Franchising Comparative Guide -

1 Legal and enforcement framework

1.1 Which legislative and regulatory provisions govern franchising in your jurisdiction?

There is no legislation dedicated specifically to franchising in the Czech Republic. However, this is not unusual and is not a barrier to the development of franchise systems. Franchise arrangements, the establishment of the business and business relationships are typically governed by general civil law. However, public law also plays an important role, especially in areas such as competition regulation, consumer protection, employment, trade licences and tax. Therefore, numerous laws are relevant in connection with the franchising industry. A typical franchise agreement will be considered an innominate agreement (ie, a type of contract that is not specifically provided for in law), and will include elements of a sale contract, lease contract, licensing agreement, consignment contract and so on, which are all expressly regulated by the Civil Code.

The European Code of Ethics for Franchising is not binding in the Czech Republic; however, it may have certain persuasive power and tends to be relied on by entities involved in cross-border franchising.

1.2 Do they apply to foreign franchisors entering your jurisdiction or only to domestic franchises?

Foreign entities that carry out business activities in the Czech Republic on a regular basis may need to set up a local subsidiary or a branch. They must also comply with the same rules that apply to domestic entities, such as acquiring the relevant trade licence and registering in the Commercial Register (this may not apply to EU-based entities, but it is always a good idea to double-check).

1.3 Do any special regimes apply in specific sectors?

There are no explicit statutory franchising regimes that apply in specific sectors. Nevertheless, each individual business case must be assessed to consider any potentially relevant sector-specific regulation that would apply generally, regardless whether it is within the framework of franchising (eg, food, pharmaceuticals, tobacco products).

1.4 Which bodies are responsible for enforcing the applicable laws and regulations? What powers do they have?

In general, the Czech courts are responsible for enforcing the law in the Czech Republic. It is, of course, possible for the parties to a franchise agreement to agree to resolve disputes through arbitration rather than the courts, whether locally or internationally. In court proceedings, it is possible to seek a preliminary injunction where this is necessary to arrange rights and obligations between the participants to the proceedings. The enforcement of judgments and awards follows the common rules of enforcement under Czech law. The Czech courts recognise foreign arbitral awards from other countries that are party to the New York Convention.

With respect to regulatory law, various bodies with various powers may be involved. For example:

the Trade Licensing Office oversees general aspects of carrying out commercial activities in the Czech Republic, including advertising (along with specific sectoral bodies);
the Czech Trade Inspection (or other authorities, depending on the sector) supervises compliance with consumer protection rules;
the Office for the Protection of Personal Data is the relevant authority with respect to privacy protection and regulation of spam;
the Office for the Protection of Competition is the antitrust watchdog;
the tax authorities are relevant with respect to numerous tax and similar obligations; and
a variety of additional authorities may be important in given areas.

However, there is no franchising-specific authority.

1.5 What is the regulator's general approach in regulating the franchise sector?

As there is no legislation dedicated specifically to franchising and no specific regulator, it is not possible to highlight any general approach to regulation of the franchise sector in the Czech Republic.

1.6 Are there any trade associations for the franchise sector? If so, what are the conditions for membership? What are the commercial implications of not being a member?

There are two major trade associations in the Czech Republic:

the Czech Franchise Institute (CFI), which runs the Franchise Club; and
the Czech Franchise Association (CFA).

Both are non-profit professional organisations whose members comprise franchisors, franchisees as well as specialist lawyers and advisers. The CFI/Franchise Club has around 100 individual members and has ties with the International Franchise Association; whereas the CFA has 60 members and is linked with the European Franchise Federation and the World Franchise Council.

Only an individual may become a member of the CFI/Franchise Club and the membership criteria are not too formalised. By contrast, both individuals and legal entities can become members of the CFA if its board of directors decides to accept the member by:

approving a written application; and
confirming that the applicant complies with the conditions set forth in the CFA Bylaws and has undertaken to:
- observe the bylaws;
- meet the conditions set forth in the Ethical Code of Franchising;
- comply with the conditions of the CFA Admission Order;
- participate in the activities organised by the CFA;
- comply with the resolutions and decisions of CFA bodies; and
- pay the membership fee.

There are no substantial commercial implications of not being a member of these associations. However, membership of both associations offers many advantages – in particular, access to networking opportunities, education and the sharing of experiences.

2 Franchise market

2.1 How mature is the franchise sector in your jurisdiction?

The concept of franchising was introduced to what was then Czechoslovakia soon after 1989, when the fall of communism resulted in the necessary political and economic changes. However, the expansion of the franchising model was rather slow during the 1990s. This was due to several factors, such as:

the difficulties that small entrepreneurs experienced in accessing external funding;
an underdeveloped legal system;
foreign franchisors and investors' limited knowledge of Central and Eastern Europe markets; and
Czech small to medium-sized businesses' lack of experience of international trade.

