Franchising in Japan: overview
A Q&A guide to franchising in Japan.
The Q&A provides an overview of the main practical issues concerning local and international franchising, including: current market activity; franchising regulatory framework; contractual issues relating to franchising agreements (analysing pre-contract disclosure requirements, formalities, parties' rights and obligations, fees and payments, term of agreement and renewal, termination and choice of law and jurisdiction); Operations Manual; liability issues; intellectual property; real estate; competition law; employment issues; dispute resolution; exchange control and withholding; and proposals for reform.
To compare answers across multiple jurisdictions, visit the Franchising: Country Q&A tool.
This Q&A is part of the global guide to franchising law. For a full list of jurisdictional Q&As visit www.practicallaw.com/franchising-guide.
Direct franchising is the most commonly used method of local franchising. For large franchise chains, such as convenience stores, it is common to have an area franchisee that operates multi-unit franchises in a specific area.
Local laws or commercial issues do not have an impact on the prevalence of, or preference for, these techniques locally.
International franchisors typically use master franchise agreements to enter the Japanese market. These agreements are preferred because it is difficult to monitor and manage the daily operation of a franchise business from outside Japan.
A domestic brand that expands its business outside of Japan will typically use a simple licensing or franchising agreement. Key factors that determine the structure used include whether:
Local regulations on licensing/franchising are strict.
The franchisor wishes to maintain the style of the business.
Regulation of franchising
There is no formal definition of franchising and/or a franchise under Japanese law.
The Guidelines concerning the Franchise System under the Anti-Monopoly Act, issued by the Japan Fair Trade Commission, state that a franchise system is generally considered to be a form of business in which the head office both:
Grants to any member of the system the right to use a specific trade mark and trade name.
Provides co-ordinated control, guidance and support to the member's business and its management.
The Medium and Small Retail Commerce Promotion Act (Law No. 110 of 1973) (MSRCPA) regulates franchising that falls under the definition of "specified chain business". A "chain business" is defined as a business that, under an agreement with standard terms and conditions, continuously sells or acts as an agent for sales of products and provides guidance regarding management, primarily targeting medium and small retailers (Article 3, paragraph 5, MSRCPA). A "specified chain business" is defined as any chain business where a member (Article 11, paragraph 1, MSRCPA):
Is allowed to use certain trade marks, trade names or any other signs.
Must pay joining fees, deposits or any other monies on becoming a member.
Apart from the MSRCPA and the Guidelines concerning the Franchise System under the Anti-Monopoly Act, there is no law that specifically regulates franchising. There are, however, many laws that regulate specific industries or businesses, which may also apply to franchises. The franchisor must therefore comply with the applicable laws and regulations.
The Small and Medium Enterprise Agency is responsible for enforcing the Medium and Small Retail Commerce Promotion Act (Law No. 110 of 1973) (see Question 5).
Parties to a contract have a general obligation to exercise their rights and to perform their duties in good faith (Article 1, paragraph 2, Civil Code (Act No. 89 of 27 April 1896)) (see Question 12).
The Japan Franchise Association (JFA) also issued its Ethic General Plan, which applies to the members of the JFA. The Ethic General Plan provides, among other things, that:
Products, services or management know-how to be licensed must be supported by past experience and performance.
The franchisor must:
disclose sufficient information to franchisees;
not use excessive advertising or misleading representations; and
confirm the eligibility of a potential franchisee.
The Foreign Exchange and Foreign Trade Act requires prior notification to the Bank of Japan and other relevant authorities when a franchise agreement between a foreign franchisor and a local franchisee includes a licence covering specified technologies (such as technologies regarding aircraft, atomic power, and so on), although these are unlikely to be included in most franchise businesses.
Pre-contract disclosure requirements
The franchisor must provide disclosure documents before entering into a franchise agreement if the franchise business falls under the definition of a specified chain business under the Medium and Small Retail Commerce Promotion Act (Law No. 110 of 1973) (MSRCPA) (see Question 5). As the MSRCPA is designed to protect medium and small-sized retail businesses, the disclosure obligations will not be imposed if the majority of the franchisees are large and sophisticated franchisees. Whether the business falls under the definition of the specified chain business must be carefully checked on a case-by-case basis. The disclosure must be made before signing a franchise agreement.
