Global Franchising In F&B: NDAS & Licensing Agreements Across Sea Jurisdictions

INTRODUCTION

The term “franchise” originates from the Norman French word “franchise,” which is derived from the French word “frank,” meaning a free man, liberated to engage in employment. The English term “franchise” was originally employed to denote the liberation from any prohibition, permission, or privilege. This term refers to the ability of a company to engage in or refrain from engaging in activities for which it would typically not have authority.^[1]

Franchising is a proven approach for facilitating effective worldwide collaboration between food and beverage enterprises, such as restaurants and coffee shops, and real estate investors, including hotel and shopping center proprietors. Global companies like Burger King and Domino’s Pizza, together with robust local brands such as Jamie’s Italian and Costa Coffee, are employing franchise and management agreements to effectively expand in both established economies and emerging countries.^[2] India is the second-largest franchise market globally, after the United States, with over 4,600 active franchisors and 150,000 to 170,000 franchisees in 2017.^[3]

When food and beverage (F&B) companies enter markets in Southeast Asia, Non-Disclosure Agreements (NDAs) and Licensing Agreements (LAs) become an important legal instrument. NPAs protect sensitive business information, while licensing agreements clarify the conditions under which franchised intellectual property – trademarks, branding, recipes, and technology – can be used. Both legal instruments protect important assets while maintaining trust between the franchisor and local stakeholders.

This blog post compares NDA and licensing agreement models across countries in Southeast Asia and identifies important legal provisions, upcoming legal developments, and the impact of global Franchising laws in the F&B industry. Due to the rapidly evolving legal environment in Southeast Asia, businesses need to remain vigilant and flexible. This article provides new ideas and potential obstacles facing businesses when trying to operationalise laws governing businesses in Southeast Asia.

LEGAL PROVISIONS

Unlike the United States and Australia, which have specific and systemic rules covering franchise castings, most countries in Southeast Asia do not have dedicated franchise laws and instead use laws covering contract, competition, and intellectual property. The following are the main legal rules and issues:

1. LICENSING AGREEMENTS: ONE SIZE DOESN’T FIT ALL

Licensing agreements are vital for any food and beverage franchise. Local franchisees are allowed to use a brand’s trademark, recipes, operations manual, and trade secrets; however, the rules around these licenses vary considerably across Southeast Asia. Agreements are critical to facilitate brand consistency and to make sure royalty payments are being made.

LEGAL FRAMEWORK:

Malaysia

Franchising and licensing started in Malaysia in the 1900s; A&W was the first food and beverage franchise to enter the country in 1967, then KFC entered the country in 1973.

With the introduction of franchising and licensing in Malaysia, some institutions were set up, such as the Malaysian Franchise Association (MFA), the Ministry of Entrepreneur and Co-operative Development (MECD), and the International Franchise Association (IFA). These institutions, along with government laws and regulations, manage the entire process of franchising and licensing from issuing permits to managing operations and even terminating contracts.

Franchises in Malaysia are governed by the Franchise Act 1998, which was amended in 2020 and came into effect on 8 October 1999. The FA 98 gives legal provisions for the definition of a franchise and prescribes rules for the business structures that fit within this definition. The FA 1998 requires all franchise businesses operating in Malaysia to be registered with the Registrar of Franchises (ROF). Franchise businesses that do not comply are regarded as offenders.^[4]

Indonesia

Franchising in Indonesia is governed by the Government Regulation No. 35 of 2024 on Franchising (GR 35/2024). Licensing with relation to franchising and intellectual property is regulated under applicable laws of trademark, copyright, and patent.^[5]

Thailand

The scope of franchising law in Thailand is broad and complex. Unlike many other countries, Thailand does not have a separate piece of franchise law. The franchise business model operates under a web of existing laws and legal frameworks, primarily the Civil and Commercial Code governing contracts, the Trade Competition Act on fair competition, and various laws on intellectual property such as the Trademark Act, Copyright Act, and Patent Act; there is no standalone franchise law.^[6]

