Franchising

Franchising in Romania is primarily governed by Government Ordinance 52/1997, which was recently modified through the enactment of Law 179/2019.

In Romania, no distinction is made between foreign franchisors and domestic franchisors when it comes to the applicable legal requirements. Both must adhere to the same regulations imposed by national laws.

While there are no special regimes that apply to specific sectors, there are opportunities for tax relief in specific industries.

In Romania, there are no bodies with specific responsibility for enforcing the franchise regime. However, the competition and commercial laws also apply, meaning that the Competition Council and the national/arbitration courts will have jurisdiction.

There are no specific approaches to the regulation of the franchise sector. In Romania, the Constitution and national law apply to all regulatory matters.

Several franchise associations are active in Romania, but membership is not mandatory. Participation in a franchise association may offer certain advantages in terms of:

• access to enhanced knowledge in the field; and
• the opportunity to establish a network of contacts with other professionals.

The purpose of franchise associations is to support members with information and increase the visibility of franchising on the market. However, there is no legal obligation to participate in a franchise association as either a franchisor or as a franchisee. Also, there are no commercial implications of not being a member.

Although Government Ordinance 52/1997 dates back to 1997, it is only in the last five to 10 years that activity in the Romanian franchise sector has ramped up. Today, many international brands are active in Romania and some local brands are starting to expand internationally.

Almost any prosperous business has the potential to evolve into a franchise model. The food and beverage sector is one of the most prolific in Romania, although recently franchising has also gained traction in the education and healthcare sectors.

Numerous well-established franchise brands are active in Romania, including internationally renowned names such as:

• McDonald’s;
• Burger King;
• Domino’s;
• Pizza Hut;
• KFC;
• Taco Bell; and
• Subway.

Notably, Romania also welcomes service-oriented franchises, with industry leaders such as Remax making their mark. This diverse franchise landscape demonstrates the country’s receptiveness to a wide range of franchise opportunities, ranging from fast-food giants to real estate services.

A substantial majority of businesses in this domain tend to adopt the unit franchise model as their preferred mode of operation. Within this context, it is customary to see multiple unit franchises, with entrepreneurs often managing and operating more than one unit of a franchise. Further, most of these successful multi-unit entrepreneurs tend to operate more than one franchise brand, contributing to a robust and dynamic franchise ecosystem.

Although both the master franchising and multi-unit development models are utilised in Romania, they are primarily used by international franchises. The most common model for Romanian franchises is the single-unit franchise approach.

The most common business model is the single-unit franchise approach.

Single-unit franchise model:

• Advantages:
• • Simplicity: The single-unit franchise model is straightforward and easy to understand, making it accessible to a wide range of entrepreneurs.
  • Local focus: Franchisees can concentrate on a single unit, allowing for a strong local presence and personalised customer service.
  • Lower risk: Operating a single unit carries lower financial risk compared to the multi-unit and master franchise models.
• Disadvantages:
• • Limited growth: The potential for expansion may be limited compared to other models, as each franchisee operates a single unit.
  • Fewer economies of scale: The unit model may miss out on certain economies of scale achieved by multi-unit or master franchise operations.
  • Dependency: The success of the business relies heavily on the performance of a single unit, making it vulnerable to local market fluctuations.

Multi-unit franchise approach:

• Advantages:
• • Faster expansion: Multi-unit franchisees can expand more rapidly by managing multiple units simultaneously.
  • Economies of scale: Operating multiple units can lead to cost savings and increased profitability.
  • Diversification: Spread across multiple units can help to mitigate the risks associated with a single-location operation.
• Disadvantages:
• • Complexity: Managing multiple units can be challenging and can require a higher level of organisational and managerial skill.
  • Higher initial investment: Acquiring and operating multiple units typically involves a greater upfront financial commitment.
  • Market saturation risk: Rapid expansion can lead to market saturation in certain areas.

Master franchise approach:

• Advantages:
• • Rapid expansion: Master franchisees have the potential to develop an entire region or country quickly.
  • Revenue streams: Master franchisees can generate revenue from sub-franchise fees and ongoing royalties.
  • Local expertise: Master franchisees often possess deep knowledge of the local market, which can be advantageous.
• Disadvantages:
• • Complexity: Managing multiple sub-franchisees and adhering to brand standards can be complex.
  • High responsibility: Master franchisees bear substantial responsibility for brand growth and management in their designated territory.
  • Initial investment: Acquiring master franchise rights can involve a significant initial investment.

