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Franchise Business and Lessons for Foreign Entrepreneurs

With the recent break-up between a major US Cola Company and its franchise bottler and sole distributor in Thailand, Company A, the US beverage giant has to maintain its distribution and availability in the Thai market. The cola giant was confronted by this dilemma since its franchise agreement with Company A ended in November 2012 when Company A declared it was not going to sign a new agreement.

After the break-up, Company A, as the main retail distributor, withdrew all cola products from its shelves and replaced them with its own carbonated product using look-alike trade-dress, without any trademark violation claim from the cola giant’s side. This was only possible because the “non-compete clause” the companies entered into had expired when their franchise agreement ended. In this regard, although the new product to some extent like the old one and is being sold in the similar bottles, but with a different red, white and blue logo reminiscent of the cola giant’s product, it is considerably difficult for the US cola company to claim trademark infringement.

Legal Analysis

1.    Thailand has no specific law regulating franchise business

Currently, all franchise agreements in Thailand need to comply with the provisions of the Civil and Commercial Code, the legislations of the Intellectual Property (Trademark Act, Patent Act, Copyright Act, Trade Secret Act and Trade Competition Act.)

When franchise agreements include trademarks, a practical problem arises whether such agreements must be registered with the Thai Department of Intellectual Property (the “DIP”) or not. The answer remains uncertain. This is a question that even Trademark Officers cannot give a consistent answer since there are no court precedents to follow.

Nonetheless, a noteworthy comment coming from the DIP is that a clear distinction should be drawn between “franchise agreements” and “distribution agreements”. Pursuant to Section 68 of the Thai Trademarks Act 1991, Trademark License Agreements or Franchise Agreements containing Trademark Licensing provisions are required to be in writing and to be registered with the DIP. However, according to the opinions of the Thai Officers, there will be no such requirement under the following circumstances:

  • The franchisor has never registered its trademark in Thailand;
  • The franchisee acts as a distributor who directly purchases products with a foreign franchisor and conducts a sale without any quality control from a foreign franchisor; or
  • The franchisor has solely committed all managements to maintain business quality.

To address the problem raised by ambiguity and inconsistency, a Draft Franchise Act has been introduced. Once such draft comes into effect, it is expected that certain terms and conditions as well as a registration requirement may be essentially imposed to control the franchise businesses in Thailand.

2. An applicable “Non-compete clause” should be included to protect your franchise

A non-compete clause that restricts an ex-franchisee from operating a business that is identical or similar to the franchisors’ business during a term of agreement and for a certain time thereafter is commonly included in every franchise agreement. For the US cola giant, there was such a non-compete restrictions that prevented Company A from offering competing services, but the restrictions expired when the franchise agreement ended.

Company A is not the first Thai franchisee who has broken away from its foreign franchisor. over a decade ago, a pizza franchise based in Thailand elected not to renew its franchise agreement with its American franchisor as the Thai company would have had no choice but to sign a non-compete clause potentially damaging its success in moving forward.

Although, the essence of a non-compete clause is undeniable, Thai courts seemingly take various factors into consideration when determining the enforceability of such non-compete clause, namely: (i) reasonableness of the duration; (ii) reasonableness of the geographic area; and (iii) reasonableness of the nature of things. In the other words, the Thai courts are allowed to apply provisions of the Unfair Contract Terms Act when considering the reasonableness of any restriction of a non-compete clause.

However, the scope of protection provided by this Act is limited to disputes between professional or business entrepreneurs and the consumer on the unfair nature of the contractual clauses in question. Therefore, it is suggested that a new Draft Franchise Act should include a provision granting Thai courts authority to rule on the reasonableness of a constraint in any franchise agreement.

3. There is no “trade dress” protection in Thailand

You might ask yourself why a carbonated product of Company A be sold in the similar bottles, with a red, white and blue logo reminiscent of the US Cola product. In truth, there might be many reasons for the US cola giant to decide not to make any trademark claim against Company A, but one reason remaining certain is that trade dress protection doctrines are not recognized under Thai Trademark law.

In essence, “trade dress” is the overall commercial image (look and feel) of a product, also known as “product design”. Thailand does not provide remedies for trade dress infringement, unless applied for protection under a registered design patent regime. So far, Thai courts have yet to determine whether “trade dress,” or the look and feel of a product’s packaging or presentation, should be legally protected under the Thai Trademark Act. Trade dress owners are left with the “passing off” provision of Section 46 of the Trademark Act that only allows the proprietor of an unregistered trademark to institute a Court case against any person for passing off goods as those of the proprietor as well as the liabilities regarding offences relating to Trade under the Thai Penal Code.

By Rawat Chomsri (Partner) and Tatchaporn Natprasertkul (Associate) © July 2013
Khun Rawat can be reached at Rawat@siampremier.com
Khun Tatchaporn can be reached at Tatchaporn@siampremier.com