This began to change in 2004, when the Czech Republic became a member of the European Union. This political development at the EU level contributed to the creation of a favourable environment for franchising, which has since developed rapidly. Today, franchising is seen as a common business model, with approximately 260 franchises in operation on the Czech market. In 2017, there were 8,103 franchisees in the Czech Republic operating 6,262 own branches and 8,476 franchise outlets – almost double the figures for 2012.

2.2 In which sectors is franchising most common?

As elsewhere in the world, franchises operate in every sector in the Czech Republic. The most common sectors are:

food and groceries;
clothes and shoes; and
real estate.

2.3 Who are the biggest and most successful franchisors in your jurisdiction? How are they typically structured?

The most successful Czech brands are:

Husky and Bushman (outdoor clothes);
Benu and Teta (pharmacy and retail); and
Fruitisimo and Bageterie Boulevard (food).

For instance, one-third of the 187 subsidiaries of the Benu pharmacy are franchisees.

3 Franchising models

3.1 Is master franchising or the development model most common in your jurisdiction?

Yes, master franchising appears to be quite a common model of franchising in the Czech Republic.

3.2 What other models of franchising are commonly used in your jurisdiction?

Another common model of franchising is direct franchising, as it allows for easy and direct cooperation between the franchisor and the franchisee. We have not seen many joint venture franchising or other advanced models in the Czech Republic so far.

3.3 What are the potential advantages and disadvantages of these different models?

In direct franchising, the franchisor grants the franchisee the right to open one franchised business at one location, with a specified geographic range that will be protected from other franchised businesses in the same system. Under this model, franchisees are not usually required to satisfy performance criteria or sales quotas.

On the other hand, the master franchising model usually grants the right to a wide territory, such as an entire region of the country. Master franchising is typically employed by foreign franchisors so that a resident of the relevant territory can expand the system in areas with which the franchisor may be unfamiliar. Furthermore, master franchisees will generally be given the right to sub-franchise (ie, the right to grant franchises to franchisees within their territory, rather than only operating them themselves).

Of all the main structures, the joint venture franchise is the least understood and the most likely to cause difficulties if not structured correctly. With a joint venture franchise, the franchisor maintains its contractual control through the terms of the franchise agreement, but this is underpinned by a further layer of control at the corporate level through a joint venture or shareholder arrangement.

3.4 What specific considerations should be borne in mind in the case of cross-border franchising into your jurisdiction?

In general, no restrictions or approvals are required in connection with foreign franchisors entering the local market. There are, of course, some highly regulated sectors; but these are not the typical sectors for franchising activities.

Foreign entities that carry out business activities in the Czech Republic on a regular basis might need to set up a local establishment. In general, there are no restrictions on a foreign entity granting a master franchise or development rights to a local entity. Notably, the terms of the respective agreements must comply with the provisions of competition law.

4 Definitions and scope of application

4.1 How is ‘franchising' defined in your jurisdiction?

There is no legal definition of ‘franchising' in Czech legislation. In 1998, the High Court in Prague issued a decision which contains a general description of franchising activities and the typical contents of a franchise agreement (Ref 7 A 170/1995).

Another definition can be found in a 1999 decision of the Office for the Protection of Competition of the Czech Republic (Ref S 50/99-240). In that decision, the office stated that a ‘franchising agreement' is an agreement:

by which the franchisor grants the franchisee the right to use the franchise – a set of knowledge, experience, know-how, an established business name or trademark for the purpose of selling certain types of goods or services. The franchisee acts as an independent business entity in its own name an on its own account and has a full legal and partial business autonomy. The franchisor usually owns the well-known company with a well-known business name and a sophisticated system for selling goods or providing services. The franchisor transfers a comprehensive, successful, tried and tested concept under a well-known brand on the franchisee and the franchisee and his business become a part of unified network.

An unofficial definition has also been provided by the Czech Franchise Association, which states that ‘franchising' is a sales system through which goods, services or technology is marketed.

4.2 What are the key requirements that apply to franchising? Is pre-contractual disclosure required? Is registration of documentation required? Are mandatory terms imposed?

In the Czech Republic, there is no legislation dedicated specifically to franchising.

In 2014, the Civil Code introduced the concept of pre-contractual liability (culpa in contrahendo) into Czech law. Sections 1728 and 1729 of the Civil Code set out the following general rules:

Parties are entitled to hold talks freely and are not liable if a contract is not concluded, unless the other party starts or continues negotiations without the intention of concluding a contract.
During the contract negotiations, the parties should inform each other of all factual and legal circumstances to allow the other party to determine the possibility of concluding a valid agreement, and should be clear about the other party's interest in making the contract.
If, during the negotiations, the parties reach the point where the conclusion of an agreement appears to be highly likely, a party that, despite the other party's reasonable expectations, terminates the negotiations without justified reason is deemed to have acted unfairly.
A party that acts unfairly is liable for damages up to the maximum amount corresponding to the loss from non-concluded contracts in similar cases.