The following information must be disclosed under the MSRCPA:
Information concerning the initial fee, deposit or any other money to be collected on becoming franchisee.
Information concerning the terms of sales of products to a franchisee.
Information concerning management guidance.
Information concerning trade marks, trade names and other signs that can be used.
Information concerning the duration, renewal and termination of the agreement.
Any other items specified in the ministerial ordinance.
If the franchisor fails to comply with the disclosure obligations, the competent minister can issue a recommendation to comply with these obligations. If the recommendation is not followed, the competent minister can publish the name of the franchisor in breach.
If there is local sub-franchising, an overseas franchisor or IP owner must follow the disclosure process when the agreement between the overseas franchisor or IP owner and the local sub-franchisor falls under the definition of specified chain business.
A franchisor must disclose the information specified in the Medium and Small Retail Commerce Promotion Act (Law No. 110 of 1973), where applicable (see Question 11).
If the material facts are intentionally or unintentionally not disclosed to the franchisee and there is a material misunderstanding on the part of the franchisee, the agreement can be null and void or cancelled (Civil Code (Act No. 89 of 27 April 1896)). This may also constitute a breach of the Act on Prohibition of Private Monopolisation and Maintenance of Fair Trade (Act No. 54 of 14 April 1947).
Parties' rights and obligations
There is a general obligation to exercise rights and to perform duties in good faith, which applies to both franchisors and franchisees (Article 1, paragraph 2, Civil Code (Act No. 89 of 27 April 1896) (Civil Code)). Since it is a very general provision, a party will usually base its claims on express provisions of an agreement or other provisions of the law and use Article 1, paragraph 2 of the Civil Code to supplement its claims, or when it is difficult to base claims on other provisions.
Obligations of the franchisee
The scope of obligations imposed on a franchisee is generally determined by the express provisions in a franchise agreement. When there are no express provisions in a franchise agreement, the court will interpret the parties' intention and whether the parties are acting in line with the general obligation to exercise rights and perform duties in good faith (see above).
Obligations of the franchisor
The scope of obligations imposed on a franchisor is generally determined by the express provisions in a franchise agreement. The Guidelines concerning the Franchise System under the Anti-Monopoly Act describe various practices of franchisors that can be considered illegal under the Anti-Monopoly Act. Franchisors must be careful to avoid these practices, even if they are not expressly included in the agreement.
An overseas franchisor or its officers and directors can be liable for failures of the local sub-franchisor if there is a fault that is attributable to the actions of the overseas franchisors or its officers and directors.
Entire agreement clauses are not very common in Japan, but are generally included in international franchise agreements. In the case of a dispute, the court will usually decide what was agreed based on a reasonable interpretation of the parties' intention, considering the circumstances of the case. Even if an agreement contains an entire agreement clause, the court will not decide based solely on the wording of the agreement.
The provisions of a franchise agreement that exclude certain liabilities of the franchisor are generally enforceable if their scope is reasonably limited.
Restrictions on purchasing and product tying
A provision that imposes purchasing restrictions must be examined carefully. A franchisor that prohibits its franchisees, without proper justification, from trading with companies that can provide cheaper, higher-quality products and better services, and forces the franchisees to trade only with the franchisor or companies appointed by the franchisor, can be deemed to be abusing its superior bargaining position under the Anti-Monopoly Act of Japan (Guidelines concerning the Franchise System under the Anti-Monopoly Act). The Japan Fair Trade Commission will assess purchasing restrictions based on the specific circumstances of the case.
Non-compete obligations and transfer restrictions
The validity of a non-compete obligation depends on whether it is considered reasonable. Reasonableness is assessed by taking into account the following factors, among others:
Scope of the restricted geographical area.
Whether the restrictions are limited to the extent necessary to preserve the commercial rights of the franchisor in the specified area and/or to protect the expertise provided by the franchisor to the franchisee.
A non-compete obligation that prohibits direct competition during the term of the agreement is generally considered to be reasonable.
Prior consent of the franchisor is required if the franchisee intends to transfer the business, unless transfer without consent is specifically permitted under an agreement. The franchisor can require its prior consent if the owner of the franchisee entity intends to transfer shares or other interests in the entity, but in such a case, the franchisor must enter into an agreement with the owner of the franchisee entity, rather than the franchisee.
