Question:
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“Hi Lawyer Yeo, I’ve been running a milk tea shop in Malaysia for the past 3 years, and my milk tea products have proven successful and won the hearts of many local customers. Now, I am eager to take my success to the next level by offering franchises to my potential partners.
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Recently, I attended a class and I was told that there is “an alternative approach” to achieve the same results – licensing. According to the “business guru”, licensing can offer a less cumbersome process compared to franchising, as it doesn’t require trademark registration or a fixed contract of at least 5 years with my future partners. It sounds more convenient and flexible.
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However, I’m finding it difficult to comprehend the fundamental difference between a franchise and a license. Moreover, I’m curious to know if it’s legally acceptable to use a license agreement as a substitute for a franchise agreement. I would greatly appreciate your view on this matter. Thank you!”
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Answer:
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Franchise vs License (the Definition)
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1. A franchise is a business model that allows an individual/business entity (franchisee) to use a well-established company’s brand name, trademarks, and business model to operate in a specific area.
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2. The franchisor usually receives a start-up fee and profit sharing. In return, the franchisor offers a range of support to the franchisee, such as labour training, marketing assistance, product supply, and other essential services to help them succeed in their operations. Notable examples of franchising encompass renowned brands like McDonald’s, KFC, Starbucks, etc.
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3. In contrast, a license involves the legal authorization granted by an owner permitting a certain individual or entity, to use its specific legal rights. For instance, a small local food retailer could obtain a license from a well-known foreign brand to use their trademark in the local market.
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4. Unlike franchising, licensing generally entails lower fees and may not include support such as labour training or marketing assistance. Thus, this arrangement is often preferred by small businesses as it allows them to reduce expenses associated with the products or services.
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The legal requirements for franchising and licensing in Malaysia
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5. In Malaysia, franchise is being subjected to stricter requirements of registration. According to the Franchise Act 1998, it is mandatory for the franchisor to register their franchise business with the Ministry of Domestic Trade and Consumer Affairs prior to granting the right to operate.
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6. The entire registration process usually takes 2-6 months. The required documents are as follows:-
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- Complete disclosure documents;
- A copy or sample of the franchise agreement;
- The operation and training manuals of the franchise;
- A copy of the latest audited accounts, financial statements and reports, if any, of the auditors and directors of the applicant;
- Registration application form;
- Certificate of Incorporation;
- Forms 24 and 49;
- The Franchisor’s organizational chart with the names and positions of key personnel;
- The Franchisor’s business brochures; and
- Such other additional information or documents as may be required by the Registrar for the purpose of determining the application.
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7. ***In addition, according to relevant provisions, after signing the franchise agreement with the franchisee, the franchisor must also submit the relevant contract to the Ministry of Trade and Consumer Affairs within 14 days. The duration of the contract cannot be less than 5 years and if the franchisor wants to terminate early or does not want to renew the franchise contract, the franchisor must have a good reason (as defined under section 31)
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8. With regard to the license agreement, there is no requirement for registration. Both parties will abide by the terms specified in the agreement they have signed, provided that these terms adhere to the principles of contract laws.
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Can a license agreement be used as a disguise/ substitution for a franchise agreement so to avoid registration in Malaysia?
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9. The answer is negative. Even if the name of the agreement is license agreement, the court will still look at the contract terms and the collaboration between the two parties, in particular, the franchisor’s ongoing control over the business to determine whether the agreement is indeed a franchise agreement.
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10. As decided in the case of DR HK FONG BRAINBUILDER PTE LTD v. SG-MATHS SDN BHD & ORS [2018] 1 LNS 773, whereby the two parties signed a ‘master license agreement’ and after the Court carefully read the agreement, it has decided that the agreement has fulfilled all four prerequisites of a franchise as set out under section 4(a), (b), (c) and (e) of the FA 1998 and thus indeed a franchise agreement governed by the Franchise Act 1998.
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What are the legal consequences if a license agreement is being used to disguise a franchise agreement?
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11. According to the case of Dr Premananthan a/l Vasuthevan v Permai Polyclinics Sdn Bhd [2015] MLJcon 127, it has been decided that since the agreement at hand has not been registered under the Franchise Act 1998, accordingly all contractual terms would be deemed to be illegal, void and unenforceable.
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12. In addition, according to Section 6(2) of the 1998 Act, the illegal franchisor will also be prosecuted, and if convicted, they will be subjected to fine or imprisonment, or both:
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Where the Franchisor is a body of corporate
- For the first offence: a fine not exceeding RM250,000.00; and
- For a second or subsequent offence: a fine not exceeding RM500,000.00.
Where the Franchisor is not a body corporate
- For the first offence: a fine not exceeding RM100,000.00 or imprisonment for a term not exceeding one (1) year, or both; and
- For a second or subsequent offence: a fine not exceeding RM250,000.00 or imprisonment for a term not exceeding three (3) years, or both.
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The above are the laws governing franchising and licensing that we would want to share with you today. Should you have further inquiries for this matter, please do contact us: https://wa.link/q3kmv5
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