CHINA Law and Practice Contributed by: Qiang Ma and Yan Feng Liu, Jingtian & Gongcheng
6.2 Exclusive Territories and Competing Businesses Exclusive territories can be permitted in franchise agreements, and franchisors can include clauses to prevent franchisees from operating competing busi - nesses during the term and for a period after termina - tion. However, their enforceability and specific require - ments are subject to legal scrutiny and must balance the interests of both parties. 6.3 Requiring Franchisees to Purchase Specific Goods and Services A franchisor can require a franchisee to purchase products, services, or equipment from the franchisor or its designated suppliers. This is considered a core element of maintaining brand consistency and quality control within the franchise system. However, such requirements should not be used to impose unrea - sonable prices or conditions that could be deemed anti-competitive. 6.4 Channel Reservation A franchisor is generally permitted to reserve certain sales channels, such as the internet or specific corpo - rate accounts, for itself. This should be clearly stipu - lated in the franchise agreement. 6.5 Vertical Agreement Block Exemptions While China does not have a direct equivalent to the EU’s Vertical Agreement Block Exemption Regulation (VBER), Article 15 of its Anti-Monopoly Law provides for exemptions for monopoly agreements, including vertical ones, under certain circumstances. These exemptions are available if the agreement is for cer - tain specified purposes, such as: • improving technologies or researching and devel - oping new products; • upgrading product quality, reducing costs or improving efficiency; • enhancing the competitiveness of small and medium-sized businesses; • serving the public interest, such as by conserving energy or protecting the environment; • mitigating a severe decrease in sales volume dur - ing economic recessions; and • protecting justifiable interests in foreign trade and economic co-operation.
Article 15 Exemption Criteria The franchisor and franchisee would need to demon - strate that their agreement meets one or more of the criteria listed in Article 15, as set out below. Franchisor investment The franchisor invests significantly in developing a proprietary business model, operational systems, specialised software, branding or marketing strate - gies. The vertical restraints in the franchise agreement (eg, requirements to use specific equipment, follow operational manuals, adhere to quality standards and participate in marketing pools) are indispensable to: • improving technology/quality – ie, ensuring the franchisee delivers a consistent, high-quality prod - uct and customer experience, thereby upgrading the overall product offering in the market; and/or • reducing costs/improving efficiency – ie, achieving economies of scale in national advertising, cen - tralised purchasing of supplies (which can lower costs for franchisees), and efficient training where such standardisation can reduce the operational and managerial costs for individual, often small, franchisees. Preventing free riding The restraints are necessary to prevent “free riding.” Without territorial protections or quality controls, one franchisee could benefit from the brand investment and marketing of others while undercutting them on cost by lowering quality, ultimately degrading the entire brand and reducing consumer choice. The Safe Harbour Presumption China’s State Administration for Market Regulation (SAMR) has issued the “Antitrust Guidelines on the Platform Economy” and accompanying notices that, while focused on platforms, reflect a broader modern - ised approach. Importantly, they introduced a “safe harbour” presumption for vertical agreements. While not an absolute exemption, this guidance sug - gests that if the parties to a vertical agreement (like a franchise) have a market share below 15%, there is a presumption that the agreement does not have the effect of eliminating or restricting competition. This provides a significant degree of comfort for the vast
39 CHAMBERS.COM
Powered by FlippingBook