Franchising Russia

1.2 Do they apply to foreign franchisors entering your jurisdiction or only to domestic franchises?

In general, there are no legal restrictions on foreign franchisors offering franchises to Russian businesses, directly or indirectly. Moreover, international franchising agreements may be governed by a national law other than Russian. If the parties choose foreign law, only certain mandatory Russian laws will apply (see questions 1.1. and 7.2).

1.3 Do any special regimes apply in specific sectors?

Russian law establishes an obligation to obtain a licence for conducting certain types of activities – for example:

• the production and distribution of pharmaceuticals;
• the production and maintenance of medical equipment
• and passenger transportation services.

A franchisee that will conduct such activities under a franchising agreement is obliged to obtain a licence. If the franchisor establishes a subsidiary in Russia in order to provide franchises through it, this daughter company will also be subject to the abovementioned licensing requirements.

Restrictions relating to corporate ownership and control also apply in the media and telecommunications industries.

1.4 Which bodies are responsible for enforcing the applicable laws and regulations? What powers do they have?

In Russia, there is no special franchising regulatory body. The federal executive body responsible for control and supervision in the field of IP rights is Rospatent, which has a number of competencies, including:

• registration of trademarks and service marks, inventions, utility models, industrial models, and other IP rights;
• registration of disposals of intellectual property (including the grant of a licence under a franchising agreement); 
• and maintenance of state registers of intellectual property.

Through civil law enforcement procedures, the rights holder or its exclusive licensee may file a claim in a state commercial (arbitrazh) court to demand:

• cessation of the unlawful use of intellectual property;
• withdrawal from circulation and destruction of counterfeit products; and
• reimbursement of damages or monetary compensation.

Also, licensees may seek protection against licensors for breach of contract.

Certain categories of IP-related issues, including franchising disputes, may also fall under the competence of the dedicated Russian Intellectual Property Court.

Criminal liability for illegal use of intellectual property in the event of substantial damage caused to the rights holder or repeated infringement can be imposed by the courts of general jurisdiction. The investigation of such cases falls under the competence of the relevant bodies of internal affairs (police).

Administrative proceedings relating to the unlawful use of intellectual property and unfair competition associated with the use of intellectual property fall under the competence of the Federal Service for Surveillance on Consumer Rights Protection and Human Wellbeing (Rospotrebnadzor) or the Federal Anti-monopoly Service.

1.5 What is the regulator’s general approach in regulating the franchise sector?

The franchise sector is not regulated by a regulatory body. With regard to intellectual property, Rospatent is guided by the existing laws when registering franchising agreements, as well as their amendments or termination.

In 2009, Rospatent adopted Recommendations on Reviewing Agreements on the Disposal of Exclusive Rights for the Use of the Results of Intellectual Activity and Means of Individualisation, including franchising agreements. The recommendations provide guidance on the assessment of documents submitted for the registration of grants of licences under franchising agreements.

Although some provisions of the recommendations seem questionable to the author (eg, those allowing the registration of franchising agreements to use a firm name), they imply flexibility in certain aspects. For instance, although only commercial legal entities and individual entrepreneurs can enter into franchising agreements, the recommendations suggest that registration should not be denied if the submitted franchising agreement does not contain details identifying the individual acting as one of the parties as an individual entrepreneur. In the view of Rospatent, the reasonableness and good faith of participants in civil law relations should be assumed in such situations.

1.6 Are there any trade associations for the franchise sector? If so, what are the conditions for membership? What are the commercial implications of not being a member?

There are several franchise associations in Russia. Membership of these associations is not mandatory, but may yield certain benefits for franchise businesses.

The most important franchising association in Russia is the Russian Franchise Association (RFA). This was established in 1997 as a non-profit public organisation with the purpose of supporting and protecting the interests of its members in order to create a favourable legal and economic environment for the spread of franchising in Russia. To become a member of the RFA, a franchisor must:

• provide evidence of trademark registration and a sample of its commercial offer for franchisees; 
• and accept the RFA Ethical Code.

Membership of the RFA is subject to fees established by the association.

The RFA issues publications and organises seminars, exhibitions, and other events, including business delegations to other countries. It represents the interests of its members before the authorities, public organisations of entrepreneurs and other businesses. Moreover, the RFA provides consulting services and helps foreign brands to adapt to the specifics of the Russian market. In 2020, the RFA submitted proposals to the Russian government on government support measures for franchisees required due to the spread of COVID-19.

More information about the RFA can be found at https://rusfranch.ru/.

If a business decides not to join a franchise organisation, it will still be entitled to engage in franchising activities on the franchisor or franchisee side. However, it will be unable to enjoy the services and other benefits associated with membership.

2.Franchise market

2.1 How mature is the franchise sector in your jurisdiction?

The franchising model emerged later in Russia than in Western Europe and the United States. Franchising (commercial concessions) was first regulated in 1996 through the adoption of Part IV of the Russian Civil Code.

Today, Russia is a world leader in terms of growth in the number of franchises. According to a report by Franshiza.ru, the volume of the Russian franchising market at the end of 2019 was about RUB 2.8 trillion. Currently, the share of Russian franchisors exceeds the share of foreign franchisors and continues to grow. Many Russian franchisors – such as Pyaterochka, MegaFon and FixPrice – have become widely known outside the country.

However, the conditions for franchising in Russia are not always ideal. The problems include:

• imperfect and underdeveloped legislation;
• a lack of suitable real estate;
• uneven prevalence across the territory; and
• many offers from little-known franchises that have no real value.

This situation can be explained by the fact that franchising in Russia has a relatively short history and does not yet fully meet global standards. However, the intense pace at which the Russian franchising market is developing suggests that non-compliance with such standards should rapidly decrease. As a result, Russia’s relatively young franchising market should not lag behind mature markets in the future.

2.2 In which sectors is franchising most common?

The business sectors in which franchising is most common in Russia are as follows:

• Services for individuals and businesses (more than 40% of franchise offers): This sector covers a wide range of services, including: 
  • travel agencies;
  • beauty salons and barber shops;
  • dry cleaners;
  • auto repair shops;
  • educational, IT and medical services; and
  • support services.

The fact that the service sector ranks first in Russia is surprising, as worldwide the restaurant and cafe sector occupies this position. This reflects the creativity of Russian businesspeople in finding new channels for their business.

