According to Federal Law No. 8955/1994 (the Franchise Law), business franchises are systems whereby franchisors grant franchisees – in exchange for certain direct or indirect remuneration, the right to use a trademark or patent along with exclusive or semi-exclusive distribution rights for products or services, and the possibility to have the right to use business deployment and administration technology, or operating systems developed or held by franchisor.

 

The offer and sale of franchises is regulated by the Franchise Law, with respect to disclosure requirements, the Industrial Property Law, which concerns the trademarks involved; and National Institute of Industrial Property (INPI) Normative Act No. 135/1997 with respect to filing requirements and procedures.

 

The Franchise Law basically sets out rules on the information that franchisors must disclose to potential franchisees before entering into any preliminary or definitive franchise agreement. According to the Franchise Law, the Franchise Disclosure Document (FDD or ‘offering circular’) – must be handed in writing, drafted in clear and accessible language, and contain details on the potential business Agreements executed out of Brazil must be legalized.

 

Cross-border franchising contracts must be registered with the INPI to enable remittance of royalties out of Brazil and allow franchisee to deduct such royalties as operational expenses for income tax purposes. INPI filing procedures may be pursued by the foreign franchisor or by the local franchisee.

 

A master franchisor is also required to make pre-sale disclosures. The Franchise Law likens the terms ‘franchisor’ and ‘franchisee’ to ‘sub-franchisor’ and ‘sub-franchisee’. To that end, all obligations imposed by the Law on the franchisor are imposed on the sub-franchisor as well.

 

The Franchise Law requires that franchisees receive the FDD at least 10 days before they execute a definitive or preliminary franchise agreement, or pay any fees to franchisor or to any company or person related to the franchisor.

 

The Law does not provide for an updating obligation. The draft standard franchise agreement and the complete standard preliminary franchise agreement, including relevant annexes and term must be included in the FDD. The Franchise Law specifically provides that if a franchisor provides false information in the FDD, then a franchisee may claim the contract to be null and demand restitution of all amounts paid in consideration for entry fees or royalties (adjusted for inflation according to the basic remuneration paid to official savings accounts over the period), plus damages and without prejudice of the applicable criminal sanctions.