Other than these general provisions applicable to all commercial contracts, there are no pre-contractual disclosure obligations that specifically relate to franchising under Czech law. The above rules are fairly general, broad and still quite new. Recent case law suggests that:

each case must be assessed on its merits;
the principle of honesty is key; and
pre-contractual liability should be treated as an exception rather than a common rule.

There are no special provisions regarding formal requirements for pre-contractual information concerning franchise agreements, and no mandatory clauses applicable to franchise agreements. There are also no registration requirements applicable to franchise agreements. In principle, the parties can freely determine the terms and conditions of their contract, provided that their contract does not infringe good morals (bonos mores), public order or the protection of personality status or rights.

4.3 What specific activities (if any) are prohibited under the franchising laws and regulations? What are the potential consequences of breach?

As there is no specific regulation of franchising in the Czech Republic, general principles apply. The prohibited activities will therefore include in particular acts that:

infringe good morals (bonos mores); or
are unlawful from the private law, administrative law or criminal law perspective.

In general, criminal liability is applicable to both individuals and legal entities, especially crimes such as corruption, money laundering and fraud. Nonetheless, there is no special regulation applicable to franchise agreements.

Despite legal independence, the economic activities of the franchisee are almost universally influenced and determined by the franchisor, which seeks to harmonise its own activities with those of its franchisees to the farthest extent possible. This could potentially lead to a restriction of competition, in which case all market-sharing agreements and price recommendations would be unlawful.

Depending on the particular breach, the consequences will usually include:

fines;
invalidation of contractual provisions;
damages; and
criminal liability.

5 Initial steps

5.1 Are there any restrictions on foreign franchisors entering your jurisdiction?

No restrictions or approval requirements apply to foreign franchisors entering the local market.

5.2 What is the most common structure adopted by foreign franchisors entering your jurisdiction?

The most common structure through which foreign franchisors enter the Czech market is the master franchise and, to a certain extent, the joint venture franchising method. Given the relatively small size of the Czech market, there is often little commercial reason to adopt highly complex structures.

5.3 What requirements or restrictions apply with regard to the selection and recruitment of franchisees?

There are no statutory requirements or particular restrictions, other than the requirements under the generally applicable law. As in other countries, franchisors will typically focus on business issues such as:

proven experience or sales records of the franchisee;
a growing market; and
lack of competition, creating better opportunities.

5.4 Are franchisees subject to any legal obligations when purchasing a franchise?

There are no specific statutory obligations in relation to the purchase of a franchise. Therefore, the general obligations under civil law, corporate law, competition law, administrative law and so on will apply. It is not possible to determine the applicable obligations in general; each purchase of a franchise must be assessed individually.

6 Disclosure and due diligence

6.1 What pre-contractual disclosure requirements apply to franchisors in your jurisdiction?

Other than the pre-contractual liability discussed in question 4.2, there are no pre-contractual disclosure obligations specifically relating to franchising under Czech law. There are no special provisions regarding formal requirements for pre-contractual information concerning franchise agreements. In addition, there is no statutory obligation under Czech law to provide the franchisee with a franchise disclosure document or similar pre-contractual disclosure. Nevertheless, to validly conclude the contact, the rules on general pre-contractual disclosure under the Civil Code will apply. In particular:

the franchisor should deliver to the prospective franchisee the offer to conclude a contract; and
the parties should inform each other of all factual and legal circumstances that will assist the other party in deciding whether to enter into a valid agreement, and be clear about the other party's interest in entering into the contract.

6.2 What formal, substantive and procedural requirements apply with regard to the disclosure document in your jurisdiction?

There are no statutory requirements regarding the disclosure document in the Czech Republic. Therefore, the rules on general pre-contractual disclosure under the Civil Code will apply. Under the Civil Code, the proposal to conclude a contract (an offer) must clearly indicate that the party making the offer intends to conclude a particular contract with the party with respect to which the offer is made. The offer must contain the essential elements of the contract, so that the contract can be concluded by simple acceptance.