• Restaurants and cafes (more than 20% of franchise offers): Russia is home to franchises for a wide range of catering establishments, from small fast-food cafes to drinking establishments and restaurants of various national cuisines.

• Non-food retail trade (about 20% of franchise offers): This sector includes:
  • clothing;
  • footwear;
  • sporting goods;
  • household goods;
  • goods for pets; and
  • pharmacies.

Retail trade in groceries (about 7% of franchise offers): This sector includes grocery stores, including meat and alcohol stores, ready-made food stores and so on.

The remaining less common franchises relate to production, construction and other sectors.

2.3 Who are the biggest and most successful franchisors in your jurisdiction? How are they typically structured?

The largest franchisers in terms of network size include:

• Bosch Car Service (service station);
• Boxberry (pick-up points, delivery service);
• OZON (pick-up points);Fasol (grocery store);
• 1C (software support); and
• Championika English (children school of English).

The most successful franchisors in Russia in terms of the volume of franchises sold include:

• 1C (software support);
• Pedant.ru (repair of smartphones and laptops);
• Gemotest (medical laboratory);
• Helix (medical laboratory);
• Invitro (medical laboratory);
• Piv & Co (alcoholic drinks store);
• Sun School (kindergartens); and
• Fit Service (car repair and maintenance).

The most common model for popular Russian franchises in the service/catering sector is direct franchising, in which the franchisee receives a certain package of rights and benefits from the franchisor directly, without intermediaries. This package usually includes:

• the right to use means of individualisation (eg trademarks);
• the right to open a service point/store with a specific location;
• the right to use business technologies of the franchisor; and
• the right to receive detailed instructions and training and other support from the franchisor.

The franchisee undertakes to adhere to a brand style and business format. Typically, the franchisor charges:

• a one-off lump-sum fee to join the franchise programme; and
• monthly royalties in the form of a fixed amount or percentage of revenue.

However, some successful brands have specific requirements for franchisees. For example, 1C demands that franchisees:

• purchase a software product; and
• ensure that a certain number of employees pass 1C certification to provide a set of services primarily associated with 1C software products.

3.Franchising models

3.1 Is master franchising or the development model most common in your jurisdiction?

Both of these models deal with the development of multiple franchise units and afford certain advantages arising from the legislative, geographical and other conditions that are typical of Russia.

Typically, master franchising is used where the franchise owner does not have sufficient knowledge of the Russian market or culture, and would like to avail of the master franchisee’s expertise in local legislation, customer preferences and other aspects. This model implies that the franchise owner sells the right to develop a certain territory by granting sub-franchises to third parties and opening own franchise points (optional) to a master franchisee. The master franchisee assumes all responsibilities of the franchise owner towards its sub-franchisees. In Russia, master franchising is usually implemented by large foreign franchisors by issuing a master franchise for the country or a group of neighbouring countries. For example, the master franchise model is successfully used by Coca-Cola in Russia.

Development franchising is also well known in Russia. For instance, supermarket brand Pyaterochka has used this model to expand its business into different regions of Russia. According to this model, an area developer receives an exclusive franchise for the development of a specific geographical territory and undertakes to open a certain number of units within the agreed timeframe. The model often does not imply the grant of sub-franchises, and the area developer does not assume obligations that are typical of a master franchisee. It also provides the franchisee with an opportunity to develop the area without competing with others.

In Russia, all common methods of franchising can be used (direct, multi-unit franchising, joint ventures).

One of the most common models in Russia is direct franchising, which is the opposite of master franchising. Under this model, relationships are built directly between the franchisor and franchisees without any intermediaries; franchisees are not granted the right to offer franchises to sub-franchisees. This type of franchising may cover:

• production;
• the sale of goods;
• the provision of services; or
• the performance of works.

This franchise model may have territorial limitations where the franchisor grants the franchisee the right to open one or several units in a certain territory.

Foreign franchisors may resort to a franchise model involving a special representative in a certain area instead of master franchising. This model is similar in outcome to master franchising, but has differences in implementation. The franchisor personally makes decisions on the sale of franchises and enters into legal relationships with the franchisees directly. At the same time, the franchisor empowers its representative in Russia, without granting it the status of a general franchisee, to resolve organisational issues, conduct training and exercise control over the franchisees. Special representatives may also be responsible for searching for and recommending potential franchisees to the franchisor. All payments by the franchisees are made to the franchisor directly and no transactions take place between the representative and franchisees. Depending on the terms of the agreement with the franchisor, special representatives may receive commission for each franchisee solicited and fees for supervising and servicing franchisees.

3.3 What are the potential advantages and disadvantages of these different models?

The advantages of the direct franchise model include the following:

• Unmediated communication with the franchisor allows the franchisee to receive first-hand information and closely follow all aspects of the brand;
• A direct franchise can be more affordable for franchisees in cost terms than a master franchise; and
• Franchisees are highly motivated for success, as this is usually their main business.

The disadvantages of the direct franchise model include the following:

• Developing a franchise system via direct franchise is slower and more expensive for franchisors than through a master franchise;
• Compared to a master franchise, maximum sales are capped and profits are usually lower; and
• The franchisor must deal with each franchisee individually.

The advantages of a franchise involving a special representative include the following:

• The franchisor retains the ability to control key decisions on the issuance of a franchise while outsourcing the functions of supervising the franchisee;
• The franchisor does not need a staff of recruiters, trainers and local franchisee support; and
• Unlike master franchising, the franchisor receives royalties in full directly from the franchisees – the representative is paid only for its functions.

The disadvantages of a franchise involving a special representative include the following:

• Unlike in a master franchise, the franchisor carries all of the burden associated with making decisions on selecting franchisees and offering franchises;
• The franchisor bears the risk of liability directly to franchisees; and
• Unlike in a direct franchise, there may be a delay in the development of the territory by the representative (the same applies to a master franchise).

See also question 3.1 for the differences between the master and development franchise models.