Vietnam

The legal framework regulating franchising in Vietnam is principally defined by the Commercial Law, approved by the National Assembly on June 14, 2005. The regulations are elaborated in Decree No. 35/2006/ND-CP, promulgated by the Government on March 31, 2006, and then modified by Decrees No. 120/2011/ND-CP (December 16, 2011) and No. 08/2018/ND-CP (January 15, 2018). The agreements are required to be submitted to the Ministry of Industry and Trade. The Law on Technology Transfer, enacted on June 19, 2017, and revised in 2023, includes pertinent laws on franchising activities. ^[7]

2. NON-DISCLOSURE AGREEMENTS (NDAS): MORE THAN A FORMALITY

Non disclosure agreements (NDAs) are often executed before the initiation of franchising negotiations, particularly before the franchiser has disclosed proprietary recipes, operations manuals, or pricing information. NDAs make sure the franchiser’s employees do not divulge to their competition or others any confidential information.. However, the protection offered by law is different for each region.

• Singapore & Malaysia: ( Non-Disclosure Agreements (NDAs) are fully enforceable under general principles of contracts as long as they are reasonable and well drafted. The Franchise Act 1998 governs franchising and provides for franchise agreements to contain provisions for the protection of proprietary knowledge (Section 26)
• Thailand: The Trade Secrets Act strongly supports non-disclosure agreements (NDAs). The Trade Secrets Act B.E. 2545 (2002) protects proprietary trade information and requires that NDAs clearly state what constitutes a trade secret and what the obligations of the parties are.^[8]
• Indonesia & Vietnam: Recognition of Non Disclosure Agreements is limited. There may be legal repercussions for the wrongful disclosure of such information, but these consequences are likely to be rare. There is no formal law governing NDAs, leading to differing interpretations and application by courts in relation to each NDAs.

LEGAL ANALYSIS

For SEA’s delegated food and beverages franchising business, the legal environment of NDAs and licensing agreements is quite fragmented, requiring franchisors to tailor contracts to specific jurisdictions. Herein, I review my observations on the primary issues of concern.

BALANCING IP PROTECTION AND LOCAL COMPLIANCE:

The franchisors need to ensure that the licensing deals as well as nondisclosure contracts are sufficiently a general framework not to breach competition law. For example, the Franchising Guidelines (2020) issued by the Trade Competition Commission of Thailand requires franchisors to provide certain non-disclosure terms , including non-disclosure agreements ahead of time to franchisees. Such cases, for example Smash Franchise Partners, LLC v. Kanda Holdings, Inc. (Delaware, 2020)^[9] case a US court ruled that information provided without NDAs during recruitment is not protectable as a trade secret.^[10]

Therefore, franchisors should undertake IP audits of business entities and draft NDAs with precise definitions of confidential information tailored to the trade secret laws of each SEA jurisdiction. Registrations of trademarks and licenses need to be filed with local IP offices to ensure enforceability of the agreements on IP licensing.

CROSS-BORDER ENFORCEMENT CHALLENGES:

Applicability of all laws regarding license agreements, marking and non-disclosure agreements in SEA conflicts is rendered rather impossible because a lot of legal systems intervene. For instance, enforcement is less strict in Cambodia and Laos because they follow general contract law, while Vietnam and Malaysia have specific laws for franchises. The lack of harmonised IP laws in SEA increases the risk of infringement by franchisees or third parties, which is the opposite of the EU’s unified trademark system..^[11]

Franchisors should include arbitration clauses that name neutral jurisdictions like Singapore, known for its strong arbitration policies, as the jurisdiction of choice. This approach mitigates the risks of varying judicial precedent, such as in the case of McDonald’s India Private Limited v. Vikram Bakshi^[12], where the Delhi High Court emphasised that “exceptional circumstances” need to be proven in order to grant anti-arbitration injunctions.