Fees and payments
The fee arrangement varies depending on the franchisor. Generally, initial fees and in-term royalty payments are required.
Interest can be charged on overdue payments. There is no technical limitation on the amount of interest, unless an agreement is treated as a loan agreement. However, if the amount is unreasonably high, it will be void as being against public policy (Article 90, Civil Code (Act No. 89 of 27 April 1896)).
Term of agreement and renewal
It is common for franchise agreements to be renewed on the condition that the franchisee satisfies certain requirements (for example, no breach of the agreement). Automatic renewal clauses are usually avoided, as an agreement that continues for a long period of time cannot be easily terminated in Japan. Whether renewal fees are required depends on the agreement, although these fees are not a common feature of Japanese franchise agreements.
There is no local law that specifically protects a right of renewal or restricts fees or charges payable on renewal. However, there are court precedents in which courts protected a party's expectation of renewal of the agreement (for example, when a party made significant investments because it believed that the agreement would continue for a long period of time, but the counterparty decides to terminate the agreement).
Even where a franchisor exercises a termination right under the provisions of the franchise agreement, the exercise of the termination right can be restricted when the agreement has continued for a long period of time and the franchisee has a reasonable expectation that the agreement will continue. In such a case, the court generally requires either:
A longer notice period for termination.
Compensation in lieu of a longer notice period.
A franchisee can terminate the franchise agreement based on the provisions of the agreement. If the franchisee intends to terminate the franchise agreement in the absence of termination event under the franchise agreement, it must obtain the franchisor's consent for termination.
Contractual penalties or liquidated damages are enforceable provided that their amount and scope is limited to a reasonable extent.
Post-term restrictive covenants are generally enforceable provided that their scope is reasonably limited. When considering the enforceability of a non-compete covenant, the courts will take into account whether the restrictions on the scope of business, geographical area, and the duration of the covenant, are reasonably necessary to protect the know-how and confidential information of the franchisor.
Post-term confidentiality restrictive covenants are generally enforceable.
Payment to the franchisee is not required as a condition for the validity or enforceability of post-term restrictive covenants.
The provisions of a franchise agreement and other relevant agreements commonly allow the franchisor or a replacement franchisee to continue to sell to the former franchisee's customers. If there is no express provision in an agreement, it is necessary to analyse whether the franchisor or a replacement franchisee can do so based on the nature of the business, agreements with the customers, how customers' personal information is treated and so on.
Choice of law and jurisdiction
Depending on the circumstances, the franchisee can claim, among others:
Compensation for damages in a tort claim.
Breach of an express or implied obligation to provide sufficient information.
That the agreement is null and void or can be cancelled.
The franchisee can also contact the competent authorities by claiming that the franchisor's practice breaches the Medium and Small Retail Commerce Promotion Act (Law No. 110 of 1973) or the Anti-Monopoly Act.
Whether the franchisor can be held liable by a third party depends on how the claim is structured. Generally, the most important factor is whether there is any fault attributable to the franchisor.
The franchisor and franchisee can bring indemnity claims against each other based on an indemnification clause in the franchise agreement.
It is possible to include a clause in a franchise agreement to exclude liabilities of the parties, but the enforceability of such a clause can be limited if its scope is considered to be unreasonable.
A typical franchise agreement usually clearly states that the franchisee is not an agent or a representative of the franchisor, but an independent contractor.
Generally, the franchisee has a licence to use the franchisor's trade mark, know-how and other relevant IPRs for conducting the franchised business. If the franchisee can sub-franchise the business, the franchisee is also usually licensed to sub-license the trade marks, know-how and so on.
It is generally possible to limit the purpose of the use of IPRs.
A licence over IPRs can be included in the franchise agreement. It is not mandatory to register licences over IPRs as distinct from the IPRs themselves. Exclusive trade mark licences can be registered. However, it is not typical to register a trade mark licence in Japan because an exclusive licence limits the franchisor's use of the trade mark.