3.4 What specific considerations should be borne in mind in the case of cross-border franchising into your jurisdiction?

Foreign companies that are planning to expand their business in Russia using franchising should consider the following:

• The franchising model should reflect the franchisor’s goals, financial and organisational opportunities and market characteristics.
• Foreign franchises often enter the Russian market through Moscow and St Petersburg, primarily due to their advanced economic development in comparison with other regions.
• The legal aspects associated with the regulation of franchising agreements under Russian law include the following:
  • Franchising agreements must be concluded in writing;
  • The grant of a licence under a franchising agreement is subject to state registration with the Federal Service for Intellectual Property;
  • Each of the parties to a franchising agreement concluded without a particular validity period is entitled to withdraw from it at any time by notifying the other party six months in advance, unless the agreement stipulates a longer period;
  • The franchisor bears subsidiary liability for claims to the franchisee regarding the inconsistency of the quality of goods (works, services) sold or provided by the franchisee under the franchising agreement. In case of production of goods under a franchise, the franchisor is liable both independently and jointly with the franchisee regarding claims to the franchisee; and
  • Upon the end of the franchise term, the franchisee, having complied with the terms of the franchise agreement, enjoys the preferential right to enter into a franchise agreement with the franchisor for a new term (see also question 7.7)
• The taxation aspects include the double taxation treaties applicable to the chosen franchise structure.

Definitions and scope of application

4.1 How is ‘franchising’ defined in your jurisdiction?

Russian law uses the term ‘commercial concession’ to refer to the concept known worldwide as ‘franchising’. The definition of a ‘commercial concession agreement’ is set out in Article 1027 of the Russian Civil Code as follows: “Under a commercial concession agreement one party (the right holder) obligates itself to provide to another party (the user) against remuneration for a definite or indefinite term the right to use in entrepreneurship activities a complex of exclusive rights owned by the right holder, which includes the right to a trademark, service mark, as well as rights to other objects of exclusive rights stipulated by the agreement, in particular, business name, know-how.”

For the purposes of this Q&A, the terms ‘commercial concession’ and ‘franchising’ have the same meaning. The ‘rights holder’ and the ‘user’ are respectively referred to as the ‘franchisor’ and the ‘franchisee’.

4.2 What are the key requirements that apply to franchising? Is pre-contractual disclosure required? Is registration of documentation required? Are mandatory terms imposed?

The following key requirements should be considered when applying for or granting a franchise:

• Franchise agreements can be concluded only by commercial legal entities or individual entrepreneurs. At the same time, foreign franchisors are not required to register an affiliate in Russia, provided that they comply with the above requirements.
• Trademarks and patents which are licensed to the franchisee under a franchise agreement are subject to registration prior to the conclusion of a franchising agreement. Based on the Madrid Agreement and the Madrid Protocol, international trademark registrations with the World Intellectual Property Organization designating Russia are recognised along with local registrations with the Federal Service for Intellectual Property (Rospatent).
• A franchising agreement must be concluded in writing; otherwise, it is deemed null and void.
• The grant of a licence under a franchising agreement is subject to state registration with Rospatent.

No pre-contractual disclosure is required by law (see question 6.1).

Franchising agreements must include the following essential terms:

• the grant of the right to use a selection of IP rights, which mandatorily includes a trademark or a service mark, by the franchisor to the franchisee. An agreement which does not grant this right cannot be considered a franchising agreement. However, this will not necessarily invalidate the agreement;
• the volume in which the franchisee may use the franchisor’s IP rights; and
• the amount and form of compensation for the grant of the franchise (eg, one-time payment, royalty, mark-up on the wholesale price).

4.3 What specific activities (if any) are prohibited under the franchising laws and regulations? What are the potential consequences of breach?

Russian franchise laws do not restrict the grant of franchises in any specific areas. However, the civil circulation of certain objects of civil rights is restricted. In particular, some of these may belong only to certain persons or may be dealt with only on the basis of special permission (eg, tobacco products, narcotics, weapons).

Moreover, activities in certain areas are subject to licensing (eg, the production and sale of pharmaceuticals).

Failure to comply with these restrictions may lead to administrative or criminal liability.

Conducting activities without a licence may be subject to the following administrative fines (with or without confiscation of produced products, instruments and raw materials):

• for legal entities – from RUB 40,000 to RUB 50,000; and
• for company officials – from RUB 4,000 to RUB 5,000 RUB.

The same infringements associated with large-scale income generation may be punished under the Criminal Code with:

• a fine of up to RUB 300,000;
• withdrawal of salary or other income for a period of up to two years;
• compulsory work for up to 480 hours; or
• imprisonment for up to six months.

Liability for the committed crime is imposed on the responsible individual.

Failure to obtain a licence required under Russian law might also result in the liquidation of the franchisee’s legal entity or the franchisor’s affiliate established under Russian law.

5. Initial steps

5.1 Are there any restrictions on foreign franchisors entering your jurisdiction?

No, there are no restrictions on foreign franchisors entering Russia compared to local franchisors.

5.2 What is the most common structure adopted by foreign franchisors entering your jurisdiction?

Significant foreign franchisors use:

• master franchising, where a franchisee appointed by the franchisor grants franchises to sub-franchisees; or
• development franchising, which grants the right to develop a specific territory by open an agreed number of units.

However, many other foreign franchisors prefer to structure relationships with franchisees using the direct franchising model, through which franchises are granted directly to individual franchisees without the right to appoint sub-franchisees.

Franchisors rarely acquire shares in franchisees, since franchisees are usually expected to run the business on their own, and control functions are exercised on the basis of franchising agreements.

The whole chain of licences (from the holder of the rights to the trademarks or service marks to the franchisee) must be registered with the Federal Service for Intellectual Property.

5.3 What requirements or restrictions apply with regard to the selection and recruitment of franchisees?

There are no such requirements. However, franchisees should comply with mandatory regulatory requirements established for the relevant activities or goods. See also question 4.3.

5.4 Are franchisees subject to any legal obligations when purchasing a franchise?

During the term of the franchise agreement, the franchisee must:

• use the franchisor’s trade name, trademark or other means of individualisation in the course of activities and within the limits provided by the franchise agreement;
• ensure that the quality of goods, works and services provided under the franchise agreement are analogous to those of the franchisor;
• observe the instructions and directions of the franchisor that are intended to effect compliance with the character, manner and conditions for use of the franchise within the franchisor’s system, including directions concerning the internal and external design of the commercial premises used by the franchisee when exercising the rights provided to it under the franchise agreement;
• render to customers all additional services which would be expected as a direct customer of the franchisor;
• refrain from disclosing the franchisor’s know-how and other confidential commercial information received from the franchisor;
• provide the agreed quantity of sub-franchises if this obligation is included in the franchise agreement; and
• inform customers, in the manner most apparent to them, of the fact that it is using a trade name, trademark or other means of individualisation on the basis of a franchise agreement.