NEW CHALLENGES FOR NDAS AND LICENSING AGREEMENTS

The growth of e-commerce and influencer advertising in Southeast Asia’s F&B industry creates new compliance problems. As Thailand’s ETDA (2023) put it, operators of digital platforms must validate advertising data, which affects franchisors’ control over online promotion management. They have to amend franchising agreements to restrict franchisees’ or influencers’ unauthorized use to digital assets, including social media content.

Franchisors should revise the licensing agreements to protect digital IP and ensure that NDAs cover online disclosures in line with emerging regulations like Thailand’s ETDA.^[13]

LEGAL POTHOLES AND HOW TO AVOID THEM

IP Licensing vs. Competition Law

Licensing agreements may contain exclusivity or non-compete clauses. In some jurisdictions, the inclusions of such clauses may contravene domestic competition law, particularly in countries such as Singapore and Malaysia. For example, clauses that improperly have the effect of preventing a franchisee from competing with other businesses may be found to be unenforceable.

Registration and Disclosure

Countries such as Malaysia and Vietnam, feature mandatory registration of licensing agreements. In some jurisdictions where registration is required, failure to properly register a license could render the agreement unenforceable or unprotected and in extreme cases may be punishable by law.

Trade Secret Enforcement is Uneven

In countries such as Indonesia and Vietnam, weak enforcement systems for trade secrets or failure to act to enforce trade secrets could undermine even well-written NDAs. in those markets. In any event, global brands need to prepare for a lack of legal certainty in Indonesia or Vietnam.

IMPLICATIONS FOR THE FOOD AND BEVERAGE SECTOR

The Southeast Asian region provides food and beverage companies a considerable growth opportunity complicated by the need to tailor contracts to fulfill compliance requirements with local laws.

• Intellectual Property Protection: Franchisors must conduct an audit of their intellectual property to substantiate ownership of trademarks, recipes, and other proprietary assets. Failing to register trademarks or license as required in Malaysia, Thailand, and Vietnam could render the agreements unenforceable against other parties and lead to brand dilution or infringement of brands who could adversely affect the prospective franchisee.
• Compliance costs: Regulatory compliance means that every NDA and license agreement must be tailored to each of the SEA countries, increasing the legal and administration costs. Small and medium-sized franchisors may find it very challenging to comply with registration requirements, such as Malaysia’s MyIPO or Vietnam’s NOIP.
• Digital Evolution: The rise of e-commerce and influencer marketing means that franchisors must review their NDAs and license agreements to include digital assets. Franchisees and influencers might misuse trademarks of the brands when flaunted on social media, which could cause potential brand reputational harm.
• Recent Developments: In Thailand’s new Franchising guidelines and Cambodia’s (2020) Law on Food Safety, there are indications that regulations on franchising and consumer protection are shifting away from being a ‘let it be’ regime to something with more prescriptive parameters. Innovations in eco-franchising, safe delivery provisions, and particularly AI in food preparation will change how licensing and NDAs are framed in the future.^[14] It is important that franchisors remain aware of these changes to avoid fines and disputes.

CONCLUSION

To effectively manage the NDAs and license agreements in the food and beverage franchising sector in Southeast Asia, a complex understanding of national laws, Intellectual Property protections, and emerging digital trends is necessary. While Malaysia, Thailand and Vietnam have developed relatively advanced frameworks, Cambodia and Laos have only general rules of contract law, which makes uniform compliance difficult.

There are even ongoing discussions in Southeast Asia on the harmonization of franchise laws related to cross border franchising. The ASEAN Economic Community promotes greater regional integration; however, the inconsistent intellectual property and contract rules represent a real barrier to actual integration. Policymakers are also discussing greater disclosure obligations to protect franchisees, as evidenced by recent changes in Thailand’s regulations. As the food and beverage continues to grow in Southeast Asia, governments will need to consider the harmonization of franchise law to enable growth in the region whilst protecting franchisees. By embracing proactive ways to prevent risk, franchisors can protect their brands and prosper in this evolving industry.