The most important aspects that should be borne in mind are as follows:

• Understand the Romanian franchise laws and ensure legal compliance both when concluding agreements and in daily business operations.
• As most IP rights are territorial, protection should be ensured in Romania.
• Accurately translate documents into Romanian.
• Establish clear dispute resolution mechanisms in the franchise agreement, including jurisdiction and choice of law clauses, to ensure that knowhow is properly protected in case of infringement.

Government Ordinance 52/1997 defines a ‘franchise’ as follows:

Before expanding through franchising, a franchisor should have:

• proven the business concept by successfully operating it for at least one year; and
• registered its IP rights.

Before selling a franchise, a franchisor must also meet the pre-contractual disclosure requirements. If the franchisor fails to comply with these obligations, the franchisee:

• may request the courts to determine that the contract is null and void; and
• may be entitled to claim related damages.

Registration of the franchise is not required, but the right to use or own a registered IP right is required under Government Ordinance 52/1997

Yes, the law sets out some mandatory terms as follows:

• Clearly define the obligations and responsibilities of each party, as well as any other collaboration clauses;
• Include:
• • the object of the agreement;
  • the rights and obligations of the parties;
  • financial conditions;
  • the duration of the agreement; and
  • the conditions for amendment, extension and termination; and
• A non-compete obligation; a clause stating that the franchisee cannot engage, either directly or indirectly, in any activity that is similar to the subject of the franchise agreement.

No such activities are expressly prohibited by law.

No.

Franchisors are not obliged to establish a presence in the local area. However, if foreign franchisors do decide to establish a corporate entity in Romania, this typically takes the form of a limited liability company.

In Romania, no requirements or restrictions apply in relation to the selection of franchisees.

No.

The pre-contractual disclosure requirements are a legal obligation of the franchisor. Before executing a franchise agreement, the franchisor must inform the franchisee of:

• the history and experience of the franchisor;
• details of the management’s identity;
• the litigation history of the franchisor and its management;
• the initial investment required to operate the franchise;
• the mutual obligations of the parties;
• the franchisor’s financial results from the previous year; and
• information on the pilot unit.

The information must be disclosed to the franchisee in the form of a disclosure letter, drafted in the language of the franchise agreement.

There are no disclosure requirements that apply to franchisees. However, Government Ordinance 52/1997 and the Civil Code set forth an obligation to deal in good faith in business relations in general, as well as in a franchise relationship in particular.

If a franchisor fails to accurately disclose the information required by law, the franchisee may file a lawsuit seeking damages. Additionally, a franchisee which can prove that its consent has been vitiated may initiate legal proceedings to request the invalidation/annulment of the franchise agreement. If the agreement is invalidated, the franchisee may seek reimbursement of the entry fee and the royalties paid, among other things.

From the franchisee’s perspective, the most important issue is to verify the information disclosed by the franchisor, especially in relation to:

• trademarks;
• financial results; and
• litigation history.

These issues can all be validated from public sources.

On the other hand, the franchisor should check whether the franchisee:

• is a good fit for the business; and
• has the financial and personal capabilities and means to open and operate the business.

No.

As mentioned in question 6.1, the franchisor is obliged by law to disclose:

• its financial results from the previous year; and
• the initial investment required to operate the franchise.

The ongoing relationship between the franchisor and franchisee is governed by:

• Law 179/2019;
• Government Ordinance 52/1997; and
• the Civil Code and related legislation.

The franchise agreement must:

• clearly define the obligations and responsibilities of each party, as well as any other collaboration clauses;
• include:
• • the subject of the agreement;
  • the rights and obligations of the parties;
  • the financial conditions;
  • the duration of the agreement; and
  • conditions for amendment, extension and termination; and
• a non-compete obligation; a clause stating that the franchisee cannot engage, either directly or indirectly, in any activity that is similar to the subject of the franchise agreement.

It is not mandatory for the franchise agreement to be governed by local law; instead, it can be governed by the law chosen by the parties. However, if the parties choose a law other than Romanian law, a court jurisdiction other than the Romanian state courts should be also chosen.