In addition, according to the general rules established by the Civil Code, a franchisee must behave in good faith (see question 7.6).

6. Disclosure and due diligence

6.1 What pre-contractual disclosure requirements apply to franchisors in your jurisdiction?

Russian law does not provide for express obligatory pre-contractual disclosure, but it does impose the following obligations regarding the disclosure of documents and information:

• The franchisor must provide all required technical and commercial documentation and other information to the franchisee, and instruct the franchisee and its employees on all aspects associated with the contracted rights. The law does not require that the documents and information in question be provided prior to conclusion of the agreement.
• The parties have the right, but not the obligation, to provide each other with documents and information which are important for the conclusion of an agreement at the negotiation stage. If one party receives confidential information from the other party in the course of the negotiations, it is obliged to refrain from disclosing or improperly using that information for its own purposes, irrespective of whether the agreement is eventually concluded. Failure to comply with this requirement triggers an obligation to reimburse damages to the other party.
• In negotiating a franchising agreement, the parties may bear pre-contractual liability for conducting or interrupting the negotiations in bad faith. Acting in bad faith is presumed if one party provides incorrect or incomplete information to the other party; or if it suddenly and unreasonably interrupts the negotiations, which the other party could not have reasonably expected. A party acting in bad faith must reimburse damages to the other party, including the expenses incurred in connection with the negotiations and the loss of opportunity to conclude an agreement with a third party.

6.2 What formal, substantive, and procedural requirements apply with regard to the disclosure document in your jurisdiction?

Russian law does not establish any requirements regarding the format of pre-contractual disclosure. However, the parties may agree themselves on the standards of disclosure at the negotiation stage by entering into an agreement on the negotiation procedure.

This agreement may, among other things:

• specify a requirement to engage in the negotiations in good faith;
• provide for cost distribution between the parties; and
• establish penalties for breach of the obligations stipulated in the agreement.

At the same time, an agreement on the negotiation procedure cannot reduce liability for acting in bad faith.

6.3 What pre-contractual disclosure requirements apply to franchisees in your jurisdiction?

Franchisees have virtually the same obligations at the negotiation stage as franchisors. See also questions 6.1 and 6.2.

6.4 What are the consequences of any breach of the pre-contractual disclosure requirements?

As Russian law contains no express requirements on obligatory pre-contractual disclosure, there is no liability or other consequences associated with failure to provide any specific documents or information to the other party at the negotiation stage. If the disclosure obligations mentioned in question 1 are breached, the party in breach is obliged to compensate the other party for the damages suffered. Furthermore, if the parties establish disclosure requirements in an agreement on the conduction of negotiations, they may also agree on contractual penalties in that agreement (see question 6.2).

6.5 What other due diligence should the parties undertake before entering into a franchise agreement?

As a rule, due diligence conducted by the parties at the negotiation stage before entering into a franchise agreement encompasses the following aspects:

• corporate law (eg, registration status, executive bodies and approval structure);
• commercial and financial standing;
• intellectual property;
• real estate;
• litigation;
• tax; and
• regulatory compliance.

The actual scope of the due diligence depends on the specifics of the franchise model and industry.

6.6 Are there any restrictions imposed upon franchise brokers in your jurisdiction?

No, there are no specific requirements imposed on franchise brokers under Russian law.

7. Franchise agreement

7.1 What formal, substantive, and procedural requirements apply with regard to the franchise agreement in your jurisdiction? Are there any mandatory terms? What terms are typically included in the agreement?

See question 4.2. In addition to the essential terms listed, franchising agreements usually contain the following terms:

• parties (names, addresses and registration details);
• duties and covenants (eg, compliance with operational manuals, product quality assurance, site selection);
• confidentiality;
• exclusivity of the franchise;
• term (definite or indefinite);
• territory;
• the right of the franchisee to grant sub-franchises;
• termination (right of unilateral termination, reasons of termination) and post-termination obligations;
• governing law and jurisdiction; and
• the languages in which the franchising agreement is drawn up and the language that prevails in case of discrepancies.

7.2 Do any specific requirements apply regarding the governing law or jurisdiction of the franchise agreement?

By default, international franchising agreements are governed by the law of the country for which the franchise is granted (or, if it is granted for several countries, the country where the franchisor resides or has its main place of business).

The parties may agree on the application of local or foreign law. However, the following must be borne in mind:

• Mandatory rules of Russian law apply irrespective of the chosen law. Such rules can be expressly stipulated or recognised as such due to their extraordinary importance (eg, if they are aimed at protecting the public interest associated with the fundamentals of Russian’s economic, political or legal system).
• Foreign law will not apply if the consequences of its application would obviously contradict the fundamentals of the Russian legal system.
• If all circumstances concerning the essence of the parties’ relationship relate to only one country, the choice of foreign law cannot affect the mandatory norms of that country.
• The application of Russian public law (eg, tax, competition) cannot be excluded or replaced by the parties with relevant provisions of foreign law (see also questions 1.1 and 1.2)

The choice of a foreign jurisdiction will be recognised by the local courts, although the enforcement of foreign state court decisions might be difficult in Russia due to the absence of relevant international treaties. However, arbitral awards obtained in other countries which have signed the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958 are enforceable in Russia, and vice versa.

See also question 15.1.

7.3 Does the franchisor have any mandatory rights and obligations under the franchise agreement?

The franchisor has the right to receive remuneration from the franchisee and to repudiate the agreement in the event of the following breaches by the franchisee:

• non-compliance with quality requirements;
• gross violation of the franchisor’s instructions; or
• failure to pay remuneration to the franchisor.

The Civil Code obliges the franchisor to provide all necessary technical and commercial documentation and information, as well as instructions relating to the rights contracted to the franchisee.

The franchise agreement may also establish the following obligations:

• to arrange for the state registration of the licence;
• to provide continuous technical and advisory assistance, including training for the franchisee’s employees;
• to exercise control over the quality of the franchisee’s goods, services or works; and
• to refrain from providing similar sets of exclusive rights to third parties within the area assigned to the franchisee, or from conducting own activities within this territory.

Subject to any special conditions included in the franchise agreement, the franchisor may also demand from the franchisee the opening of a certain amount of franchise units or impose certain non-compete obligations (see question 7.5).

