United States: Recent Changes to Mexico´s Franchise Law

A new law has been enacted in Mexico that has significantly changed the provisions of Article 142 of the Mexican Industrial Property Law locally known as MIPL, which is the primary law specifically governing franchising in Mexico. By decree published on January 25, 2006, which became effective January 26, 2006, Article 142 now not only sets forth the broad parameters for disclosure and possible registration of Franchise Agreements in Mexico, but includes relationship law elements that were previously not part of the law. Further, the changes now provide prospective Franchisees the right to rescind a Franchise Agreement for a Franchisor’s failure to timely or accurately provide disclosure document (notably, with no materiality threshold). The changes, among other things, attempt to limit a Franchisor’s right to terminate a franchise relationship without "good cause."

These are certain of the more notable parts of the changes:

While the initial push to significantly change the definition of a "franchise" did not prevail (the only change to the definition of a "franchise" is that a franchise must be granted in writing), the new legislation sets forth twelve minimum requirements for a Franchise Agreement. While some of these criteria are easily understood (e.g., setting forth the geographic zone where the Franchisee may exercise its rights, setting forth the terms and conditions for subfranchising), other requirements are less than obvious at this time (e.g., setting forth the criteria and methods applicable to determining profit margins and Franchisee commissions, the assumptions under which the parties may review and mutually determine to modify the Franchise Agreement).

While modifications to Article 142 did not change the specific disclosure obligations in Mexico (which are set forth in Article 65 of the Regulations to the MIPL), a very significant change to Article 142 modified the timing for providing disclosure to a prospective Franchisee. The previously existing disclosure law simply required that disclosure be provided prior to execution of the Franchise Agreement. As modified, Article 142 now requires that a Franchisor provide the requisite disclosure to a prospective Franchisee at least 30 days prior to execution of the Franchise Agreement in question. The proposed law does not state how non-material changes to a Franchise Agreement should be dealt with during the 30-day cooling off period or how to address changes to the Franchise Agreement requested by the Franchisee during the cooling off period.

If the information that is to be disclosed to the prospective Franchisee is omitted or lacks truthfulness, then the Franchisee is granted the right to seek the rescission of the Franchise Agreement, as well as a private right of action for consequential damages and losses caused by the noncompliance. The right to seek consequential damages and losses is only available for one year from the date of execution of the Franchise Agreement, while the right to nullify the agreement and obtain rescission does not have any time limitation.

In addition to the mandatory contractual terms referenced above, the new law adds, in several of its portions, relationship elements that must be taken into account when entering into a Franchise Agreement in Mexico. Again, some of these revisions are straight-forward while others will require some thought and further determination. For example, Article 142 Bis, in clauses (XI) and (XII), provides that there will be no obligation on the Franchisee to sell its assets or to sell its shares to the Franchisor, unless the parties otherwise agree. Also clear is a provision that states that neither the Franchisee nor the Franchisor may unilaterally terminate the Franchise Agreement absent "just cause". However, Article 142 Bis 1. interestingly provides that the Franchisor may "meddle" or "interfere" (tener injerencia) in the organization or operations of the Franchisee, but only to guarantee that the standards of administration and image of the franchise are observed. More problematic, however, is the next paragraph of the same section which provides that the Franchisor will not be allowed to meddle or interfere in the event of the merger, spin-off, corporate transformation, modification of charted documents, transfer or grant of liens in the interests in or shares of the Franchisee. This change presents particular problems to Franchisors that have entered into a Franchise Agreement in reliance on the personal characteristics of the Franchisee or its owners. This addition to the law places in doubt the enforceability of the restrictions on transfers of interests in the Franchisee that are contained in most Franchise Agreements. Indeed, it appears that the new legislation restricts a Franchisor’s right to require prior consent (and possibly even notice) with respect to a transfer of interests in the Franchisee entity.

The modifications to Article 142 have not changed the provisions of the earlier law as to registration of the Franchise Agreement. As such, the opportunity was missed to revise or clarify the language in Article 142 that "For the recordal of the franchise the dispositions of this chapter will be applicable." So there is no clarity as to whether there is a registration requirement applicable to Franchise Agreements in Mexico. However, one thing is clear: in order for a Franchise Agreement to be accepted for recordal by the Mexican Institute of Industrial Property (IMPI), and thereby be able to be asserted against third parties, the Franchise Agreement must now comply with the minimum requirements of the Article 142 et seq. At the time of this writing, we are seeking clarification to determine whether recordal is mandatory, as the language itself that was retained is still not altogether clear. However, the addition of mandatory contractual provisions to the law could put IMPI in the position of reviewing and commenting on all Franchise Agreements that are submitted for recordal.

As originally conceived in the lower house of Mexico’s Congress, there were more controversial provisions of the then-proposed bill that did not make it through to the final law, namely: (a) a proposal under the bill that would have given the IMPI the right to cancel the registration of a trademark if one or more Franchisees could prove to IMPI that the Franchisor had engaged, directly or indirectly, in illegal or criminal acts that affected free trade or violated industrial property rights, (b) a proposed preferential right in favor of a current Franchisee to be granted a new Franchise Agreement for the same territory after the expiration of the existing Franchise Agreement, and (c) a proposal that would have added a strict non-discrimination rule which would have essentially forced all Franchisors to treat all Franchisees in the same manner. These proposed changes to the law would have certainly acted as a disincentive for companies to enter into the Mexican market using a franchise model.

Franchisors currently operating in Mexico should review their respective Franchise Agreements and determine strategies to deal with the renewal, modification or transfer of existing Franchise Agreements, as well as develop procedures for handling the new thirty day cooling off period.

This article is intended to provide information on recent legal developments. It should not be construed as legal advice or legal opinion on specific facts. Pursuant to applicable Rules of Professional Conduct, it may constitute advertising.