6.3 What pre-contractual disclosure requirements apply to franchisees in your jurisdiction?

Same as in the case of the franchisor (please see question 6.1). Other than the pre-contractual liability discussed in question 4.2, there are no pre-contractual disclosure obligations specifically relating to franchising under Czech law. There are no special provisions regarding formal requirements for pre-contractual information concerning franchise agreements. Nevertheless, to validly conclude the contact, the rules on general pre-contractual disclosure under the Civil Code will apply. In particular the parties should inform each other of all factual and legal circumstances that will assist the other party in deciding whether to enter into a valid agreement, and be clear about the other party's interest in entering into the contract. Therefore, the pre-contractual disclosure requirements will depend mainly on the respective franchisor.

6.4 What are the consequences of any breach of the pre-contractual disclosure requirements?

In general, if the contract negotiations between parties reach a point where the conclusion of the contract seems highly probable, a party that terminates the negotiations without just cause despite the reasonable expectations of the other party to conclude the contract will be considered to have acted unfairly. A party that acts unfairly must compensate the other party for damages, but only to an extent that does not exceed the loss resulting from failure to conclude a contract in similar cases. Other than that, there are no other consequences.

6.5 What other due diligence should the parties undertake before entering into a franchise agreement?

The due diligence relating to a franchise acquisition transaction should generally cover the following aspects:

corporate and operational records and documents;
accounting, financial and tax records;
bank accounts and loans;
insurance policies;
real estate documentation;
property, building, lands and any encumbrances made thereto;
machinery, equipment and other leased items;
patents, trademarks, technology transfers, copyright and any other applicable IP rights;
data protection and privacy; and
regulatory compliance.

6.6 Are there any restrictions imposed upon franchise brokers in your jurisdiction?

We are not aware of any restrictions imposed on franchise brokers in the Czech Republic, besides the general law provisions.

7 Franchise agreement

7.1 What formal, substantive and procedural requirements apply with regard to the franchise agreement in your jurisdiction? Are there any mandatory terms? What terms are typically included in the agreement?

There are no specific regulations on franchise agreements in Czech law. Therefore, the franchise agreement as such will be considered as an innominate agreement – that is, a type of contract that is not specifically provided for in law, pursuant to Section 1746(2) of the Civil Code. There are no mandatory clauses applicable to franchise agreements. In principle, the parties can freely determine the terms and conditions of their contract, provided that their contract does not infringe:

good morals (bonos mores);
public order; or
the protection of personality status or rights.

In general, the following substantive legal rights and obligations should be included (regardless of jurisdiction):

the grant of franchise rights and the term of the contract;
the franchisee's development obligations;
initial and ongoing training;
territorial rights;
operating procedures – especially the franchisee's obligations to follow procedures and systems established by the franchisor;
initial and ongoing fees;
marketing obligations and related payments;
an IP licence to use trademarks, know-how and so on;
restrictive covenants and non-compete agreements; and
governing law and dispute resolution.

7.2 Do any specific requirements apply regarding the governing law or jurisdiction of the franchise agreement?

There are no specific requirements on the governing law or jurisdiction of the franchise agreement under Czech law. However, if the agreement is between two Czech entities, the local law will usually govern the agreement. Therefore, it is up to the parties to determine in the agreement what the governing law will be. If this is not addressed in the agreement, the general rules at the EU and local level will apply.

7.3 Does the franchisor have any mandatory rights and obligations under the franchise agreement?

No. There are no mandatory clauses applicable to franchise agreements in the Czech Republic. In principle, the parties can freely determine the terms and conditions of their contract, as long as their contract does not infringe:

good morals (bonos mores);
public order; or
the protection of personality status or rights.

7.4 Does the franchisee have any mandatory rights and obligations under the franchise agreement

good morals (bonos mores);
public order; or
the protection of personality status or rights.

7.5 What restrictions can the franchisor impose on the franchisee's activities under the terms of the franchise agreement (eg, purchasing requirements, non-compete obligations, exclusivity, price control)?

As franchise agreements are not specifically regulated under Czech law, the parties can freely determine the terms and conditions of their contract, as long as their contract does not infringe:

good morals (bonos mores);
public order; or
the protection of personality status or rights.

Franchise agreements typically contain in-term and post-term restrictive covenants such as:

purchasing requirements;
non-compete obligations;
exclusivity requirements; and
contractual penalties.

Nevertheless, all restrictive covenants will be individually assessed, taking into account the relevant relationship. For example:

the non-compete clause must meet the statutory obligations (eg, the clause must specify the activity, territory, relevant persons and a term no longer than five years); and
the price control must meet the competition law requirements (ie, it cannot be a price-fixing agreement).

7.6 Is there a duty of good faith imposed upon the franchisor and franchisee?

Yes, Czech civil law is governed by the principle that everybody must act fairly in their legal relationships. No one should obtain a benefit by:

performing an unfair or illegal act; or
causing or controlling illegal conditions.

Civil procedural law presumes good faith; whereas a lack of good faith is subject to a burden of proof.

