Laws of the People's Republic of China

The Ministry of Commerce

Measures for the Administration of Commercial Franchises

Order No. 25 [2004] of the Ministry of Commerce

December 30, 2004

Chapter I General Provisions

Article 1

With a view of regulating the commercial franchise acts, protecting the lawful rights and interests of the parties and promoting the healthy and orderly development of commercial franchises, the present Measures are formulated.

Article 2

For the purpose of the present Measures, the term "commercial franchise" (hereinafter referred to as the franchising) shall refer to that a franchiser confers business resources at his disposal on a franchisee such as trademark, trade name or business pattern, etc. by signing a contract, and the franchisee undertakes business activities under the uniform business system as stipulated by the contract and pay franchising fees to the franchiser.

Article 3

The present Measures shall be applicable to the franchise activities carried out within the territory of the People's Republic of China.

Article 4

A franchiser may, according to the contractual stipulations, confer franchising right directly on a franchisee. The franchisee may invest to establish franchised businesses to carry out business activities, but shall not confer the franchise on anyone else. It may also confer the exclusive franchising right within a certain region on a franchisee, and the franchisee may re-confer the franchise on other applicants or may establish franchised business of his own within the region.

Article 5

Where franchised business is carried out, the laws and regulations of the People's Republic of China shall be followed, the principles of free will, fairness, honesty and good faith shall be observed and the lawful rights and interests of consumers may not be damaged.

No franchiser may undertake illegal pyramid selling activities in the name of franchising.

No franchiser may result in market monopoly or obstruct fair competition when undertaking business activities in the way of franchising.

Article 6

The Ministry of Commerce shall conduct supervision over and administration on franchising activities nationwide, and the competent departments of commerce at all levels shall conduct supervision over and administration on the franchise activities within their respective jurisdiction.

Chapter II Parties to a Franchise

Article 7

A franchiser shall have the following conditions:

1.

Being a lawfully established enterprise or other economic organization;

2.

Having such business resources at his disposal on a franchisee as trademark, trade name or mode of business operation on other people;

3.

Being able to provide the franchisee with long-term business guidance and training services;

4.

Having at least two direct sales stores that have been undertaking the business for more than a year or direct sales stores established by its subsidiary companies or its holding companies within the territory of China;

5.

In the case of a franchising that requires the franchiser's provision of goods, having a stable supply system that can ensure the quality of the goods and provide the relevant services; and

6.

Having good credit standing, without any record of undertaking activities of fraud by ways of franchising.

Article 8

A franchisee shall have the following conditions:

1.

Being a lawfully established enterprise or other economic organization; and

2.

Having the capital, fixed place and personnel that correspond to the franchising.

Article 9

A franchiser shall enjoy the following rights:

1.

For the sake of guaranteeing the uniformity of the franchise system and the consistency of the quality of products and services, supervising over the business activities of franchisees according to the contractual stipulations;

2.

Disqualifying, in accordance with the contractual stipulations from franchised business operations, the franchisee that infringes upon the lawful rights and interests of the franchiser or damages the franchise system in violation of the franchise contract;

3.

Collecting franchising fees and deposit as stipulated in the contract; and

4.

Other rights as stipulated in the contract.

Article 10

A franchiser shall fulfill the following obligations:

1.

Disclosing information in time in accordance with relevant provisions of the present Measures;

2.

Conferring the franchising right on a franchisee and providing the business symbol and business handbooks that stand for the franchising system;

3.

Providing guidance, training and other services in sales, business or technology necessary for a franchisee to carry out franchising business;

4.

Providing goods supply for a franchisee pursuant to the contractual stipulations. Except for the monopolized commodities and goods that shall be provided by a franchiser or a supplier designated by the franchiser for guaranteeing the quality of the franchise, a franchiser shall not force any franchisee to accept his supply of goods, but may prescribe the quality standard of the goods, or put forward several suppliers for the franchisee to choose;

5.

A franchiser shall be responsible for ensuring the quality of the products of any supplier designated by him;

6.

The sales promotion, advertising and publicity as stipulated in the contract; and

7.

Other obligations as stipulated in the contract.

Article 11

A franchisee shall enjoy the following rights:

1.

Obtaining to use such business resources as the trademark, trade name or business pattern authorized by the franchiser;

2.

Obtaining training and guidance provided by the franchiser;

3.

Obtaining goods supply provided or arranged by the franchiser in time according to the price stipulated in the contract;

4.

Obtaining the support of sales promotion uniformly carried out by the franchiser; and

5.

Other rights as stipulated by the contract.

Article 12

A franchisee shall perform the following obligations:

1.

Carrying out business activities pursuant to the contractual stipulations;

2.

Paying franchising fees and deposit;

3.

Maintaining the uniformity of the franchise system, and not further conferring the franchising right without permission of the franchiser;

4.

Providing authentic business conditions, financial status and other information as stipulated in the contract to the franchiser in time;

5.

Accepting the franchiser's guidance and supervision;

6.

Keeping the franchiser's business secrets; and

7.

Other obligations as stipulated in the contract.

Chapter III Franchising Contract

Article 13

A franchising contract shall be concluded by the parties concerned, and shall cover the following items in general:

1.