Legal nuances are complex in Southeast Asian franchising. Licensing and Non-disclosure agreements are critical tools to protect a brand image or maintain private information that can be leveraged in business. As laws develop with increasing focus on intellectual property or fair competition, food and beverage companies have to be aware, agile and legally informed. Taking a proactive legal step today can save costly disputes tomorrow.

Author: Divya Saini, in case of any queries please contact/write back to us via email to [email protected] or at IIPRD. 

[1] Ilan Alon, Mirela Alpeza (2007). “Opportunities and Threats Regarding The Development Of The Franchising Business Model In Croatia” Seventh International Conference on “Enterprise in Transition. https://www.researchgate.net/publication/228467047_Opportunities_and_threats_regarding_the_development_of_the_franchising_business_model_in_Croatia

[2]Nishita Deka, India’s Franchise Law – A Patchwork of Statutes, Lexology (May 31, 2024) https://www.lexology.com/library/detail.aspx?g=6a643b9f-702c-470a-9e4b-3a2efa8e3813

[3] Franchise India, Current Market Landscape for Franchising in India, Franchise India (May 2, 2024), https://www.franchiseindia.com/index.php/insights/en/article/current-market-landscape-for-franchising-in-india.42281

[4]Nishita Deka, Franchising and Legal Compliance in India: Navigating the Legal Landscape, Lexology (Jan. 5, 2023),  https://www.lexology.com/library/detail.aspx?g=1798b730-b0d5-496d-8df1-626f7207207c

[5] 10 Things to Note About Indonesia’s New Franchise Regulations, Wong & Partners (Oct. 24, 2023), https://www.wnplaw.com/knowledge/10-things-to-note-about-indonesia-s-new-franchise-regulations

[6] What Are the Legal Aspects of Franchising in Thailand?, Lawzana (Jan. 2024), https://lawzana.com/articles/thailand/what-are-the-legal-aspects-of-franchising-in-thailand-123

[7] Franchising in Vietnam: Legal Framework and Registration Requirements, Vietnam Briefing (Jan. 10, 2024), https://www.vietnam-briefing.com/news/franchising-in-vietnam-legal-framework-and-registration-requirements.html/

[8]Thailand’s Trade Secret Act: Understanding the Law and Prevailing Disputes, Tilleke & Gibbins (Feb. 2024),  https://www.tilleke.com/insights/thailands-trade-secret-act-understanding-law-and-prevailing-disputes/

[9] Smash Franchise Partners, LLC v. Kanda Holdings, Inc., 2020 Del. Ch. LEXIS 263, No. 2020-0302-JTL (Ch August 13, 2020)

[10]Franchise Laws and Regulations – USA, ICLG (2024),  https://iclg.com/practice-areas/franchise-laws-and-regulations/usa

[11]Sandeep J. & Rishi Anand, Franchise Law Comparison: India and Taiwan’s Regulatory Evolution, Law.Asia (Mar. 8, 2024),  https://law.asia/franchise-law-comparison-india-taiwan-regulatory-evolution/

[12] McDonald’s India Private Limited v. Vikram Bakshi & Ors., [2016] 232 DLT 394

[13]ETDA Digital Platform Advertising Guidelines Released, The Reporter Asia (June 2024), https://thereporter.asia/eng/2024/06/etda-digital-platform-advertising-guidelines/#google_vignette

[14]How Much Is My Restaurant Worth?, Mission Peak Brokers (Apr. 2024), https://missionpeakbrokers.com/restaurant-business-values/

David Duncan & Dino Santaniello, Franchising in Southeast Asia: Key Considerations for Market Entry, 41 Franchise L.J. 2 (2021), https://www.tilleke.com/wp-content/uploads/2022/01/FLJ-41-2-Tilleke-SE-Asia-Franchising-Overview-1.pdf.