7.4 Does the franchisee have any mandatory rights and obligations under the franchise agreement?

The Civil Code provides for the following rights of the franchisee under the franchise agreement:

• the right to use a selection of exclusive rights, which necessarily includes a trademark or service mark, and avail of the business reputation and commercial experience of the franchisee;
•  the right to receive from the franchisor all necessary technical and commercial documentation and information, as well as instructions relating to the contracted rights;
• a preferential right to conclude an agreement for a new term upon the expiry of the initial term, provided that the franchisee has duly performed its duties; and
• the right to demand termination of the agreement and compensation for damages if the franchisor changes the trade name that is part of the exclusive rights granted to the franchisee. If the franchisee decides not to terminate the franchise agreement, it may demand a commensurate reduction in the remuneration due to the franchisor.

See also question 5.4 regarding the obligations of the franchisee.

The following rights of the franchisee are optional and may be amended by the franchise agreement:

• the right to sell sub-franchises on the terms and conditions agreed with the franchisor;
• the right to receive from the franchisor continuous technical and advisory assistance, including training for the franchisee’s employees; and
• the right to demand a commensurate reduction in the remuneration if, during the term of the franchise agreement, the exclusive right expires or is terminated, but the franchise agreement remains in effect.

7.5 What restrictions can the franchisor impose on the franchisee’s activities under the terms of the franchise agreement (e.g, purchasing requirements, non-compete obligations, exclusivity, price control)?

The franchisor may provide instructions to the franchisee in order to ensure that the latter uses the franchisor’s exclusive rights in a way which is consistent with that of the franchisor. The franchising agreement can also include an obligation for the franchisee to agree with the franchisor on the location of commercial premises and their external and interior decoration.

In addition, Russian law explicitly allows for the imposition of the following non-compete obligations on a franchisee:

• to refrain from competing with the franchisor on the territory for which the franchising agreement is concluded regarding commercial activity which the franchisee conducts through the use of the licensed exclusive rights;
• not to acquire similar rights under franchising agreements with competitors or potential competitors of the franchisor;
• to sell goods, perform works or render services at the prices established by the franchisor, and/or within the agreed territory; and
• to refrain from selling similar goods, performing works or rendering services under the trademarks and trade names of third parties.

At the same time, discriminatory conditions – for example, those requiring the franchisee to sell goods or provide works and services only to clients which are located or reside in a given territory – are not allowed and shall be deemed null and void.

As a general rule, restrictions imposed on the franchisee must comply with Russian competition law. For instance, obligations that would constitute an abuse of a dominant market position are prohibited.

7.6 Is there a duty of good faith imposed upon the franchisor and franchisee?

All participants in civil law relations must act in good faith regarding the establishment, exercise and protection of civil law rights and the performance of obligations. This rule is generally implied.

As a general rule, both when establishing and fulfilling obligations and following their termination, the parties must:

• act in good faith;
• consider each other’s rights and legitimate interests;
• cooperate to the extent necessary; and
• provide necessary information.

The abuse of rights – for example, exercising civil rights with the exclusive intention of harming another person, circumventing the law with unlawful aims or otherwise knowingly exercising civil rights in bad faith – is prohibited.

One important implication of these fundamental civil law principles relates to the concept of estoppel, which can generally be defined as a legal restriction on contradictory behaviour. For instance, a party cannot refer to the invalidity of a contract based on circumstances of which it was aware when it expressed its will to enter into the contract. By way of example, according to existing court practice, a franchisee may not claim that the franchising agreement is invalid and refuse to perform it, or demand the return of funds paid to the franchisor due to the absence of state registration of the agreement, if the parties have begun to execute it (eg, the franchisee has paid the fees established by the franchising agreement, or the franchisor has started to provide consulting and other support to the franchisee).

7.7 What are the parties’ rights and obligations in relation to renewal of the franchise agreement, and what is the process for renewal?

Upon the expiry of the term of the franchise agreement, a franchisee which has duly performed its obligations has a preferential right to conclude an agreement for a new term. If the franchisor refuses to conclude the franchise agreement with the franchisee for a new term, but, within one year of the expiration date of the previous agreement, enters into a franchise agreement on the same conditions with a third party, the franchisee may commence court proceedings to demand the transfer of the rights and obligations of the new franchisee to itself and/or the reimbursement of damages incurred due to the franchisor’s refusal to renew the agreement.

7.8 What formal, substantive and procedural requirements apply with regard to termination of the franchise agreement in your jurisdiction?

 An agreement concluded for an unlimited term can be terminated by either party, through sending written notice to the other party at least six months in advance, unless a longer term is established in the franchise agreement.

If the franchise agreement provides for a fixed term or if no validity term is specified, either party may terminate the franchise agreement by sending written notice to the other party at least 30 days in advance, if the franchise agreement provides for the possibility of termination in the event of payment of a monetary sum as a form of compensation.

The franchisor may also terminate the agreement if the franchisee has committed any of the following breaches and does not cure such breach within a reasonable timeframe following receipt of written notification of the franchisor, or has committed such a breach repeatedly within one year:

• non-compliance with quality requirements;
• gross violation of the franchisor’s instructions and directions intended to ensure compliance with the character, manner and conditions of the use of the provided exclusive rights; and
• failure to timely pay remuneration to the franchisor.

The agreement automatically terminates in the event of:

• termination of the franchisor’s rights to the trademark, service mark or trade name granted to the franchisee, unless this is replaced by another IP right; or
• the bankruptcy of one of the parties.

The termination of a franchising agreement is subject to state registration.

See also question 7.4 regarding the consequences of changing the trade name of the franchisor.

7.9 Are there any restrictions on repatriating moneys out of your jurisdictions?

There are no restrictions on the repatriation of money out of Russia, including franchise fees payable to foreign franchisors. The parties may also agree on payments not only in roubles, but also in a foreign currency of their choice.

Nevertheless, certain Russian currency control requirements should be considered when transferring money from Russia to foreign countries. Franchise agreements must be registered with the Russian bank of the Russian party which makes or receives payments under the franchise agreement if the payment exceeds RUB 3 million. Usually, the bank will require that the agreement be provided in a Russian or a bilingual version.

