CHINA Trends and Developments Contributed by: Qiang Ma and Yan Feng Liu, Jingtian & Gongcheng
Contract and infringement disputes The landscape of franchise litigation in China is shaped by two principal categories of dispute: those arising from the franchise agreement itself and those concerning intellectual property infringement. Contract validity disputes A significant portion of litigation concerns the fun - damental validity of the franchise agreement. Such disputes often arise from the franchisor’s failure to comply with statutory preconditions established by the Regulations. Common grounds for challenging a contract’s validity include the franchisor’s failure to meet the “two stores, one year” operational require - ment, failure to complete the mandatory archival filing, or defects in the licensed business resources, such as the use of unregistered trade marks or intellectual property with contested ownership. Contract termination disputes These disputes are common and can be initiated by either party. Franchisees frequently seek termination on grounds of material breach, alleging that the ser - vices provided are substantially different from what was advertised, that the franchisor failed to provide contractually obligated guidance and training, or that the quality of supplied goods is deficient. Con - versely, franchisors may seek termination due to the franchisee’s failure to pay fees in a timely manner or for breaching the agreement by selling unauthorised products from other brands. Infringement by the franchisee of the franchisor’s rights A common area of conflict involves the franchisee’s misuse of the franchisor’s intellectual property. This includes modifying the franchisor’s authorised trade mark and attempting to register it, continuing to use the franchisor’s trade marks and trade names after the contract has been terminated, or the unauthorised publication and distribution of proprietary materials such as franchise operation manuals. Infringement by the franchisee of third-party rights A franchisee’s unauthorised sale of goods that infringe upon the intellectual property rights (eg, trade mark, patent or copyright) of a third party can expose both the franchisee and the franchisor to liability. The rights
holder may pursue a claim against both parties, alleg - ing direct infringement by the franchisee and contribu - tory or vicarious infringement by the franchisor. Infringement by the franchisor of third-party rights Disputes may also arise if the core business resources licensed by the franchisor are themselves defective and infringe upon the intellectual property rights of others. In such circumstances, a third-party rights holder may take legal action, and the franchisee can be implicated in the dispute and suffer business inter - ruptions and other damage as a result of the fran - chisor’s defective title. Judicial Treatment of Key Issues The franchisee’s “cooling-off” period Article 12 of the Regulation grants a franchisee a uni - lateral right of termination subsequent to the execu - tion of a franchise agreement. However, the statute does not delineate a specific duration for this right; this has created significant ambiguity in statutory interpretation and led to differing judicial treatment. The legislative intent is to correct the inherent asym - metry of information and bargaining power by pro - viding a mandatory period for reconsideration. In the absence of explicit temporal parameters, the Chinese judiciary has formulated a dispositive, fact-intensive test centred on a key question: whether the franchisee has substantially utilised the franchisor’s operational resources. This doctrine establishes a functional, rath - er than a purely chronological, boundary for exercising the termination right. Case law demonstrates that the right of rescission is robustly protected during the preliminary, pre- operational phases of the franchise relationship. For instance, courts have affirmed termination where fran - chisees, approximately one month post-execution, had only paid fees, received technical manuals, and engaged in site-selection discussions. The judicial reasoning is that such preparatory acts do not con - stitute substantial utilisation of the franchisor’s core business resources, as the franchise location was never established and no operational training or ser - vices were rendered. Furthermore, courts have invalidated contractual clauses that impose a manifestly unreasonable and
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