7.7 What are the parties' rights and obligations in relation to renewal of the franchise agreement, and what is the process for renewal?

There is no specific statutory regulation of franchise agreements in the Czech Republic. Therefore, it is up to the parties to decide on all issues in the contract. The renewal process will thus be governed by the contractual provisions, as long as they do not infringe:

good morals (bonos mores);
public order; or
the protection of personality status or rights.

7.8 What formal, substantive and procedural requirements apply with regard to termination of the franchise agreement in your jurisdiction?

There is no specific regulation of franchise agreements in the Czech Republic. Therefore, a franchise agreement can be terminated for the reasons set out in the Civil Code or for reasons that have been contractually agreed. In the vast majority of cases, the main grounds for termination of a franchising agreement are as follows:

Mutual consent: Franchise agreements may typically be terminated by mutual consent of the parties.
Withdrawal: A party may withdraw from a contract if this is stipulated by the parties or provided for by law. Typically, withdrawal involves termination of a contract for cause. The reasons for withdrawal are usually enumerated in the contract. The law expressly specifies one cause for withdrawal, which is a material breach of contract. In particular, the law provides that a breach is material if the breaching party knew or should have known at the conclusion of the contract that the other party would not have entered into the contract had it foreseen such a breach. A party may also withdraw from a contract without undue delay if the conduct of the other party undoubtedly indicates that the other party will commit a substantial breach of contract. Upon withdrawal from the contract, the rights and obligations are terminated with effect from the beginning (unless agreed otherwise – and it is a good idea to agree otherwise for practical purposes).
Termination: A party may unilaterally terminate the agreement without cause if this is stipulated by the parties or provided for by law. The effects of such termination are from the expiry of a notice period or from receipt of notice (if there is no notice period). Agreements that are concluded for an indefinite period can generally be always terminated with a notice period.
Expiration: An agreement will also terminate upon expiry of its term.

7.9 Are there any restrictions on repatriating moneys out of your jurisdictions?

There are no specific regulations in the franchising sector in the Czech Republic. Therefore, the general rules on anti-money laundering, limitation of payments in cash (CZK 270,000), international sanctions and so on will apply.

7.10 Are there any withholding taxes that apply to franchising in your jurisdiction?

In general, there should be no withholding obligations on payments made to an overseas franchisor under Czech law. However, this should be assessed on an individual basis.

In relation to taxes, we would recommend consultation with a tax adviser or accountant in each particular case. In general, as far as withholding tax on royalties paid to non-residents is concerned, the standard rate is 15%, but can be 35% if income is paid to a ‘tax haven'. However, these rates can be reduced under either a tax treaty or an exemption granted under the applicable EU legislation. Taxpayers from other EU or European Economic Area countries may file a tax return at year end and deduct expenses relating to royalty payments. Since 2014, the Czech Republic and the United States have cooperated on the enforcement of tax duties under the terms of the US Foreign Account Tax Compliance Act.

8 Operational standards

8.1 What legal status does the operations manual have in your jurisdiction?

The operations manual has the status of contractual provisions between the parties – provided, of course, that this effect is explicitly agreed by the parties.

8.2 How can the franchisor ensure compliance with its operational standards during the term of the franchise agreement?

Typically, parties tend to use contractual penalties as legal means to ensure compliance with contractual obligations in the Czech Republic. Enhanced contractual audit and reporting obligations can also help to ensure compliance with operational standards.

8.3 Can the franchisor make unilateral changes to its operational standards during the term of the franchise agreement?

Any changes to the agreement and/or the operational standards must be proposed by the franchisor and accepted by the franchisee in the manner specified in the agreement. In general, neither the franchise agreement nor the operational standards (which form a part of the franchise agreement) can be changed unilaterally according to Czech law.

Nevertheless, it is possible that changes made by the franchisor will be considered accepted if the franchisee continues to fulfil its obligations and raises no objections within a defined timeframe. In addition, changes to the operations standards may be possible if the conditions for the change are agreed between the parties in advance.

9 Intellectual property

9.1 How are brands protected in your jurisdiction and what specific implications does this have in the franchising context?

Brand protection is typically secured through registration of the relevant brand as a national trademark by the Czech Intellectual Property Office or as an EU trademark by the EU Intellectual Property Office. (International registrations through the World Intellectual Property Office are also a good strategy in order to expand the brand protection internationally). Although Czech law contains instruments to protect non-registered signs under certain conditions, it is always a good idea to rely on registered rights. Once a trademark has been successfully registered, it is protected for 10 years from the priority date. This period can be repeatedly extended by an additional 10 years, subject to payment of an administrative fee. According to the Trademark Act, the trademark owner has the exclusive right to use the trademark in connection with the goods or services for which the trademark is registered.

