The Franchise: Evolving to the Age of the New Normal

The unusual situation that the world is experiencing has impacted all sectors, including the Franchise system. According to the Mexican Franchise Association (“AMF”), Mexico ranks fifth worldwide in number of franchises, and the franchise sector represents 4.2% of the National GDP. However, according to the information provided by the AMF, given the current situation in the country, around 90% of the 90,000 points of sale are facing partial or total closure of their units, which puts about a million people at risk of losing their employment, not including the distribution chain.

Nevertheless, even when a negative scenario is seen for the sector, the AMF still estimates a growth of 7% during this 2020, considering a growth in consumption at the end of the pandemic.

Current Franchise Outlook

Given the impact on the sector caused by the health crisis, the federal government launched a support campaign for small and medium-sized companies. This promotes the granting of credits for an amount of $25,000.00 mexican pesos (approximately USD$1,200.00). Obviously, this amount supports small franchises (from 1 to 2 employees) but results insufficient to cover the operating expenses of larger franchises, for example, hotels, gyms and restaurants.

Due to the lack of government support, the Franchise sector has been faced with the need to take extraordinary measures, these ranges from negotiating with its franchisees the payment of royalties (adjustment or suspending the payment of royalties, postpone the payment of advertising fees, among others).

Equally, some franchises were faced with the need to innovate and evolve the model even faster than anticipated, migrating to the inevitable immediately, that is, to the modernization of their operations through electronic means and the necessary use of electronic platforms and social media.

Measures taken by Franchisors for the New Normality

Part of the franchisor’s job is to provide Ongoing Assistance to the franchisee, and considering the current health crisis, franchisors were faced with the urgent challenge of innovating, adapting, modifying and modernizing their operations not only in the short term, but also taking measures for the long term. As part of that work and Ongoing Assistance, franchisors had to modify their systems to include new ways of sanitization that comply with government requirements, which impacts the daily operation (cleaning methods, customer service with stricter health measures – use of mouth covers, gloves, silicone screens, UV guns, etc.). As a result, the Operations Manuals, Safety Manuals and Health Manuals needed to be updated and include the new measures.

It is inevitable that the way of providing services in the “new normal” has radically changed. One of the most important challenges franchises were faced with in the short term, was providing services electronically through platforms that were previously unused or reserved exclusively for the franchisor and in the middle term, incorporating sanitary measures without damaging the corporate image of the Franchise, on the contrary, said modifications must provide security to the clients and employees.

In Mexico, certain franchises are re-opening their doors and following certain restrictions (the obligatory use of mouth covers, installing glass screens on counters or service tables, establishing the healthy distance between tables and customers, limiting the number of customers in the establishment, taking temperature of employees and customers, among other). One of the successful examples of franchises that innovated to maintain operations, are gyms. They immediately changed their franchise model and invested in new technologies, electronic platforms to provide the customer with a choice of on-demand routines, classes, advice, and online product sales. This transformation in the business model is efficient, safe and functional, successfully maintaining business operating.

Due to the changes in the Franchise System, the parties should not forget to pay attention to the legal aspects. It is important to execute an Agreement that includes the new provisions and obligations of the parties. For example, adjustment of royalties or publicity payments, if the publicity provisions were modified in order for the franchisee to be able to advertise on social media and online sales (usually reserved for franchisor), obligations related to the sanitary measures of the franchise and new operations of the unit, including using new delivery platforms.

Furthermore, it is important to comply with regulations that could apply with the new safety measures. That is to say, if franchisee will be handling information concerning sensitive data of the employees, taking temperature and keeping a record of the health status of each employee, the franchisee must process said database in accordance with the Federal Law on Protection of Personal Data Held by Private Parties.

The New Federal Law for the Protection of Industrial Property

In the midst of the pandemic, the new Federal Law for the Protection of Industrial Property will come into force. In relation to the regulation of the Franchise, no substantial changes were made, the requirement to deliver the Franchise Disclosure Document at least 30 days prior to executing the Franchise Agreement, and the minimum requirements that the Franchise Agreement and Franchise Disclosure Document must contain remained the same.

However, the obligation to register the Franchise Agreement (or the Summary of the Agreement eliminating confidential provisions) with the Mexican Trademark Office in order for it to be binding to third parties was removed.

Also, the scenario of cancellation of the Recordal of the agreement due to the expiration of its term has been included, therefore, the cancellation will proceed in the following cases:

  1. When jointly requested by the trademark owner and the licensee;
  2. Due to nullity, expiration or cancellation of the trademark registration, or in the case of trademarks in process when registration is not obtained,
  3. By judicial order, and
  4. By term of its validity.

Finally, the previous amendments to the Industrial Property Law incorporated the possibility of protecting the operational and image elements of a commercial establishment, in other words the “trade dress”. The new Federal Law for the Protection of Industrial Property maintains the possibility of protecting the “trade dress, an essential and distinctive element of the franchise.

Final Considerations

The sanitary crisis due to COVID-19 caused an inevitable change of the operations of the franchise model, resulting in a modern franchise system adapted to the “new normal”. At the beginning, this may have been seen as an arduous and unnecessary challenge, yet, in most cases, the new model has proven successful and efficient.

It is important to be aware that all changes may have legal implications, consequently, the franchisor and franchisee must consider updating all documents to the new terms and conditions arising from the evolution and negotiations carried out between the parties, specifically the provisions of the Franchise Agreement, Manuals and Franchise Disclosure Document. Without a doubt, the Franchise model has proven itself to be a solid and successful business, and the “new normal” will not change that, but only make it stronger.