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Franchise (Amendment) Act 2012

Franchise (Amendment) Act 2012
Reinforcing the Franchise Industry

A. Introduction

In 2011, the franchise industry contributed a total of RM21.48 billion to the Malaysian economy, equivalent to 2.5% of Malaysia?? Gross Domestic Product. Among the well-known brands are Nelson??, Gloria Jean?? and Secret Recipe, to name a few. In order to encourage healthy competition in this important industry, the government recently amended the Franchise Act 1998 (??ct??. The Franchise (Amendment) Act 2012 (??mendment Act?? is expected to come into force on 1st January 2013. The Amendment Act introduces three new provisions, amends twenty two sections and deletes two other sections from the Act. This article focuses on some of the key amendments to the Act.

A ??ranchise??refers to an agreement where the franchisor grants the franchisee the right to use its trademark as well as certain business systems and processes to produce and market a good or service according to certain specifications. In return, the franchisee may be required to a pay a fee to the franchisor. A ??ranchisor??refers to a person who grants a franchise to a franchisee, and a ??ranchisee??is a person who accepts a franchise.

B. Key Amendments

Compulsory Registration for Franchisees

Presently, only franchisors are required to register with the Registrar of Franchise. According to the Minister of Domestic Trade, Cooperative and Consumerism, there were cases where franchisors left their franchisees without any support or assistance after they established their franchise. In order to prevent this, the Amendment Act makes it compulsory for franchisees to register with the Registrar within 14 days from signing of the franchise agreement. The Ministry believes this will protect franchisees as they would be able to monitor the franchisees??progress, and allow the Ministry to offer more programmes that will enhance the franchisees??competency and capabilities to enable them to be successful entrepreneurs in their own right.

Enhancing the Registrar?? Powers

Under the Act, a franchisor may apply to the Registrar for cancellation of the franchise from the register, and the Registrar must cancel the registration if he is satisfied that the franchisor is no longer granting rights under the franchise. However, the Registrar does not have any discretion to cancel the registration of the franchise without prior application from the franchisor. The Amendment Act allows the Registrar to cancel the registration of the franchise on his own accord if he is satisfied that the franchisor has, for example, failed to submit its annual report for 5 continuous years or if the franchisor is insolvent, in addition to the Registrar?? present powers.

Confidential Information and Prohibition against Similar Business

Currently, only the franchisee and its employees are restrained from giving out confidential information contained in the franchise operation manual or obtained while undergoing training by the franchisor. They are also prohibited from engaging in other similar businesses to the franchise operated by the franchisor during the franchise term and for two years after the arrangement has ended. The Amendment Act widens the coverage to include the franchisee, its directors and their spouses and immediate family, and its employees. These amendments should allay franchisors??fears of franchisees using their ideas and trade secrets to subsequently compete with their business.

Offence of Holding Out as a Franchise

The Amendment Act also makes it an offence for any person to use the term ??ranchise??or any other words indicating that they are carrying on a franchise when in fact they are not registered or approved by the Registrar to do so. This amendment is aimed at deterring companies from misusing the word ??ranchise??in their business.

Harsher Penalties

The Amendment Act also increases the penalty for offences where no penalty is expressly provided under the Act. If the offender is a company, it would be liable to a fine of between RM10,000 and RM50,000, and for a second or subsequent offence, to a fine of between RM20,000 and RM100,000. If the offender is an individual, he would be liable either to a fine of between RM5,000 and RM25,000 or to imprisonment for up to 6 months, and for a second or subsequent offence, either to a fine of between RM10,000 and RM50,000 or to imprisonment for up to 1 year. Additionally, the Amendment Act also increases the penalty for offences prescribed by the Regulations from a fine of RM10,000 to RM50,000 or imprisonment for up to one year, or both.

C. Conclusion

Amending the Act to bring it in line with today?? demands is a sensible and timely move by the government. The amendments give added comfort to franchisors seeking to protect their intellectual property rights whilst protecting franchisees from unscrupulous franchisors. The stiffer penalties should deter non-compliance with the Amendment Act, and this in turn should increase the confidence of businesses in deploying and adopting the franchise system as a means to expand their business. If implemented correctly, the Amendment Act should encourage innovation and economic growth in Malaysia.


Contributed by Nur Ayuni binti Ab Rahim and Kuok Yew Chen of Christopher Lee & Co (www.christopherleeco.com).

Article length : 782 words
Date???????????? : 30 October 2012
Contact??????? : The Editor
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