IP rights are typically enforced by the courts. With the exception of copyright, which is regulated separately, the relevant rights and claims available in case of IP rights infringement are set out in the IP Enforcement Act, which gives the rights holder the right to request that:

the infringer cease the activity that infringes or endangers the rights concerned;
the consequences of infringement or threatened infringement be removed by:
- recalling or permanently removing the infringing or potentially infringing goods; and
- recalling, permanently removing or destroying tools or devices determined or used in connection with the infringing or potentially infringing activities; and
information on the origins of the infringing or potentially infringing goods and their distribution channels be provided.

Regarding monetary claims, the rights holder can claim:

damages – either:
- actual damages and lost profits, if applicable; or
- the amount calculated as double the standard market licence fee;
surrender of unjust enrichment; or
in case of non-monetary harm, reasonable satisfaction, which can take the form of anything from an apology to financial compensation.

Simultaneously with the enforcement of IP rights, it is also fairly common in practice to make unfair competition claims.

9.2 How are other intellectual assets of the franchisor (eg, know-how, trade secrets) protected in your jurisdiction and what specific implications does this have in the franchising context?

IP assets such as know-how and trade secrets are protected under three main statutory laws in the Czech Republic:

the Civil Code;
the Criminal Code; and
the Act on Enforcement of Industrial Property Rights and Protection of Trade Secrets.

Most importantly, the Civil Code provides that a breach of trade secrets occurs where a person unlawfully discloses or makes available to another person, or uses for himself or herself or for another person, trade secrets which can be used in competition and which the person learned of:

as a result of having been entrusted with the secrets or as a result of the secrets having otherwise been made available to him or her:
- through his or her employment relationship or other relationship with a competitor;
- where applicable, through the discharge of the office to which he was appointed by a court or another body; or
by the person's own act or the act of another which is in breach of a statute.

In court proceedings, the authorised person may request:

withdrawal of products from the market;
permanent removal or destruction of products; and
withdrawal, permanent removal or destruction of materials, apparatus and equipment designed or used exclusively or mainly in activities that infringe or threaten infringement of the law.

However, the definition of ‘trade secrets' in Czech law is rather broad, and ‘know-how' is not defined at all. Thus, in the franchising context – as in all other contexts – in order to rely on trade secrets, it is important to ensure that:

the relevant intellectual assets fulfil the statutory criteria for protection; and
in particular, the trade secret owner takes active steps to protect them.

Contractual arrangements are thus key in defining:

what is to be considered as a trade secret or know-how for the purposes of the agreement; and
the rights and obligations of both parties in that regard.

In addition to trade secrets and know-how, other types of IP rights are available which might also be relevant in the franchising context, such as designs, patents and utility models. The protection of these rights is established under specific legislation, but enforcement is the same as described above with respect to trademarks.

10 Employment

10.1 What is the applicable employment regime in your jurisdiction and what specific implications does this have in the franchising context?

In the Czech Republic, employment relationships are governed by the Labour Code. The Labour Code regulates legal relations that arise in connection with the performance of dependent work between employees and their employers. ‘Dependent work' is work that is:

carried out within a relationship of the employer's superiority and the employee's subordination, in the employer's name and according to the employer's instructions; and
performed in person by the employee for the employer.

Dependent work may be carried out exclusively within a basic labour relationship.

The franchising relationship, however, is not usually set up as an employment relationship. It is common practice to state this explicitly in the franchising agreement.

10.2 Can franchisees be deemed to be employees of their franchisor?

Czech labour law defines an ‘employee' as a natural person who undertakes to provide dependent work in a basic employment relationship based on an employment contract or an agreement to complete a job or work. The relationship between franchisor and franchisee is not established by such contract. It is therefore highly unlikely that the courts would treat franchisees as employees. Nevertheless, the parties to a franchise agreement typically feel the need to explicitly rule out the creation of an employment agreement by contract (even though this provision may not be fully enforceable under Czech law, especially if all criteria of employment are met).

11 Competition

11.1 What is the applicable competition regime in your jurisdiction and what specific implications does this have in the franchising context?

In the Czech Republic, competition law is governed by the Civil Code, which provides a brief general overview of competition law and regulates unfair competition and non-compete arrangements. The Competition Act addresses regulatory aspects such as:

cartels and other restrictive agreements;
abuse of a dominant position; and
mergers.

Czech competition law is harmonised with EU law, and the activities and views of the Czech Competition Office are generally aligned with those of the European Commission.

Franchise agreements are usually subject to a legal or block exemption and do not constitute a potentially prohibited agreement. However, it is always a good idea to review franchise agreements – especially from the perspective of any potential vertical restraints, which may include any exclusivity arrangements, resale price maintenance, product ties and so on – while checking whether the EU block exemption regulation applies.