It is generally necessary to obtain the landlord's consent to transfer a lease or to grant a sublease, unless otherwise specifically permitted in the lease agreement. Generally, the landlord has broad discretion to decide whether to give consent to a transfer or to a sublease. Usually, landlords will check the credibility of the new lessee or sublessee. Whether a landlord will require payment for consent depends on the landlord.
If the franchisor is leasing the premises to the franchisee, the termination of the franchise agreement is commonly included as a termination event under the lease agreement.
If the franchisee is directly leasing the premises from a third-party landlord, the franchisor, the franchisee and the landlord must execute an agreement, which provides that:
On termination of the franchise agreement, the lease will be transferred to the franchisor or an entity that the franchisor designates.
The landlord must permit the transfer in advance.
If the franchisee leases the premises directly from a third-party landlord, the franchisee, the franchisor and the landlord must enter into an agreement under which the franchisee agrees to transfer the lease at the end of the franchise relationship. The terms and conditions will be determined by negotiation between the parties. To be effective, a franchisor's option need not be protected at a land registry or in another way.
Among the various types of illegal conduct under the Anti-Monopoly Act, unfair trade practices that mainly deal with vertical relations are the most relevant to franchise agreements. In particular, the following prohibitions are relevant to franchising businesses (Article 19, Anti-Monopoly Act):
Abuse of a superior bargaining position.
Trading on restrictive terms.
Resale price maintenance.
The Guidelines concerning the Franchise System under the Anti-Monopoly Act provide examples of practices that can be problematic under the Anti-Monopoly Act. For example, unreasonable conditions imposed on a franchisee can be considered as an abuse of superior bargaining position (for example, a restriction on suppliers without any justification or an obligation to purchase an excessive amount of products without a right to return them).
There is no exemption from the prohibitions above, except for limited exemptions from the prohibitions, such as resale price maintenance with regard to books, CDs and so on.
Whether any contemplated online/e-commerce restrictions are permissible must be considered on a case-by-case basis. An important factor to consider is whether there is a legitimate reason to justify the restrictions. If a restriction cannot be justified, it will be considered as trading on restrictive terms or other unfair trade practice.
The franchisee is generally not regarded as an employee of the franchisor, as the franchise agreement provides that the franchisee is an independent contractor. If the franchisee is an individual, however, the franchisor must be careful to avoid the franchisee being regarded as one of its employees, by explaining that the franchisee is not an employee.
Generally, the differences between court proceedings and arbitration relate to the following issues:
Availability of an appeal system.
Whether the proceedings are public.
Possibility to choose the language of the proceedings and the judge/arbitrator.
Court litigation is generally used in local franchising disputes, while agreements involving an international franchisor doing business in Japan typically refer disputes to litigation or arbitration in the franchisor's country. A requirement for an overseas forum and overseas governing law is enforceable (see Questions 24 and 25).
To enforce a foreign judgment in Japan, it is necessary to obtain recognition of the foreign judgment from a court (Article 118, Code of Civil Procedure) and then to follow the execution procedure.
Foreign arbitral awards obtained in a country that is a party to the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958 are enforced in accordance with the Convention. Other foreign arbitral awards are enforced in accordance with similar requirements under the Arbitration Act.
Exchange control and withholding
Etsuko Hara, Partner
Anderson Mōri & Tomotsune
Professional qualifications. Japan, Lawyer, 2001; New York, Lawyer, 2007
Areas of practice. Franchising; competition law; corporate transactions.
Non-professional qualifications. LLB, University of Tokyo, 1998; LLM,
Columbia University School of Law, 2006
Advising on the restructuring of a franchise business in Japan.
Advising on franchise agreements between foreign franchisors and local franchisees.
Assisting clients doing franchise business in south-east Asian countries.
Languages. Japanese, English
Professional associations/memberships. Dai-ni Tokyo Bar Association.
Franchise 2015 (Getting the Deal Through, Law Business Research).
"Japanese Anti-monopoly Act - Annotated" (Koubundou, 2014) (co-author).
"Introduction to Japanese Business Law & Practice Second Edition" (LexisNexis Japan, 2014) (co-author).
"Commentary on Anti-Monopoly Act" (Dai-ichi Hoki, 2014) (co-author).
"Extraterritorial Application of Foreign Laws: A Primer for Japanese Companies" (Kinzai, 2013) (co-author).