The names and domiciles of the parties concerned;

2.

The contents, time limit, place for authorizing the use of a franchising right and whether or not such right is exclusive;

3.

The type, amount, ways of payment of franchising fees and the ways of collecting and refunding deposit;

4.

Confidential clauses;

5.

The quality control of the franchising products or services and the liabilities thereof;

6.

Training and guidance;

7.

The use of trade name;

8.

The use of trademarks and other intellectual properties;

9.

Consumers' complaints;

10.

Publicity and advertising;

11.

Alteration and rescission of the contract;

12.

Liabilities for breach of the contract;

13.

Dispute resolution clauses; and

14.

Other clauses as stipulated by both parties.

Article 14

The franchising fees shall refer to the fees paid by a franchisee for obtaining a franchising right, including the following several types:

1.

Membership fees: referring to the fees paid once for all by a franchisee to a franchiser for obtaining a franchising right;

2.

Usage fees: referring to fees paid by a franchisee to a franchiser in light of a certain standard or proportion periodically in the process of using a franchising right; and

3.

Other stipulated fees: referring to other fees paid by a franchisee to a franchiser for obtaining the relevant goods supply or services provided by the franchiser pursuant to the contractual stipulations.

The deposit means a certain sum of money collected by a franchiser from a franchisee for the purpose of guaranteeing the franchisee's fulfilling of the franchise contract. After the expiry of the contract, the deposit shall be returned to the franchisee.Both parties to a franchise shall determine the franchising fees and deposit through negotiation in light of the principles of fairness and reasonableness.

Article 15

The term of a franchise contract shall not be less than three years in general.

After the expiry of a franchising contract, the franchiser and franchisee may determine the conditions for renewing the franchising contract through negotiation in light of the principles of fairness and reasonableness.

Article 16

After the termination of a franchise contract, the former franchisee may not use the registered trademark, trade name or other marks of a franchiser any longer without the consent of the franchiser, and may not apply for registration of the registered trademark of the franchiser as the trademarks for similar types of commodities or services, may not apply for registration of the letters that are identical or similar to the registered trademark of the franchiser as a portion of the trade name of the enterprise, and may not use the symbol that is identical or similar to the registered trademark, trade name or upholstery of shops in identical or similar commodities or services.

Chapter IV Information Disclosure

Article 17

A franchiser and a franchisee shall disclose relevant information in time before signing a franchise contract and in the process of franchised business operations.

Article 18

A franchiser shall provide authentic and accurate basic information and other materials concerning the franchised business operations and the text of franchise contract in written form 20 days prior to signing a formal franchising contract.

Article 19

The basic information disclosed by a franchiser shall include the following contents:

1.

The name, domiciles, registered capital, business scope of and time limit for undertaking franchised business operations of the franchiser and other major matters concerned as well as the contents of financial reports audited by an accounting firms and tax payment and other basic conditions;

2.

The number and location of franchisees, their business conditions and the investment budget form of franchised stores, the proportion of the franchisees who have rescinded franchise contract in the total franchisees;

3.

The conditions on registration, licensed use and lawsuits of a trademark; information about other business resources such as trade name and business pattern;

4.

The kinds, amounts and ways of collecting franchising fees and the ways of refunding deposits;

5.

The conditions on lawsuits during the recent five years;

6.

The supply of various goods or services that may be provided to a franchisee and the additional conditions and restrictions, etc.;

7.

The certification for the ability to provide training and guidance to a franchisee and the reality for providing such training or guidance;

8.

The basic information of the legal representative and other main responsible persons, and whether they have any record of criminal punishment and whether they are personally liable for the bankruptcy of any enterprise, etc.; and

9.

Other information or materials that shall be disclosed by a franchiser upon the request of the franchisee.

In case a franchisee suffers from any economic loss due to insufficient information disclosure or false information provided by a franchiser, the franchiser shall undertake compensation liabilities.

Article 20

A franchisee shall provide the relevant materials concerning his operation capacity according to the facts upon the request of a franchiser, including qualification certificate of the subject, certificate of credit standing, certificate of ownership, etc.. During the process of franchised operations, the franchisee shall provide authentic operation conditions and other materials as stipulated in the contract in time as required by the franchiser.

Article 21

During the period of franchised operations and after the termination of the franchise contract, a franchisee and his employees shall not disclose, use or allow others to use the franchiser's business secrets he holds without the consent of the franchiser.

Article 22

Any person or applicant, who does not sign a franchising contract with a franchiser but knows his business secrets through information disclosure of the franchiser, shall be obliged to keep such secrets, and shall not divulge or disclose or transfer the business secrets of the franchiser to others without the consent of the franchiser.

Chapter V Advertising and Publicity

Article 23

When a franchiser publicizes, does sales promotion and sells any franchising right, the contents of advertising and publicity shall be accurate, authentic and lawful, and shall not be fraudulent, omit major facts or have any statements that are misleading.

Article 24

The records, numbers or other relevant materials relating to business income or proceeds of a franchiser directly or indirectly contained in the advertising and publicity materials of a franchiser and a franchisee shall be authentic, and the region and time involved shall be clear.