If the payments to be made under the franchise agreement do not exceed the limit, there is no need to register the agreement, but the bank may require the submission of the agreement and other documents confirming payment and fulfilment of the agreement (eg, invoices, acts of acceptance).

In general, the Russian currency regulations have been streamlined in recent years and can now be regarded as additional paperwork, rather than a substantial obstacle to payments by Russian franchisees to foreign franchisors.

However, if a foreign franchiser has its seat in a country which is blacklisted by the Financial Action Task Force on Money Laundering (eg, Mauritius, Jamaica, Syria), payments to the foreign franchiser can be thoroughly audited by Russian banks.

7.10 Are there any withholding taxes that apply to franchising in your jurisdiction?

Royalties paid under a franchising agreement are recognised as income of a foreign franchisor received in Russia from the use of intellectual property and are thus subject to Russian withholding tax.

However, most double taxation treaties to which Russia is a party provide that royalties are exempt from Russian withholding tax or subject to a reduced tax rate (usually 10%).

The privileges under double taxation treaties are applicable if the foreign franchiser presents a tax residency certificate and documents confirming beneficiary ownership on the royalty to the Russian franchisee. Such documents should be provided annually before the Russian franchisee pays royalty to the foreign franchisor.

8. Operational standards

8.1 What legal status does the operations manual have in your jurisdiction?

In Russia, operations manuals have no specific legal status. In franchise relations, an operations manual can be attached as an annex to the franchise agreement, becoming an integral part thereof and being binding on the franchisee.

8.2 How can the franchisor ensure compliance with its operational standards during the term of the franchise agreement?

The franchisor is entitled to issue instructions to the franchisee. The instructions may be issued in any form, including an operations manual. The franchisor is also entitled to monitor the franchisee’s compliance with its instructions. The franchisee’s failure to comply may lead to fines or early termination of the franchise agreement by the franchisor.

Furthermore, most provisions of an operational manual are binding on the franchisee, as, under a franchise agreement, the franchisee is obliged, among other things:

• to comply with the instructions and directions of the franchisor, aimed at ensuring that the nature, methods and conditions of use of the exclusive rights granted correspond to how these rights are used by the franchisor. Such instructions may also relate to the external and internal design of commercial premises used by the franchisee; and
• to ensure that the quality of goods, works or services produced, performed or provided by the franchisee corresponds to those produced, performed or provided by the franchisor.

8.3 Can the franchisor make unilateral changes to its operational standards during the term of the franchise agreement?                   

Under the general rule of Russian law, an agreement may be amended by mutual consent of the parties. However, the parties may agree in the franchise agreement that such an agreement (and/or any integral parts thereof, including the operations manual/operational standards) may be changed unilaterally by the franchisor. In practice, many franchisors are entitled by the franchise agreement to unilaterally change their standards or operations manuals, and franchisees are obliged to comply with such standards upon receipt of notification from the franchisor.

A party must act reasonably and in good faith when exercising its rights to change the agreement unilaterally. It is possible that in case of a dispute, a court may conclude that the franchisor acted in bad faith and/or unreasonably, and thus that the respective unilateral amendments to operational standards may be invalidated. However, in our view, this risk is rather low if the franchisor’s right to amend the standards is incorporated directly in the franchise agreement.

9. Intellectual property

9.1 How are brands protected in your jurisdiction and what specific implications does this have in the franchising context?

Trademarks and service marks are key elements of franchising agreements under Russian law. If an agreement does not grant rights to use a duly registered trademark or service mark, it cannot be regarded as a franchising agreement.

• In Russia, brands are usually protected as:trademarks, which serve to distinguish the goods of individual entrepreneurs or legal entities; or
• service marks, which serve to distinguish services or works.

There are no differences in the legal regimes governing trademarks and service marks; both are subject to state registration.

Under Russian law, verbal, pictorial, volumetric and other designations or combinations thereof can be registered as trademarks. Trademarks can be represented in any colour or colour combination.

Russia is a signatory to the Madrid Agreement and Madrid Protocol, and international registrations designating Russia are thus also recognised in Russia. More recently, the countries forming the Eurasian Economic Union (EAEU) signed the Agreement on EAEU Trademarks, Service Marks and Appellations of Origin. As of the time of writing, the agreement had not yet become effective for the EAEU member states. Once it has taken effect for all member states of the EAEU, it will be possible to obtain protection of trademarks and service marks across the whole territory of the EAEU by submitting a single application.

9.2 How are other intellectual assets of the franchisor (e.g, know-how, trade secrets) protected in your jurisdiction and what specific implications does this have in the franchising context?

Apart from trademarks and service marks, the most relevant types of intellectual property recognised by Russian law in terms of franchising are inventions, utility models, industrial models, trade names and know-how.

Trade names are protected as a separate means of distinguishing businesses in Russia, and differ from company names. They do not require separate registration.

Inventions, utility models and industrial models are patentable and have certain exclusivity periods (10, five and 20 years respectively). Patents are territorial and must be applied for in each country in which protection is sought. Russia is a party to the Patent Cooperation Treaty (PCT) and recognises international applications for invention patents filed under the PCT procedure. It allows for the application date in different member states to be established by filing a single application in one language and initiating a patent search. The PCT procedure optimises the costs and effort required to obtain protection in different countries. However, the national patenting stage cannot be avoided in each country where the applicant seeks protection.

Trade secrets as such are not protected as IP rights, unless they have the status of know-how. For this purpose, the owner must take reasonable measures to keep commercial information that constitutes know-how in secret. Registration is not required.

Copyright on works of authorship (eg, operations manuals) is not subject to state registration or other formalities in order to be effective; such works enjoy protection from the moment of their creation. However, software and databases may be registered on a voluntary basis.

10. Employment

10.1 What is the applicable employment regime in your jurisdiction and what specific implications does this have in the franchising context?

The Russian employment regime mostly focuses on the protection of employees as the weaker party in labour relations. ‘At will’ dismissal of an employee by the employer is not possible, unless it concerns the CEO or a member of the executive board.

Employment agreements may be concluded for an indefinite or fixed term. A fixed-term agreement is usually favourable for the employer, as it ends upon the expiry of the term. Entering into a fixed-term employment agreement is permitted only if the work satisfies any of the legal grounds set out in the Labour Code, such as the following:

• The work is temporary and will last for not more than two months;
• The work goes beyond the usual activities of the employer (eg, reconstruction, installation or commissioning); or
• The work is associated with a deliberately temporary (up to one year) expansion of production or the volume of services provided.