12 E-commerce

12.1 How is e-commerce regulated in your jurisdiction and what specific implications does this have in the franchising context? Can franchisees be prohibited from using e-commerce in their businesses?

The regulation of e-commerce in the Czech Republic is rather complex. Various laws apply, including:

the Civil Code;
the Electronic Communications Act;
the Consumer Protection Act;
the Personal Data Processing Act;
the Criminal Code; and
the Information Society Services Act.

The Information Society Services Act is especially relevant – not only because it contains rules on the liability of internet service providers, but also for its regulation of email marketing (and spam). Similarly, a wide range of rules apply to social media.

Franchises must take account of many individual laws governing:

personal data protection;
personality and privacy rights;
intellectual property;
consumer protection; and
advertising regulations.

In general, the franchisor cannot prevent a franchisee from:

having its own website;
promoting its business on the Internet; or
engaging in e-commerce.

However, depending on the applicable contractual provisions, it can establish rules on how such a website should look or how e-commerce should be carried out.

13 Consumer protection

13.1 What consumer protection measures are applicable in your jurisdiction and what specific implications do these have in the franchising context?

Under Czech law, a ‘consumer' is defined as a natural person who acts outside the scope of his or her business activities or outside the scope of his or her performance of a profession during the conclusion of an agreement with an entrepreneur or business undertaking. Because franchisees themselves act in their capacity as entrepreneurs or business undertakings, they cannot be treated as consumers. On the contrary, most franchise operators must ensure that they comply with relevant consumer protection regulations in relation to their customers.

A seller of goods or services must in particular:

sell products of proper weight, measure and quantity, and allow consumers to check these;
sell products and provide services in the prescribed or approved quality; and
sell products at prices agreed in compliance with pricing regulations and charge the correct prices when selling products and providing services.

In addition, under the Civil Code, the seller of a product is obliged to provide the consumer with information about:

the product, its nature and quality; and
the rights of the consumer in connection with the sale of the product.

Furthermore, the consumer is entitled to withdraw from the contract without sanction within 14 days of the date on which the product was delivered if the contract was concluded online or outside the seller's business premises. The seller is liable for hidden defects of the product for a period of two years.

13.2 Are franchisees covered under any of these consumer protection measures?

The Civil Code defines a ‘consumer' as any natural person who acts outside the scope of his or her business activities or outside the scope of his or her performance of a profession during the conclusion of an agreement with an entrepreneur or business undertaking. Franchisees act in their capacity as entrepreneurs or business undertakings and therefore cannot be considered as consumers. On the contrary, franchisees must comply with relevant consumer protection regulation in relation to their customers.

The Civil Code also protects against abuses of expertise or economic position. This protection applies not only to consumers, but also to entrepreneurs and business undertakings, and forbids any aim to:

create or take advantage of the dependence of the weaker party; or
create a clear and unjustified imbalance in the parties' mutual rights and obligation.

14 Data security and cybersecurity

14.1 What is the applicable data protection regime in your jurisdiction and what specific implications does this have in the franchising context?

The Czech Republic has a relatively long tradition of protection of personal data. The first data protection law was adopted back in 1992 and was later harmonised with EU law by the Data Protection Act (101/2000) prior to the Czech Republic's accession to the European Union. On 25 May 2018, the Data Protection Act was replaced by the EU General Data Protection Regulation (2016/697) (GDPR), which is now valid and effective law throughout the European Union. The GDPR has further tightened the rules on the processing of personal data, as well as imposing severe sanctions for non-compliance. Conversely, some previous obligations were lifted: for example, data controllers are no longer required to notify the processing of personal data to the Czech Office for Protection of Personal Data.

With effect from 24 April 2019, local data protection legislation was introduced to implement some of the GDPR provisions, in the form of the new Act on the Processing of Personal Data (110/2019). The most relevant aspect of the new act is the specification of the age of consent for online services, which will have an impact on e-commerce. Under the GDPR, the age of consent in the online world is 16, but member states can choose to lower this to 13. From this age range of 13 to 16 years, the Czech legislature took the view that 15 years of age is sufficient to provide valid consent to data processing in the online world.

14.2 What cybersecurity obligations are applicable in your jurisdiction and what specific implications does this have in the franchising context?

The Criminal Code provides criminal law protection for IT systems and data, and explicitly addresses cybercrime. Criminal offences under the code include:

accessing IT systems and information media without authorisation (hacking);
using data without authorisation; and
obtaining technology to violate the secrecy of messages.