Article 25

No franchiser or franchisee may imitate the trademark, advertising pictures and expressions or other distinctive marks of others by any way that may be misleading, deceiving or may result in confusion.

Article 26

In the promotion activities of franchised operation, a franchiser shall not exaggerate the interests brought about by the franchise or purposely conceal the conditions that the franchising may objectively affect the interests of any other person.

Chapter VI Supervision and Administration

Article 27

The competent departments of commerce at all levels shall strengthen the administration and coordination on the franchising activities within their respective administrative district, and guide the local industry association (or chamber of commerce) to carry out their work.

The competent departments of commerce at all levels shall establish credit records for franchisers and franchisees, and timely announce the name lists of rule-breaking enterprises.

Article 28

The franchising industry association (or chamber of commerce) shall formulate industrial criterions according to the present Measures, and carry out self-discipline of the industry so as to provide relevant services for the franchising parties and advance the development of the industry.

Article 29

In January each year, a franchiser shall report the situation on the franchise contract signed in the previous years to the competent departments of commerce at his locality and at the locality of the franchisee for archival filing. The local competent departments of commerce shall submit the archival filing situation to the upper level competent department of commerce.

Article 30

Where a patent license is involved in any franchising activity, a patent licensing contract shall be signed in light of the relevant provisions of the Patent Law of the People's Republic of China and its detailed implementation rules, and the archival filing shall be made in light of the provisions of the Measures for the Administration of Archival Filing of Patent Licensing Contracts.

Article 31

Prior to undertaking franchised operational activities, a franchiser shall make archival filing of the franchise contract for the use of trademarks in accordance with the provisions of the Trademark Law of the People's Republic of China and its detailed implementation rules.

Chapter VII Special Provisions on Foreign-funded Enterprises

Article 32

No foreign-funded enterprise may engage in any business in the prohibition categories of the Catalogue of Industries for Guiding Foreign Investment by ways of franchising.

Article 33

Where a foreign-funded enterprise undertakes business activities by way of franchising, it shall apply for expanding the business scope of "carrying out business activities by way of franchising" to the original department of examination and approval, and submit the following materials:

1.

An application and the decision of the Board of Directors;

2.

The business license of the enterprise and the certificate of approval for the foreign-funded enterprise (photocopy);

3.

Agreement for the amendment of contract and articles of associations (for wholly foreign-owned enterprises, only the amendment on articles of associations is to be submitted);

4.

The relevant documents and materials that are proved to comply with the provisions of Article 7 of the present Measures;

5.

The basic information and materials as required by Article 19 of the present Measures;

6.

Sample text of the franchising contract; and

7.

Handbook for franchised operation.

The department of examination and approval shall make a written decision on whether or not to grant approval within 30 days after receiving all of the aforesaid application materials.

After an applicant gets approval, it shall go through the formalities for alteration of enterprise registration at the administrative department for industry and commerce within one month after obtaining the Certificate of Approval for Foreign-funded Enterprises altered and granted by the department of examination and approval.

Article 34

Where a foreign-funded enterprise undertakes business activities by way of franchising upon approval, it shall report the situation on franchise contracts signed in the previous year to the former department of examination and approval and to the competent department of commerce at the locality of the franchisee for archival filing in January each year.

Article 35

Where a foreign investor establishes any foreign-funded enterprise that engages exclusively in business activities by way of franchising, it shall, apart from complying with the present Measures, accord with the relevant provisions in laws, regulations and rules concerning foreign-funded enterprises.

Article 36

Any foreign-funded enterprise, which has been undertaking business activities by ways of franchising before the implementation of the present Measures, shall report the situation on the business which has been carried out to the former department of examination and approval. If it continues to undertake business activities by way of franchising, it shall go through the relevant formalities by following the procedures as prescribed in this Chapter.

Article 37

The provisions of the present Chapter shall be followed by enterprises invested by Hong Kong, Macao and Taiwan investors that undertake business activities by way of franchising.

Chapter VIII Legal Liabilities

Article 38

Where anyone violates the provisions of Article 7 or 8 of the present Measures, the competent department of commerce shall order it to make corrections, and may impose on it a fine of less than RMB 30,000 Yuan simultaneously; in case the circumstances are serious, it shall be transferred to the administrative department for industry and commerce to revoke its business license.

Article 39

Where anyone fails to disclose information according to the present Measures, the competent department of commerce shall order it to make corrections and may impose on it a fine of less than RMB 30,000 Yuan simultaneously; in case the circumstances are serious, it shall be transferred to the administrative department for industry and commerce to revoke its business license.

Article 40

Where a franchiser makes advertising publicity in violation of the present Measures, he shall be punished in accordance with the provisions of the Advertising Law of the People's Republic of China and other relevant laws, administrative regulations and rules.

Chapter IX Supplementary Provisions

Article 41

The power to interpret the present Measures shall be vested in the Ministry of Commerce.

Article 42

The present Measures shall be implemented as of February 1st, 2005, and the Measures for the Administration of Franchised Commercial Operations (for Trial Implementation) as promulgated by the former Ministry of Domestic Trade shall be abolished simultaneously.