The maximum term for fixed-term employment agreements is five years. Such an agreement must indicate the term (or the rules defining the term) and reasons for its conclusion. Otherwise, the agreement is considered to be concluded for an indefinite period.

The employer may terminate the employment agreement only based on the grounds set out in the Labour Code – for example, in order to reduce headcount or in the event of substantial breaches by the employee of the employment agreement.

10.2 Can franchisees be deemed to be employees of their franchisor?

Under Russian law, only commercial organisations and individual entrepreneurs may be parties to a franchising agreement, so the franchisor and franchisee are in practice separate and independent businesses. Thus, their relations are regulated by the civil legislation only and are not subject to employment law rules.

11. Competition

11.1 What is the applicable competition regime in your jurisdiction and what specific implications does this have in the franchising context?

Russian competition law regulates public procurement and merger control, and imposes prohibitions on cartels, abuse of dominant positions and unfair competition.

Franchising agreements may impose antitrust restrictions on both parties which are prohibited in other so-called ‘vertical’ agreements (see question 7.5). However, contractual restrictions can be recognised as invalid on the initiative of the competition authorities or interested parties if they infringe competition law, considering market conditions and the economic state of the parties.

Franchising agreements may not contain provisions that oblige the franchisee to sell goods or provide services and works exclusively to clients which are located or reside in the territory defined in the relevant franchising agreement.

Furthermore, competition law restrictions regarding monopolistic activities may apply. As a general rule, abuse of dominant market position is prohibited. For example, the imposition of monopoly pricing (high or low), discriminatory conditions or detrimental conditions on the counterparty may be regarded as such abuse.

Among other infringements, the unlawful acquisition or use of intellectual property or trade secrets may be regarded as unfair competition.

12. E-commerce

12.1 How is e-commerce regulated in your jurisdiction and what specific implications does this have in the franchising context? Can franchisees be prohibited from using e-commerce in their businesses?

In Russia, there is no separate e-commerce legislation. Thus, the different aspects of online sales are regulated by various laws of a general nature.

The Civil Code explicitly allows for agreements to be concluded in electronic form. In this situation, the written form of the agreement is considered satisfied if the content of the agreement can be reproduced intact in a tangible medium. The requirement for a signature is considered satisfied if any method is used that allows for the reliable identification of the party which has expressed its will. Online shops usually provide for an opportunity to create a personal account with a log-in and password; in certain cases, the use of such accounts can be recognised as the signature of a document with a simple electronic signature.

Russian consumer protection law governs the activities and liability of online aggregators which act as intermediaries between different sellers and customers. Furthermore, the Russian government has adopted special Provisions on the Remote Sale of Goods, which prohibit the distance sale of alcohol and prohibited or restricted goods.

13. Consumer protection

13.1 What consumer protection measures are applicable in your jurisdiction and what specific implications do these have in the franchising context?

Consumer protection legislation as an integral part of Russian public law has direct application, irrespective of which national law governs the franchise agreement. It establishes:

• the rights of consumers (eg, in relation to the quality and safety of goods, services, works or information);
• the obligations of producers and sellers;
• the liability of producers and sellers for the infringement of consumers’ rights; and
• other aspects associated with consumer protection.

The types of protection available to consumers depend on the particular infringement of their rights and may include:

• compensation for damages;
• refusal to perform the agreement;
• return of payment for the goods, services or works; and
• compensation for moral harm.

Along with the remedies established by law, agreements with consumers may include additional provisions regarding the liability of the seller. Moreover, the law establishes special penalties which can be imposed on the seller by the courts if the consumer’s claim has not been satisfied voluntarily.

13.2 Are franchisees covered under any of these consumer protection measures?

No, franchisees are not covered under consumer protection measures, as franchisees can only be legal entities or individual entrepreneurs and therefore do not have the status of consumers under Russian law. However, the customers of the franchisee may be consumers protected by the relevant laws, and claims asserted by such consumers against the franchisee may potentially lead to the liability of the franchisor (see question 15.3).

14. Data security and cybersecurity

14.1 What is the applicable data protection regime in your jurisdiction and what specific implications does this have in the franchising context?

If the parties to a franchising agreement deal with the processing of personal data, they must comply with Russian personal data law, including the requirements to conduct the initial processing of Russian citizens’ personal data on Russian servers. Moreover, the Russian franchisee as an employer is obliged to develop and adopt internal policies that regulate all information relating to personal data and how the employer receives, processes, stores and destroys such data.

In order to protect confidential information under Russian law, companies usually introduce a trade secret regime. To this end, an internal policy and set of documents must be drawn up which:

• describe what constitutes protected information;
• technically ensure its protection; and
• regulate how this information is stored and may be transferred.

Employees should demonstrate their familiarity with the internal policy through signature thereof. In addition, when concluding any transaction including a franchising agreement, the parties can:

• specify what information will be classified as a trade secret, either therein or in a separate document; and
• agree on other detailed provisions, including the liability of both parties if the protected information is disclosed and instructions on how the information should be used.

The law sets out a list of information that cannot be subject to limited access, which includes:

• the constituent documents of a legal entity;
• licences;
• the number and composition of employees;
• the remuneration system;
• working conditions;
• indicators of industrial injuries and occupational morbidity;
• payment of salaries and social benefits;
• information on environmental pollution; and
• information on the state of fire safety.

14.2. What cybersecurity obligations are applicable in your jurisdiction and what specific implications does this have in the franchising context?

When transmitting information in digital form between the parties to a franchising agreement, the order to transfer confidential information and personal data must be accompanied by special means of protection against unauthorised access, cryptographic protection or authentication. The parties’ obligations not to disclose such information are exactly the same as with any confidential information and personal data held in hard copy or on another storage device, if the organisation has established a trade secret regime and internal policies, and has implemented ways to protect, store and transfer such information.

With regard to the processing of personal data, depending on the situation, both franchisee and franchisor may be regarded as personal data operators or processors, resulting in certain obligations to protect personal data from unauthorised disclosure, access, use, distribution and so on. The necessary level of protection and the actual technical requirements which must be met will depend on the types of threats to which the company is exposed, in accordance with the established criteria.

15. Disputes

15.1 In which forums are franchising disputes typically heard in your jurisdiction? What issues do such disputes typically involve?