The Czech Republic was also one of the first European countries to adopt a Cybersecurity Act. The Cybersecurity Act imposes duties on telecommunications providers or providers of critical infrastructure (eg, the banking and defence sectors). Therefore, it is not likely to burden typical franchise businesses. This may serve primarily to benefit digital franchises. The Czech Republic has also adopted the EU Directive on Security of Network and Information Systems, which slightly extends the number of subjects affected and will harmonise the rules with the rest of the European Union.

15 Disputes

15.1 In which forums are franchising disputes typically heard in your jurisdiction? What issues do such disputes typically involve?

Disputes can be settled in court or through alternative dispute resolution. Litigation may take several years, depending on the complexity of the case. Franchise agreements therefore typically include a dispute resolution clause that points either to a court or to arbitration. Arbitration and mediation are usually faster and are therefore often recommended as an alternative.

In the Czech Republic, arbitration is regulated by the Arbitration Act, which is applicable to all relations, without regard to their character. Mediation is regulated by the Mediation Act. Where useful and suitable, the court can order the parties in dispute to attend meetings with a mediator for at least three hours and can interrupt the proceedings (for a maximum of three months). In practice, however, mediation is not used very often, especially not for commercial disputes.

There are no specific procedures or industry practices for franchising disputes. We are not aware of any of the existing franchising associations in the Czech Republic offering mediation or arbitration services.

15.2 Is mediation commonly used in franchising in your jurisdiction? Is arbitration commonly used in franchising in your jurisdiction?

As outlined in question 15.1, franchise agreements typically include a dispute resolution clause that points either to court or to arbitration. In the Czech Republic, arbitration is regulated by the Arbitration Act, which is applicable to all relations, without regard to their character. Mediation, which is governed by the Mediation Act, is not used very often, especially not for commercial disputes.

If arbitration is chosen, it is recommended to pay attention to the wording of the arbitration clause or arbitration agreement.

15.3 Can class actions be brought in your jurisdiction? If so, what specific implications does this have in the franchising context?

Although the Civil Code contains a substantive legal basis for a kind of class action in its provisions on protection against unfair competition, the Civil Procedure Code does not provide for any specific class action procedures. On the contrary, the code currently prevents claimants from filing suit in cases where a lawsuit has already been filed by a different claimant. In addition, the operative part of a final judgment is binding on other entities in such cases. These provisions constitute a lis pendens principle and the doctrine of res judicata. Claimants may therefore only join proceedings that have already commenced, rather than filing a lawsuit of their own to initiate different proceedings.

The Czech government proposed a new bill on class actions in March 2020. The bill is expected to come into force on 1 January 2022. However, the bill has not yet been adopted as the COVID-19 pandemic has slowed the legislative process.

15.4 Have there been any recent cases of note?

We are not aware of any Czech case law in relation to franchising worth mentioning.

16 Trends and predictions

16.1 How would you describe the current franchising landscape and prevailing trends in your jurisdiction? Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?

Franchising was significantly affected by the COVID-19 pandemic in 2020 and as franchisees often choose premises located in shopping centres as the best places to open franchise branches, their closure affected them significantly. Some brands were able to respond quickly to the new situation and their franchisees could at least generate some sales, especially those operating in the gastronomy sector. For example, McDonald's deliveries apparently increased by 45% to 50%.

According to publicly available information, the management of several franchise networks decided to waive or reduce franchisees' regular monthly franchise fees – for example:

Subway (food);
Fruitisimo (food);
the Nutriadapt Weight Management Clinic; and
the BodyBody fitness studio.

Other brands adopted a policy whereby franchisees do not pay fees when they have no sales, such as Los Capolitos (food) and Bageterie Boulevard (food). The management of the Subway franchise network in the Czech Republic announced a 50% reduction in franchise fees: instead of 8% of turnover, franchise partners will pay 4% to the franchisor.

Nevertheless, some franchises have not been so significantly affected by the pandemic. For example:

Oxalis (tea and coffee) plans to expand into other countries;
Mail Boxes Etc (delivery services) and GAP (clothing) both entered the Czech market; and
Alza.cz (electronics) intends to significantly expand its network of AlzaBox self-service delivery units, with plans to increase the number of these as much as fivefold by 2021.

We are not aware of any legislative proposals affecting franchising.

17 Tips and traps

17.1 What are your top tips for franchisors seeking to enter your jurisdiction and what potential sticking points would you highlight?

As franchising is not specifically regulated under Czech law, it is important from a legal perspective to focus on the contractual provisions of the relevant agreement. We would recommend consulting related aspects with a Czech specialist lawyer to avoid any future misunderstandings. Also, depending on the relevant sector, other regulatory aspects should be taken into account before time and money are spent. This should also minimise potential liability for non-compliance with applicable laws and regulations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Czech Republic: Franchising Comparative Guide