In a world of constant economic uncertainty, foreign investors seem to view Vietnam as a promising land. This is particularly true in the franchise sector. Vietnam is enjoying an unprecedented level of attention from the international franchise industry, especially from the opening of its retail market to foreign investors since January 1, 2008, in connection with the state's WTO commitments. Another reason is the country's rapid economic growth, which according to the Viet Nam Food and Drink Report continues to eclipse the growth of most Southeast Asian economies. Vietnam is also valued by potential international and local franchisors against the background of a stable political situation and its rapidly growing consumption-oriented young population, of which the average age is 30 years old. The emerging urban middle class has a rising disposable income and an insatiable hunger for quality products and Western brands.
The delayed development of franchising in Vietnam is another reason. Franchising, for example, is a business model based essentially on intellectual property, with Vietnam historically having a fairly underdeveloped judiciary and providing inadequate intellectual property protection to protect the rights of franchisors and franchisees. While the no-longer in-effect Intellectual Property Law 2005 (revised 2009) and Decree No. 35/2006/ND-CP Governing Franchises have expanded the legal framework for safeguarding intellectual property and franchise rights, the protection and enforcement of intellectual rights remains property is critical and challenging for franchisors. The recently effective Intellectual Proper Law 2022 has somewhat dealt with challenging and outstanding issues in franchising market. However, in order to capitalize on both their own intellectual property values and the potential Vietnamese market, franchisors need to be sure of a sound strategy that aims to protect and enforce equally adequately. The expanding domestic franchise market, which includes leading local brands such as Trung Nguyen Coffee, Highlands Coffee, Pho 24, as well as international brands such as KFC, Lotteria, Starbucks, McDonald's suggests that with proper due diligence, professional advice and persistence, the challenges are not insurmountable.
A strategy for a franchisor should include:
1 Registration of Intellectual Property and Related Rights. The rights must be entered early in view of the first-to-file principle.
2 Trademarks. All franchised trademarks must be registered with the State Intellectual Property Office. Registering a trademark provides the basis for taking action against franchise counterfeiters.
3 Copyright. Copyrights arise originally from the creation of a work. While it is not necessary to register copyright in a work, filing with the Copyright Office makes it easier for the franchiser to establish proof of ownership and allows for any direct enforcement of rights.
4 Company name. A company name is a name under which a company or individual conducts business. Although registration of the name is not required as rights can be directly established through the lawful use of a company name, registration of the name as a trademark is recommended when deemed appropriate.
5 Domain names. A domain name identifies an Internet address. Franchisers should register their domain names with Vietnam's state Internet Center to avoid unauthorized use on the Internet.
6 Business Secrets/ Know-How
A trade secret (such as the recipe for Coca Cola) is any business or technical knowledge that is not available to the public. Trade secrets are protected in Vietnam as long as they are of economic value, are not common knowledge or are easily traceable and the owner tries to keep them secret. Given that the franchiser bears the burden of proving that the trade secret has been kept under wraps, they are regularly difficult to protect. Confidentiality agreements and the design of access restrictions for employees serve equally as proof of confidentiality and authorization.
7 Due diligence. An analysis of a potential franchisee by the franchisor before an agreement is entered into pays off. Proper audits are mandatory to ensure strict compliance with the franchise agreement.
8 Franchise agreements
Before signing the franchise contract, the franchisor should insist that the contract negotiations be flanked by a non-disclosure agreement. The franchise agreement must be made in writing and in the Vietnamese language. This language restriction, however, does not apply to a franchise agreement under which a Vietnamese franchisor grants a franchise in a foreign country. The franchise agreement should cover all aspects of the obligations and provide watertight protection of intellectual property rights, including the limits of the rights of use that are transferred to the franchisee. It would also be advisable to include a clause providing for mediation or arbitration in the event of a disagreement rather than recourse to local general jurisdiction.
9 Registration of Franchising Business
A franchise agreement need not be registered to be effective. However, franchises from overseas, from an export processing zone, a non-tariff area, or a separate customs area need to be registered with the Ministry of Industry and Trade ("MOIT") before becoming active. An offshore franchisor has only to register its franchising business once.
The franchising agreement itself need not be included in the registration dossier, except if necessary to register the licensing of intellectual property rights that are associated with a franchised business and fall within the regulations on intellectual property.
The franchisor must provide the prospective franchisee with the Franchise Description Document in the prescribed form by the MOIT and a copy of the form of the franchise agreement at least 15 working days prior to the execution of a franchise agreement, unless the parties agree otherwise. The Franchise Description Document is a part of the registration dossier for registering franchising business with the MOIT.
In any case, a reasonable personnel policy should ensure that the use of intellectual property by employees after they have left the company is excluded. Vietnamese employment contracts provided by franchisors or franchisees should contain restrictive covenants regarding intellectual property as well as trade secrets and confidential information. The importance of the brand should be conveyed through the training of the staff.
Against the background of developing commercial legal protection and the growth of the local and international franchise market of 20-30% annually expected by industry experts, the time seems ideal for companies and entrepreneurs to invest in this dynamic but comparatively underdeveloped market.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.