Romanian law requires only that the franchise agreement specify the parties’ rights and obligations. The parties are free to negotiate the extent of such rights and obligations. Common rights of the franchisor include:

• the right to receive marketing fees and royalties;
• the right to control system standards (use of brand and knowhow); and
• the right to audit the franchisee’s accounting books.

One of the most important obligations of the franchisor is to provide initial training and ongoing support to the franchisee.

The mandatory rights and obligations of the franchisee are those agreed under the franchise agreement. The main obligations of the franchisee are to:

• observe the system standards as set out in the operations manual and maintain the quality and consistency of products or services; and
• allow the franchisor to monitor such standards.

Common rights of the franchisee include:

• the right to use the franchisor’s trademarks and knowhow;
• the right to an exclusive territory; and
• the right to pre-contractual disclosure.

Based on EU Regulation 2022/720, a franchise agreement can impose restrictions on active sales (online or offline), but it cannot restrict passive sales.

Also, a franchisor can recommend the sale price and can even impose a maximum price to be observed by the franchisee, but it cannot impose the actual price. An important exception to this rule was recently introduced by EU Regulation 2022/720, which provides that a franchisor may impose a sale price for short-term marketing campaigns only.

It is both common and legal for a franchisor to impose restrictions in relation to matters such as:

• purchasing requirements;
• exclusivity in specific territories; and
• agreed suppliers (if such suppliers are essential to keep the franchise system homogeneous).

Government Ordinance 52/1997 and the Civil Code impose an obligation to deal in good faith in business relations in general, as well as in franchise relationships in particular.

If a party that deals in good faith suffers harm due to the bad faith of the other party, it can seek damages accordingly.

The parties do not have a legal right to request renewal of the franchise agreement; hence, either party may refuse renewal at its discretion. The other party may not seek compensation for such refusal.

However, the parties have the flexibility to include renewal terms and conditions within the franchise agreement, outlining any compensation relating to non-renewal as they see fit.

Under Romanian law, there are no specific requirements on the termination of a franchise agreement; hence, the general provisions of the Civil Code will apply.

Termination can occur:

• by a simple termination notice;
• by a succession of:
• • notice of breach;
  • a cure period; and
  • a final termination notice; or
• by requesting the court to ascertain the breach and termination of the agreement.

It is advisable to include termination provisions in the franchise agreement. These should make clear how the agreement can be terminated, based on the severity of the breach, meaning that for some breaches the agreement can be terminated immediately. In some cases, it is better to deal with minor breaches by providing for the imposition of fines or monetary penalties in the agreement, instead of termination.

No.

There is no specific tax regime for franchising; this will depend on the legal form used to set up the business.

From a contractual perspective, the operations manual is a binding part of the contractual agreement. In addition, the operations manual encompasses the knowhow of the franchisor and thus constitutes a trade secret.

The most common way to ensure compliance with operational standards is for the franchisor to provide for the imposition of sanctions (eg, fines) in case of breach in the franchise agreement.

The operations manual is subject to evolution and it is standard practice in the franchising industry for modifications to occur throughout the duration of the franchise agreement.

However, the franchisee should be given:

• sufficient time to comply with changes to the manual; and
• the possibility to withdraw from the franchise agreement should such changes become disproportionately burdensome from a financial perspective.

Romanian laws offer various remedies designed to safeguard against:

• trademark and design infringement;
• the disclosure of knowhow or trade secrets; and
• unlawful competition.

Additionally, the franchisor should include provisions that allow it to swiftly pursue remedies in the event of trademark, knowhow or trade secret infringement. Such remedies should include the possibility to:

• stop the infringement quickly; and
• obtain monetary relief.

These provisions can help to protect the franchisor’s intellectual property and business interests more effectively.

In Romania, the protection of intellectual assets – including knowhow and trade secrets – is governed by several laws and legal mechanisms. One very efficient mechanism is that in urgent matters (eg, those involving IP or non-compete infringements), interim injunctions can be sought through state court proceedings to temporarily block use.

The independence of the franchisee and the franchisor is one of the fundamental principles of franchising. Thus, there are no specific employment implications in the franchising context.

