dannemann.com.br COMPENSATION TO MASTER FRANCHISORS UPON TERMINATION AND NON-RENEWAL OF MASTER FRANCHISE AGREEMENTS IN BRAZIL © 2012 Dannemann Siemsen. All rights reserved. The 2012 Conference of the International Distribution Institute (IDI) Venice, Italy

dannemann.com.br Establishment and Goodwill 2 © 2012 Dannemann Siemsen. All rights reserved.  Establishment: all tangible and intangible assets, duly organized in order to fulfill the company activities (article 1,142 of the Brazilian Civil Code). Tangible assets: real estate and chattel; Intangible assets: intellectual property, trade name, reputation and the clientele, among others.  Goodwill: the intangible elements of an establishment.  Establishment: all tangible and intangible assets, duly organized in order to fulfill the company activities (article 1,142 of the Brazilian Civil Code). Tangible assets: real estate and chattel; Intangible assets: intellectual property, trade name, reputation and the clientele, among others.  Goodwill: the intangible elements of an establishment.

dannemann.com.br Law, Doctrine and Court Decisions 3 © 2012 Dannemann Siemsen. All rights reserved.  No statutory Brazilian Law determines that master franchisors or franchisees have an interest in the franchise’s goodwill.  Franchisor’s trademark, know-how and trade-dress are the most valuable intangible assets.  Master franchisors and franchisees benefit from the franchisor’s goodwill by receiving a license to use the franchisors’ intangible elements of the franchise system.

dannemann.com.br 4 © 2012 Dannemann Siemsen. All rights reserved.  Controversy: to whom does the clientele belong? Court decisions have recognized that there are no grounds for payment of any compensation to master franchisors or franchisees upon termination and non-renewal of their franchise agreements, as the franchisors are the owners of the most valuable intangible asset – the trademark – with its definitive power to attract the clientele. However, recent court decisions were in favor of the existence of local goodwill, developed through the efforts and expenditures of the franchisee and, as a result, have granted such franchisees compensation in amounts corresponding to half of the value of the goodwill. We have not found any decisions related to master franchise agreements.  Controversy: to whom does the clientele belong? Court decisions have recognized that there are no grounds for payment of any compensation to master franchisors or franchisees upon termination and non-renewal of their franchise agreements, as the franchisors are the owners of the most valuable intangible asset – the trademark – with its definitive power to attract the clientele. However, recent court decisions were in favor of the existence of local goodwill, developed through the efforts and expenditures of the franchisee and, as a result, have granted such franchisees compensation in amounts corresponding to half of the value of the goodwill. We have not found any decisions related to master franchise agreements.

dannemann.com.br 5 © 2012 Dannemann Siemsen. All rights reserved.  Analysis on a case-by-case basis, taking into consideration some main aspects, such as: (i) the terms of the master franchise agreement; (ii) if the franchisor is the owner of a well-known trademark; (iii) if the case involves a service franchise or a product franchise system; (iv) if the franchise chain was started and developed in Brazil due to the particular efforts of a master franchisor (customization, for instance); (v) if the master franchisor has prior experience in the franchise business; and (vi) if the master franchisor independently attracts clientele due to its own efforts and not due to the particular elements of the franchise system.

dannemann.com.br The Franchise Agreement 6 © 2012 Dannemann Siemsen. All rights reserved.  The analysis of the master franchise agreement will be extremely important to conclude if the franchisee is entitled to receive any compensation for the local goodwill upon termination and non- renewal.  Brazilian Franchise Law (Law no. 8,955 of December 15, 1994) solely deals with the franchisor’s obligation to provide the disclosure document to potential franchisees and does not address particular aspects of the franchise agreement. Some obligation applicable to master franchisors.  Franchise agreements are broadly regulated by the general provisions of the Brazilian Civil Code.

dannemann.com.br 7 © 2012 Dannemann Siemsen. All rights reserved.  General principles and provisions related to contracts stipulated in the Brazilian Civil Code: (i) good faith governing contractual relationships; (ii) fair dealing; (iii) unjust enrichment; and (iv) the social purpose of contracts.

dannemann.com.br 8 © 2012 Dannemann Siemsen. All rights reserved.  Common practice: the goodwill, including the clientele, belongs solely to the franchisor, as the franchisor is the owner of all intellectual property rights connected with the franchised system.  Franchise agreements related to a well-known trademark: the sale of products or performance of services is basically influenced by the famous brands owned by franchisor; the role of the master franchisors is not a determining factor in forming the clientele; and master franchisors need to uphold the standards established by franchisor in order to maintain the consistency of the franchise chain.

dannemann.com.br 9 © 2012 Dannemann Siemsen. All rights reserved.  Contractual provisions: Exclusive territory: master franchisors and franchisees have more arguments to state that part of the clientele was also attracted by their sole efforts. No exclusivity + the goodwill belongs solely to the franchisor: it is unlikely that Brazilian courts will grant master franchisors and franchisee compensation upon termination or non-renewal of the franchise agreement. Substantial control and consistent assistance regarding master franchisors or franchisee’s activities: any clientele resulting from this relationship clearly stems from the efforts of the know-how and operational methods stipulated by franchisor.  If the master franchisor or franchisee was the first to establish the brand in its trade area (or even within the Brazilian territory) on an exclusive basis, it may be partially granted the right to receive compensation.

dannemann.com.br 10 © 2012 Dannemann Siemsen. All rights reserved.  Post-termination noncompetition covenants: should be deemed legally valid and enforceable due to special features of franchise business, provided that they are reasonably limited in time and territory; Time limit: generally from 2 to 5 years. Territory limit: the city, or even state, where the franchisee’s unit is located. We may find broader territories for master franchise agreements. may also be taken into consideration to avoid the payment of compensation for loss of goodwill to the franchisee.

dannemann.com.br 11 © 2012 Dannemann Siemsen. All rights reserved. a)the term of the master franchise agreement has simply expired or the franchisor is refusing to renew; b)termination due to master franchisor’s breach; c)termination due to franchisor’s breach; d)insolvency of the master franchisor; e)the amount of effort expended by the master franchisor; f)customer referrals by the master franchisor to the franchisor. The Behavior of the Parties During the Master Franchise Agreement

dannemann.com.br 12 © 2012 Dannemann Siemsen. All rights reserved.  Master Franchisor or Franchise business: goodwill corresponds to the difference between the total value of the business as a going concern and the total value of the business’s tangible assets.  Comparing how the business ranks in relation to other master franchisors operating under the same franchise system.  Replacement cost: when comparing the costs incurred and the time spent, in order to enable a business to reach the level of profitability of a comparable franchise unit, the difference in cost could be used as a reference for the fair value of the goodwill of the franchise.  This methodology can also be used to measure the additional goodwill generated by the master franchisor to the franchise as a whole, as well as to determine the compensation that he should be entitled to. Calculating the Value of Goodwill

dannemann.com.br THANK YOU VERY MUCH! Luciana Bassani 13 © 2012 Dannemann Siemsen. All rights reserved.