Many western brands have said that they will either stop or exit the Russian market after February 24, 2022. Companies that established their businesses using the franchising model, on the other hand, have found themselves unable to close outlets due to regulatory restrictions in some circumstances.
Furthermore, the Russian government has begun to implement counter-measures to foreign-state sanctions. This includes, for example, measures aimed at allowing local enterprises to continue to use intellectual property owned by right holders in the sanctioned states.
Models of Franchising in Russia
The franchising model suggests that a right holder offers a third party a set of rights that allows it to run a business under an established brand while also utilizing the right holder’s technologies, experience, and standards.
Franchisees are expected to run the company on their own, hence franchisors rarely buy shares in franchisees. Instead, most franchise agreements are based on one of the following contractual models:
Franchisees are expected to run the company on their own, hence franchisors rarely buy shares in franchisees. Instead, most franchise agreements are based on one of the following contractual models:
- The direct franchise agreement between the right holder and each franchisee.
- Development franchising provides grants to the franchisee the right to develop a specific territory by opening an agreed number of units.
- Master franchising under which one partner concludes an agreement with the right holder and enjoys the right to grant sub franchises to other businesses.
The ability of franchisees to decide on their presence on the market is limited by contract law, in contrast to companies that run and govern the business at their own discretion.
Right holders can terminate franchise agreements unilaterally
The Russian Civil Code stipulates that commitments must be fulfilled in accordance with their terms as well as legal requirements. Unless expressly established by law, unilateral withdrawal from or alteration of obligations is illegal.
If the franchising agreement is concluded for an indeterminate time, either party can unilaterally terminate the agreement under Russian law. Unless the agreement specifies a longer duration, such termination is subject to a 6-month notice period.
If the agreement provides for the possibility of termination against payment of a particular compensation, unilateral termination of fixed-term and indefinite agreements with a 30-day notice is also allowed.
If none of the above termination options apply to a particular franchising agreement, the franchisor may terminate the franchisee only if the franchisee has committed a breach and failed to cure it within a reasonable time after receiving written notification from the franchisor, or has committed such a breach repeatedly within a year. Russian legislation, for instance, allows for such termination in the event of the following violations:
- Non-compliance with quality requirements
- Gross violation of the franchisor’s instructions and directions intended to ensure compliance with the character, manner, and conditions of the use of the provided exclusive rights; and
- Failure to timely pay remuneration to the franchisor
If the usual termination options do not apply, Russian courts will not recognize franchisors’ unilateral repudiation of contracts if the violations are not proven.
Consequences of Terminating Activity Without Legal Ground in Russian Law
Under Russian law, all parties to civil law relationships must act in good faith when establishing, exercising, and protecting civil law rights and performing obligations.
Execution of civil rights with the sole objective of harming another person, other criminal actions to avoid the law, and any other poor faith execution of rights are all considered abuses of rights and are legally prohibited.
Massive winding-up operations on the Russian market by foreign companies may have a severe impact on the country’s 140 million population, depriving them of the most basic amenities and risking their health and lives by causing a shortage of food, and hygiene products, and vital services, among other things.
Deliberate winding-up of established firms, including repudiation of franchising agreements, may be deemed a purpose to harm the Russian population and businesses and thus not recognized by Russian courts if termination of operation is not justified by a legal ground. Furthermore, people who have been harmed by a violation of their rights are entitled to compensation for their losses.
Obviously, franchisors’ attempts to obstruct franchisees’ operations without cause may be considered an abuse of rights even if the franchisors do not terminate the agreement. This may be the case, for example, if the franchisors or suppliers approved by the franchisors cease to provide technical support, training, resources, or items that the franchisees are required to receive as a result of the franchising agreement’s requirements.
There is currently no legal precedent for the application of legislation prohibiting the abuse of the power to terminate franchising agreements commenced by foreign franchisors after February 24, 2022. However, there is already an example of a court refusing to defend a British right-holder in a trademark infringement issue with a Russian individual entrepreneur. In this case, the court of first instance found that Great Britain took political and economic actions against the Russian Federation, its legal companies, individuals, and officials between the end of February and the beginning of March 2022. The court deemed the claimant’s acts to be an abuse of rights, based on these measures and the claimant’s status as a British citizen. Despite the court’s somewhat odd arguments in this case, and the fact that the decision in question will almost certainly be appealed by the claimant, the likelihood of similar rulings in the current circumstances should not be overlooked.
Termination of Foreign Law Franchising Agreements
Franchising agreements granting franchises on Russian territory can be concluded under foreign law in practice. However, certain mandatory Russian legal standards apply in certain situations. Due to their extreme importance, such mandatory norms can be specifically defined or acknowledged as such (e.g, if they are aimed at protecting the rights and legitimate interests of participants in civil relations). Foreign law will not be applied if the implications of doing so would clearly violate the Russian legal system’s fundamentals.
In this context, the author considers that if foreign law governs a franchise agreement and gives the franchisor broader termination rights than those granted by Russian law, there is currently a risk that Russian courts may reject their applicability.
Another important consideration in this regard is the possibility of resolving a disagreement in a foreign government court or an international arbitration court. The venue allowed to hear disputes originating from the franchising agreement is usually specified directly by the parties in the contract’s language. Decisions of government courts in most western nations, including the European Union and the United States, are not recognized in Russia due to the lack of appropriate international treaties. The United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Judgements governs the recognition and enforcement of foreign arbitral awards.
At the same time, it should be noted that, as of June 2020, the Russian Arbitration Procedure Code allows parties affected by foreign sanctions to refer disputes to Russian government courts, even if the agreement specifies the application of a foreign government court or an international tribunal located abroad.
Russian Government Counter-Measures in the Intellectual Property Field
Different transactions with persons from certain states were subjected to a special regime, including currency control, real estate transactions, and the export of specific items, among other things.
Government Decree No. 299 on intellectual property was adopted on March 6, 2022. Patent holders from “unfriendly countries” will not be compensated for the use of obligatory licenses to their patents protecting inventions, utility models, and industrial designs by third parties, according to the Decree. This criterion applies in particular if a patent holder is a citizen of an “unfriendly country,” is registered in that country, and has its major location of business or profit generation there.
The Russian Civil Code allows the Russian government to issue patent rights to third parties without the patent holder’s approval in the event of an emergency involving the state’s defense and security, as well as the protection of citizens’ lives and health. In most cases, such assignment of rights necessitates notification of the right holder and payment of appropriate compensation.
Furthermore, the Russian Government may adopt lists of commodities to which some articles of the Civil Code relating to IP protection cannot apply in 2022, in accordance with Federal Law No. 46-FZ as of 08.03.2022. No such lists had been approved as of the date of this article (27.03.2022).
Most likely, such lists will be created in relation to inventions, equipment, software, and technologies that may be removed from the market as a result of foreign company sanctions or deliberate actions that are unrelated to any legislative prohibitions imposed by foreign states on Russia, its citizens, legal entities, or officials.
Furthermore, pursuant to Draft Law No. 92282-8, which was introduced into the State Duma on March 22, 2012, it is proposed to prohibit one party from unilaterally terminating agreements aimed at the execution and protection of intellectual property unless the other party substantially breaches the agreement. Additionally, unless the Russian individual or legal entity refuses to extend the relationship, the validity term of license agreements will be extended for the duration of the sanctions. In the event that these restrictions are implemented, it is unclear how the government will enforce them.
Russian legislation is changing at a breakneck pace, posing a challenge to both foreign and domestic firms. Companies who wish to reconsider their presence in Russia after February 24, 2022, are strongly advised to seek competent legal guidance from Russian law advisers who can assist them in navigating the shifting legal environment.