Jan 7

Franchising in Israël : trends and tools. Par Maître Olivier Binder

Any attempt by a franchisor to place controls on the franchisee, in a manner that could be construed as limiting competition, may be deemed illegal. On the other hand, the spirit of the franchise agreement is to distribute a product nationally, in a uniform manner, and this relates to store design, sales quotas, etc.

Restrictive Business Practice Law (RBPL) 1988

The Restrictive Business Practice Law applies to the marketplace. The relevant sections of the RBPL are Sections 2 and 3, which relate to restrictive agreements.

Section 2(b) of the RPBL sets forth a list, which is NOT exhaustive, of practices that are deemed to be prima facie restrictive.

2(b)(1): "The Price that is to be demanded, offered or is to be paid ":

Problem:
- Uniformity of prices is an important feature of franchise networks. However, any attempts by the franchisor to explicitly restrict the prices charged by the franchisees is not legally authorized in Israel.

Solution:
– the franchisor can “recommend” a suggested retail price to the franchisee.

2(b)(3): "Division of all or part of the market according to the location of the business or according to the persons or type of persons with whom business is being done ":

Problem:
- Franchisors generally impose territorial restrictions on their franchisees.
- However, Section 2 of the RBPL prohibits any territorial division of all or part of the market.

Solution:
- An overall solution to the problem of territorial restrictions is franchising in a master area or under a master franchise agreement.
- As the market in Israel is small, it is likely that a single franchisee can assume the financial burden needed to open sufficient locations to satisfy the demand.
- Alternatively, the master franchisee can sub-franchise on a non-exclusive territorial basis.

2(b)(4) "The quantity, quality or type of the goods or services in the business “rn Sales Quotas issue:
- Israeli law prohibits disruptions of the free marketrn- Thus if a franchisor wishes to place sales quotas on the franchisee, there are 2 ways doing so.

Solution:
- Defining expected quotas. This will allow the franchisor to terminate the agreement at a specified time;
- Defining compulsory minimum quotas. Failure to meet the requirement will result in a breach of contract and entitle the franchisor to all applicable remedies.

Trademarks

1/ How to register:

An application must be filed with the Registrar of Trademarks and must include a description of the trademark and the goods.
The Trademark Office conducts an examination of the trademark. Once it is accepted by the Office, a notice of acceptance is published, which commences a 3-month period in which to object to the trademark.
If no objection is lodged, or if an objection is found to be spurious, the trademark will be approved and deemed registered.
The ordinance protects trademarks for a period of 14 years, renewable indefinitely upon payment of a renewal fee.

2/ International protection:

a) The Trademark Registrar has a policy of refusing to approve the registration of a trademark that takes advantage of an existing, international trademark in such a manner as to dilute the effectiveness of the latter and blur the unique image of the original, international company

b) Under the terms of the Paris Convention, a person who has applied for registration of a trade or service mark in France (which is a party to the Convention) is entitled to claim date priority with respect to an application in Israel for registration of the same mark with respect to the same goods. An application claiming such priority must be made within six (6) months from the date of the first application in a Convention country.

3/ Registration secures the following rightsrn a) Defense against cancellation for non-use :
- The claimant must prove that there was no intention to use the mark, or that no bona fide use of the trademark was made with respect to the products to which it applied.
- Non-use of the trademark for a period of two years preceding the date of application for cancellation is also a ground for cancellation.
b) Retaining the goodwill in the mark:

- Under Israeli law, a licensee does not ordinarily obtain a proprietary interest in the mark.
- However, upon the termination of the agreement, the licensee raise the issue of ownership of the goodwill created in the product during the term of the agreement.

c) Infringement is actionable against any party, not only the licensee

- A trademark can be contractually licensed or transferred to a 3’d party. This can take the form of a licensee, assignment or transfer.

- To transfer a trademark, a joint application must be made to the Registrar of Trademarks, detailing the relationship that exists between the parties.

- The application should specify any restrictions imposed upon the license.
CopyrightrnWith reference to the Franchisor, Israeli law prohibits unauthorized reproduction, in whole or in part, of the contents of the franchisor’s:
- business manualrn- computer softwarern- or similar copyrightable materials.
Know HowrnIn Israel, know-how is regarded as an intellectual property right and courts have considered know- how to be the property of the creator. It should be noted that know how can either be patented or copyrighted.

However, if such know-how enters the public domain, the creator ceases to have an actionable interest.
This applies to franchisors in two ways.
(a) Franchisors essentially sell access to their vast base of know how to the franchisee.
- The franchisor should seek protection by way of a secrecy/confidentiality agreement.
- This agreement can either be separate or included in the main agreement.
- If any sensitive material will be divulged in the pre-contractual process, it is probably better to have a secrecy agreement signed prior to the pre-contractual period.

(b) Franchisors benefit from know how gained by their franchisees and can improve their business based on it.

The transfer of know how from the franchisee to the franchisor is subject to negotiation.

Olivier BINDERrnCPA-HEC Executive M B ArnAvocat au Barreau de ParisrnCEJEF-ALEXENrnBinder, Amédée-Manesme, Athénosy et Associés