1. Case Background
SB Law represented Company X, a Hong Kong-based business, in franchise registration with the relevant authorities in Vietnam. The franchise registration was for the hotel services industry, linked to various trademarks.
According to Company X’s franchise model:
- Company X receives a trademark license from K and SCH.
- Company X signs an exclusive master franchise agreement with X Vietnam (its commercial presence in Vietnam). The intended registration was as an initial franchise.
- X Vietnam enters franchise agreements with sub-franchisees.
However, during the registration process, SB Law encountered practical difficulties because the authorities considered the appropriate franchise model to be a sub-franchise, rather than an initial franchise.
2. Issues in Franchise Model Classification
Like many major franchise models, Company X does not own the trademarks but rather licenses them from trademark owners (K and SCH) before developing the franchise system. The discrepancy between Company X’s model and Vietnam’s franchise licensing framework can be summarized as follows:
| Company X’s Franchise Model | Official Classification in Vietnam |
| X receives a trademark license from K and SCH | Initial Franchise |
| X signs an exclusive master franchise agreement with X Vietnam | Sub-Franchise |
| X Vietnam signs franchise agreements with sub-franchisees | Not permitted (as per Article 3.9 of Decree 35/2006/ND-CP) |
After reviewing relevant legal provisions, SB Law concluded that the classification of the franchise model depends on whether a franchise agreement exists between the involved parties. Specifically, it must be determined whether commercial rights are transferred between the parties.
According to Article 3.6 of Decree 35/2006/ND-CP, “commercial rights” include:
- The right to operate a business system under the franchisor’s brand.
- The right to grant primary franchise rights to a sub-franchisee.
- The right for a sub-franchisee to sub-license under a master franchise agreement.
- The right to develop a franchise under a development contract.
To classify a licensing agreement as franchising, it must grant the right to operate a business using the licensor’s system.
However, in the trademark license agreements between X – K and X – SCH, the agreements only granted trademark usage rights. They did not include the right to conduct business under a system prescribed by the licensor. Company X independently developed its franchise system without control from K and SCH.
Thus, the licensing agreements do not constitute franchising agreements, meaning K and SCH should not be classified as initial franchisors. Instead, Company X should be recognized as the initial franchisor, as the commercial rights transfer only begins at the agreement between X and X Vietnam.
However, under the current classification, Company X would not be able to expand its franchise model in Vietnam, hindering its business growth.
3. Key Takeaways & Solutions
SB Law has identified the following key lessons from this case:
Misclassification of the franchise model can hinder business expansion.
- Since Company X was registered as the franchisor instead of K and SCH, the authorities misidentified the franchise structure, creating regulatory obstacles.
Clearer franchise registration procedures are needed.
- To avoid confusion, K and SCH (as trademark owners) should register the franchise model directly in Vietnam.
- This would clearly distinguish franchise agreements from trademark licenses, ensuring smooth franchise registration and operations.
By adjusting the registration approach, businesses can navigate Vietnam’s franchise regulations more efficiently while ensuring compliance with local laws.
