Regulation of the franchise relationship in Latin America: The first step?

It has always been possible to say that nowhere in Latin America is there any franchise-specific legislation restricting the freedom of action of the parties. But if the law being advanced in Argentina is adopted, that era is over.

The Franchise Times
January 1, 2002

Regulation of the franchise relationship in Latin America: The first step?
Philip Zeidman

Dateline: Cancun, Mexico
One of my trips to Buenos Aires last year prompted me to ventilate a bit abut what I saw as shortcomings in the legal system in Argentina (“On Second Thought, Do Cry for Me, Argentina,” May 2000). The focus was only to a very limited degree on franchising. I discussed a legislative proposal which had just been set aside, amid talk of a “new approach” which was predicted to emerge within “the next 100 days.” I observed, “in Argentina any action that fast seems unlikely.”

More than 100 days has passed but we now know what that “new approach” is. The recent meeting of the Intentional Franchising Committee, held at this resort during the annual Conference of the International Bar Association, provided valuable information on developments throughout Latin America. None of those developments is more significant than what is now being proposed in Argentina. It has always been possible to say that nowhere in Latin America is there any franchise-specific legislation restricting the freedom of action of the parties. But if the law being advanced in Argentina is adopted, that era is over.

Let’s consider the key features of the proposal, some quite different than what we have seen elsewhere –

Franchisors are accustomed to making decisions as to the fundamental features of the opportunity to be offered to the franchisee. The proposed legislation would take many of those decisions away from the franchisor –

  • The term of the agreement must be no less than four years:
  • Exclusivity must be granted;
  • There must have been at least two units in existence prior to the offer;
  • Technical assistance must be offered;
  • A manual must be provided;
  • Intellectual property must be defended.

There are obligations, prohibitions and liabilities imposed upon franchisors which will be both unfamiliar and unwelcome to them:

  • A franchisor would be liable for “defects in the design of the system”;
  • If a franchisor sells goods, the law will require them to be in “adequate quantities” and at “reasonable prices”…standards which franchisors are accustomed to determining themselves;
  • A franchisor may not sell through alternative channels of distribution into the franchisee’s exclusive territory.

This is serious business. And it’s important to recognize that what we are witnessing may not ultimately be limited to Argentina. Only three countries – Mexico, Brazil and Argentina – have economies and populations which are sufficiently significant that other countries in the region may follow their lead in matters of this nature. The current dismal condition of Argentina’s economy is such that one might assume a sharp decline in the capacity to exert leadership. One might also wonder why a country with so weakened an economy would ever contemplate legislation which might further imperil the prospects for inward investment. At this point, though, those considerations don’t provide us with much comfort.

Philip F. Zeidman is a senior partner in the Washington, D.C. office of Piper Marbury Rudnick & Wolfe, where he heads the Franchise and Distribution Law Group practice. He is general counsel to the International Franchise Association.


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