If the control that the franchisor exercises over the franchisee’s employees exceeds the purposes of the franchising agreement, there is a risk that the employees and managers of the franchisee may be deemed to be employees of the franchisor. However, thus far, there is no relevant case law in Romania on this matter.

EU Regulation 2022/720 and local laws (eg, Law 11/1991) apply in Romania. EU Regulation 2022/720 provides specific exemptions for the franchising sector in relation to:

• permissions for territorial exclusivity; and
• the imposition of sales prices under certain conditions.

If the franchise involves online sales, the parties must comply with the e-commerce regulations. Additionally, the franchisor may not prevent franchisees from selling their products or services online. However, it may:

• control the way in which online sales are conducted; and
• ensure that they comply with the franchisor’s knowhow and franchise standards.

The applicability of Law 363/2007, which sets out the legal framework on consumer protection, may be relevant within the franchising context. This law applies exclusively to consumers who are:

• natural persons; and
• clients or customers of the franchise.

The franchisee is not considered to be a consumer under Romanian law, but rather a professional merchant. Therefore, the consumer protection laws do not apply to the franchisor-franchisee relationship. Of course, if the franchisee sells products or services to consumers (natural persons), the consumer protection laws and measures will apply.

In Romania, the applicable data protection law is the General Data Protection Regulation (2016/679) (GDPR). National laws do not provide for significant deviations from the GDPR.

The data protection implications of the franchisor-franchisee relationship must be established through a data processing agreement in which the parties have the roles of controller/processor or joint controllers.

Romania has no cybersecurity obligations with specific implications for franchising. Even so, franchisors and franchisees should be aware of the need to protect vital assets such as customer databases, financial data and business data from unauthorised access, theft, damage or destruction.

The GDPR is just one example of laws that require:

• the implementation of appropriate technical safeguards for data protection; and
• the reporting of data breaches to regulatory bodies in the event of cyber incidents.

Additionally, European laws that pre-date the GDPR require certain telecommunications companies and internet service providers to promptly notify both regulators and affected individuals in the event of security breaches.

If an amicable resolution cannot be reached, there are two dispute resolution options:

• the state courts; and
• the arbitration courts.

The arbitration procedure is quicker than the state court procedure; but it is also more expensive than the latter. Another advantage of arbitration is, in some cases, the confidentiality of the arbitration file.

In urgent matters (eg, involving IP/non-compete infringements), interim injunctions can be sought through state court proceedings to temporarily block use. This type of injunction is not possible in arbitration court proceedings.

Franchisors and franchisees can seek amicable settlement and mediation before submitting their case to the courts. However, this preliminary step is not mandatory.

Arbitration is not subject to any special requirements. Romania is a party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards and the Romanian judiciary is typically ready to acknowledge and uphold foreign arbitral awards from fellow convention nations.

Romanian law has no specific provisions on class actions; but multiple plaintiffs with connected interests can submit a court claim together. For example, if multiple franchisees claim the same breach of the franchise agreement by the franchisor, they can submit a claim in court together and each of them can request the damages incurred. This claim has the advantage of splitting the burden of proof.

There is not yet a substantial body of jurisprudence on franchising in Romania; but we are aware of several important rulings, some of which are ground-breaking. They include the following:

• Two franchise agreements concluded with a local franchisor were annulled and the franchisees were awarded full compensation for damages. This decision is important as it was the first of its kind to be issued after Law 179/2019 came into force, which provides for the annulment of a franchise agreements where the franchisor has insufficient knowhow to operate the business.
• The operations of several restaurants located within major shopping centres were subject to an immediate cessation order due to breach of the franchisor’s proprietary knowhow.

The franchise landscape in Romania is stable and no substantial legal developments that could significantly impact franchise relationships are expected in the next year or so. However, a significant positive change could arise from Romania’s potential entry to the Schengen Area, although the timing of this remains uncertain. Participation in the Schengen Area would simplify the cross-border transportation of products and workers, thus streamlining daily operations for international businesses.

As a franchisor, it is imperative to:

• ensure that your operations are aligned with the Romanian franchise regime and uphold legal compliance within the framework of your agreements;
• ensure that your trademarks are properly protected in Romania; and
• choose the optimal set of governing laws to ensure the proper protection of knowhow in case of infringement.