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17 de Setiembre del 2007 | Add to Delicious | Share Article

The Supreme Court of Justice has resolved new disputes related with franchises in Mexico and it is of the utmost importance to take into account that these systems in Mexico have stopped being considered as atypical contracts. Current legislation in Mexico has not only adapted, it has also taken into account the development of the economy and the defense of franchise purchasers.

Legal Considerations regarding Franchises in Mexico

I. Documents Prior to the Franchise Agreement.

Franchise Undertaking Agreement. This is a preparatory contract laying down the main features of the franchise, such as: initial consideration, royalties, mark(s), location, etc. This agreement may or may not for consideration; this feature will determine the obligations in case of rescission. The Franchise Undertaking Agreement may be signed even when the franchisor has not yet registered the mark.

Franchise Offer Circular (COF by its initials in Spanish). This document, which until 2005 was customary between franchisee and franchisor, has since January 2006 become compulsory for the franchisor to deliver to the franchisee thirty days before the date on which the franchise agreement will be signed. This document has to contain the technical, economic and financial information, namely: age of the franchisor company and, if applicable, master franchisor in the business subject matter of the franchise, industrial property rights involved in the franchise, amounts and items of the payments which the franchisee must make, types of technical support, etc.

II. Requirements Prior to the Franchise Agreement.

Registered Trademark. The registered trademark is a fundamental requirement, since the Industrial Property Act [Ley de la Propiedad Industrial] indicates it as such. It is essential for it to be a mark and not a brand slogan or trade name, since these are not types of mark, but instead different kinds of industrial property.

Operating Manuals. We recommend that Operating Manuals be prepared by the client and then checked by our firm, as nobody knows the business better than the client. It is however important for our advisors to be aware of the strengths of the business in order to emphasize them and make the relevant recommendations.

III. Franchise Agreement

Article 142 of the Industrial Property Act [Ley de la Propiedad Industrial] defines the Franchise Agreement as follows:

Article 142. A franchise shall exist when, with a license to use a mark, granted in writing, technical know-how is transmitted or technical support is provided, so that a the person to whom it is granted may produce or sell goods or provide services uniformly and with the operative, commercial and administrative methods established by the owner of the mark, aimed at maintaining the quality, prestige and image of the products or services which it distinguishes.

The Franchise Agreement may contain as many exhibits as necessary, such as: Use of Trademark License, Supply Agreement, Distribution Agreement, Confidentiality Agreement, etc. The exhibits form part of the same Agreement, incorporated by references.

In the case of Foreign Franchises, it is fundamental that not only the Franchise Agreement, but all of the legal instruments are tailored to the Mexican laws and regulations, since foreign legislation does not apply in the same way in Mexico and even the smallest legal details have to be anticipated in order to have the same or a similar effect as they do abroad.

IV. Other Laws Applicable to the Franchise Agreement

While franchises in Mexico are specifically regulated by Articles 142, 142 Bis, 142 Bis 1, 142 Bis 2 and 142 Bis 3, of the Industrial Property Act, they are not the only legal provisions applicable. In principle, these Articles lay down the definition of a franchise and its basic aspects; however there are other laws which are also applicable. They are:

The Political Constitution of the United Mexican States: The Constitution prescribes constitutional rights that are inviolable and exempt from attachment. However, there are certain situations, such as the Prohibitive Clause of similar activities in case of termination of the Agreement, where it only applies in some cases.

Liquidated Damages: In the case of breaches, as mentioned in the preceding paragraph, regarding the fact that the franchisee may not engage in similar or associated activities, the franchisee will have to pay US$100,000 by way of damages and lost profits. (Applicable Clause).

Industrial Property Act. Article 142 of the Industrial Property Act [Ley de la Propiedad Industrial], which as mentioned previously, is what defines the franchise, sets forth as a requirement without which there would be no franchise, the “use of mark license” and so this code not only governs franchises but also regulates everything regarding the marks, including prohibitions, registrations and renewals of marks.

Federal and Local Civil Code. Like any meeting of minds, the franchise is governed chiefly by the Civil Code [Código Civil] and specifically by the Industrial Property Act [Ley de la Propiedad Industrial], in whose Article 142 BIS it sets forth as a formal requirement that it must be made in writing and establish the minimum characteristics it should contain. However the Civil Code also sets forth grounds for rescission, termination, damages and lost profits, etc.

General Law on Business Corporations. Although no legal code mentions the requirement that the franchisor or the franchisee must be formed as a business entity, it is obvious that investors have to be incorporated as such to avoid running unnecessary risks. The law regulating the most popular forms of business entity, such as the stock corporation and the limited liability company, is the General Law on Business Corporations [Ley General de Sociedades Mercantiles].
This applies to both the franchisor and the franchisee companies.

Federal Labor Act. The Federal Supreme Court of Justice has declared case law stating that it is the employment relationship that sets up the employer’s obligation to the employee, and not, as is often believed, the individual employment agreement. Additionally, Article 13 of this Act states that when there is intermediation, the intermediary and the end beneficiary are jointly and severally liable in the in the employment relationship. When the franchisor trains the employee to work in the franchise, the franchisor will be jointly and severally liable with the franchisee if proper legal care is not taken. This is why although the franchise agreement establishes that the franchisee will be responsible for the social charges of its workers, the provisions of the Federal Labor Act will prevail. This situation can be neutralized with the right legal assistance.

Antitrust Act [Ley de Competencia Económica].- In the cases where products or services are considered “relevant” by the Antitrust Act [Ley de Competencia Económica], there will be franchising restrictions. In this aspect, the complexity consists in differentiating whether or not the product or service being marketed by the franchise can be considered relevant.

Applicable Special Laws. It will be necessary to comply with all of the laws and provisions applicable to the particular franchise in question, i.e., those related with the activities of the franchise.

These are just a few considerations, therefore the intention of this article is simply to provide a reference for those wishing to adapt a franchise in Mexico or those wishing to acquire one. For further information, please contact our attorneys in Mexico.