Franchise agreements often contain clauses under which disputes between the parties must be resolved by an arbitration tribunal. Famous international arbitration tribunals include those operating under the Vienna Rules, the Stockholm Chamber of Commerce Rules or the International Chamber of Commerce Rules. Foreign arbitral awards are recognised and enforced in Russia on the basis of the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Parties which prefer a Russian arbitration tribunal often agree on arbitration before the International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation.

If the agreement contains no dispute resolution clause, either party may sue the other before the Russian state commercial (arbitrazh) court at the place where the other party has its place of business. Within the arbitrazh court system, there are three further instances:

• the appellate courts;
• the cassation courts; and
• the Russian Supreme Court.

Certain IP-related conflicts, including franchising disputes, may fall under the competence of the special IP Court at the cassation stage.

The enforcement of Russian state court decisions abroad, as well as the enforcement of foreign state court decisions in Russia, may be difficult due to the absence of international treaties on legal assistance.

Franchising disputes usually involve issues such as:

• the legal qualification of the franchising agreement;
• the validity or termination of the agreement;
• registration;
• violation by the franchisee of the terms on the quality of its goods or services, or breach of the franchisor’s instructions;
• performance of payment obligations; or
• improper use of the franchisor’s intellectual property.

15.2 Is mediation commonly used in franchising in your jurisdiction? Is arbitration commonly used in franchising in your jurisdiction?

Both mediation and arbitration are available in Russia as alternative dispute resolution methods. However, mediation is rarely used, particularly in franchising disputes.
Compared to mediation, franchising conflicts are more often referred to arbitration. If the franchising agreement is governed by foreign law, arbitration might be an advantageous option for dispute resolution, due to the enforceability of foreign arbitral awards in Russia and those issued in Russia (see question 15.1). Moreover, arbitration tribunals are sometimes better qualified to handle difficult commercial cases compared to other the state courts and other dispute resolution forums.

15.3 Can class actions be brought in your jurisdiction? If so, what specific implications does this have in the franchising context?

In Russia, class actions are allowed, including cases associated with franchising. To launch a class action, the following conditions must be met:

• There is a group of at least five claimants;
• The claim is brought against a single defendant;
• The subject matter of the claim concerns common or similar rights and legitimate interests of the claimants;
• The rights of the claimants and the obligations of the defendant are based on similar facts; and
• All claimants use the same remedy.

The case will be led by one of the group members, which will assume all procedural rights and obligations of the claimants. Information about the class action will be published, so that all interested parties can join the process.

Class actions are permitted in all categories of disputes; in the franchising context, they may either:

• arise from relations between the franchisor and its (sub-)franchisees, provided that more than five companies or individual entrepreneurs have been granted franchises; or
• involve claims of consumers against the franchisee arising from its goods, services or works supplied within the framework of the franchise. In this case, the franchisor might have subsidiary liability for claims against the franchisee regarding the inconsistency of the quality of the goods, services or works. In case of the production of goods on the basis of a franchise, the franchisor might be liable jointly and severally with the franchisee regarding consumers’ claims against the franchisee.

15.4 Have there been any recent cases of note?

The court practice regarding franchising agreements is constantly developing. Cases heard by the Russian courts in recent years have involved issues associated with:

• the state registration of franchising agreements and the consequences of failure to register;
• contractual liability;
• reduction of penalties as disproportionate to the consequences of a breach; and
• the grounds for termination of the agreement.

Most interesting are those cases on the application of estoppel, in which the courts have refused to provide legal protection to parties that behaved in a contradictory manner and in bad faith (see question 7.6). Court practice on this concept is still developing, as the legislation setting out the general requirement to act in good faith and constituting a basis for the application of estoppel is relatively new.

Another interesting recent case dealt with the form of franchise agreements (Resolution of the IP Court of 18 June 2019 in Case A56-36727/2018). The IP Court found that the franchising agreement had been concluded by means of the exchange of documents via email. Therefore, the franchisee’s claim to have the effected payment returned as unjust enrichment was rejected the court, even though the parties had not signed the agreement in hard-copy form.

16. Trends and predictions

16.1 How would you describe the current franchising landscape and prevailing trends in your jurisdiction? Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?

Russia has established globally recognised franchising instruments and affords abundant opportunities for foreign investors that wish to enter or expand their business on the Russian market by offering franchises to Russian franchisees.

Russia recognises not only locally registered trademarks, but also international trademarks designating Russia. As outlined in question 9.1, at the beginning of 2020 the countries of the Eurasian Economic Union (EAEU) – Russia, Belarus, Kazakhstan, Armenia and Kyrgyzstan – signed the Agreement on EAEU Trademarks, Service Marks and Appellations of Origin (entered into force on 26.04.2021). We expect the agreement to have a positive impact on franchising in the region.

Although franchising is already well developed in many economic sectors, we believe that in the changing global business environment, there is still considerable potential for increased implementation of franchising models in many spheres. For instance, the COVID-19 crisis has led to a global shift in the perception of work and leisure, and in everyday routines. For example, it has created huge demand for IT tools and technologies allowing remote access to workplaces and the conduct of webinars and video conferences; and has boosted the growth of food delivery services. Franchising is one option for the development of relevant sectors.

17. Tips and traps

17.1 What are your top tips for franchisors seeking to enter your jurisdiction and what potential sticking points would you highlight?

Before entering into franchising agreements with Russian franchisees, franchisors should ensure that:

• the intellectual property which will be provided to the franchisees is duly registered and protected in Russia; and
• the scope of such intellectual property includes a trademark (see questions 9.1 and 9.2).

Moreover, it is important to clarify in advance whether the contemplated activities under the franchise are subject to any regulatory restrictions (eg, licensing).

It is advisable to conduct due diligence on the counterparty prior to entering into a franchising agreement. The scope of this due diligence should include a check of the legal status and a compliance check of the counterparty. Due diligence of targets in an M&A acquisition may cover further issues (eg, corporate law, competition, real estate, tax and financial assessments).

Subject to the preferred franchising model, it might be advisable to include information about the franchisor’s trademark and the franchisee in the Russian Customs Intellectual Property Register, in order to prevent the unauthorised import of goods marked with this trademark by third parties. In such a situation, the appointed franchisee will have the right to import such goods into Russia and allow or prohibit others from importing such goods.