discriminatory treatment for all franchisees of the same franchisor.” Some of these ambiguities and an expanded list of mandatory presale disclosures may be addressed in regulations to be issued by IMPI in the future.

On Jan. 26, 2006, an amendment to the Mexican Industrial Property Law (Ley de la Propiedad Industrial) (“IPL”) became effective. The new amendment mandates new requirements for presale franchise disclosure and for franchise agreements. To comply with the law, most franchisors will need to change their existing forms of franchise agreements used in Mexico.

Franchise Agreement Requirement

The new amendment is primarily devoted to issues that must be addressed in franchise agreements. Franchise agreements must be written and must contain information concerning:

1) Geographical area where the franchisee may operate;

2) Location, minimum size, and investment characteristics of the infrastructure relating to the premises that the franchisor requires;

3) Franchisor's policies relating to inventory, marketing, and advertising that are related to products that may be purchased and suppliers that may be used by the franchisee;

4) Franchisor's policies and procedures relating to reimbursement of monies paid by the franchisee, financing, and other economic terms of the relationship;

5) Applicable criteria and methods to determine a franchisee's profit and/or commission margins;

6) Technical and operational training required of the franchisee's personnel, as well as the method or manner in which franchisor will provide technical assistance to franchisees;

7) Criteria, methods, and procedures employed to supervise and evaluate the quality of services that are to be provided by the franchisee and the franchisor;

8) Whether the franchisee may subfranchise and, if so, the applicable terms and conditions;

9) Events of termination of the franchise agreement; and

10) Circumstances under which the parties may mutually agree to amend the franchise agreement.

Disclosure Standards

Under the new legislation, franchisors are required to provide a presale disclosure document to prospective franchisees at least 30 days before the parties execute a franchise agreement. The prior franchise law did not provide a timetable for presale disclosure. Franchisees who receive disclosures that are inaccurate may sue the franchisor for damages within 1 year after they sign the franchise agreement, and they also may void their franchise agreements at any time. The law authorizes the Mexican Institute of Industrial Property (“IMPI”) to take administrative action against franchisors who violate the law.

Prohibited Practices

Unless otherwise agreed in the franchise agreement, (i) a franchisee is under no obligation to sell its assets to the franchisor or any third party upon the termination of the franchise agreement, and (ii) a franchisee has no obligation to sell or transfer the shares of its company or franchisor involved in the organization and operation of its business, except to guarantee compliance with image standards of the franchise as provided in the agreement.

The new amendment prohibits franchisees from disclosing the franchisor's confidential information during and after the term of the franchise agreement.

Finally, neither a franchisor nor a franchisee may unilaterally terminate or rescind a franchise agreement unless the term provided is indefinite, or there is just cause for termination. Failure to follow the franchise agreement's standards for termination is a violation of the law.

Interpretation of the New Amendments

The ambiguous language used to describe certain requirements in the franchise agreement (ie, investment characteristics of infrastructure and criteria and methods to determine a franchisee's profit and/or commission margins) does not provide practitioners with sufficient guidance regarding how to comply with the new requirements. In addition, the legislation contains a troubling stated purpose: ” … to guarantee non-discriminatory treatment for all franchisees of the same franchisor.” Some of these ambiguities and an expanded list of mandatory presale disclosures may be addressed in regulations to be issued by IMPI in the future.