Legal Landscape: Mexico

What franchisors should know about doing business in Mexico.

By Jorge Mondragon

Franchising is directly regulated in Mexico by the Industrial Property Law (IPL) and indirectly by other related legislation. Pursuant to the IPL, a franchise agreement shall exist when (i) a trademark is licensed, (ii) the franchisor transfers know-how or provides technical assistance, and (iii) the franchisee acquires the right to produce and/or sell products or render services in a uniform manner, with the operative, commercial and administrative methods required by franchisor, so that the provided products or services maintain the same quality, prestige and image. If an agreement contains these elements, it will be considered as a franchise agreement under Mexican law, being therefore subject to the applicable legal requirements – regardless of the name attributed to the contract.

Disclosure Document

The IPL imposes upon franchisors an obligation to disclose certain information to a prospective franchisee, the Disclosure Document, at least 30 business days prior to signing the franchise agreement; such term must be calculated per the calendar of non-business days published by the Mexican Institute of Industrial Property – or the Trademark Office.

The Disclosure Document must reveal to the prospective franchisee certain technical, economic and financial information about the franchise, including, among others, the description of the franchise, intellectual property involved in the same, amounts and concepts of payments from franchisee to franchisor, technical assistance and services to be provided by franchisor, the geographical area where the franchise may be effective, as well as franchisee’s main rights and obligations under the agreement.

Franchise Agreement

The IPL establishes that a franchise agreement must be in writing and shall contain certain mandatory provisions, which cannot be overridden by the parties, including:

Minimum size and investment characteristics of the franchise’s premises;

Minimum level of inventory, marketing and advertising policies;

Provisions relating to the merchandise supply and the hiring of suppliers;

Applicable criteria and methods to determine franchisee’s commissions and profit margins;

Training and technical assistance from franchisor to franchisee, and;

Events of termination under the franchise agreement, since the parties can only terminate a franchise agreement unilaterally if the term thereof is indefinite or if there is a just cause to do so.

Other Legal Considerations

Trademarks – There is no express requirement under the IPL to register the franchisor’s trademarks prior to offering a franchise or executing a franchise agreement. Notwithstanding the foregoing, it is strongly recommended for franchisors to file applications with the Trademark Office for their trademarks before providing a prospective franchisee the Disclosure Document; otherwise, other parties may try to register said marks.

A trademark must be used by its owner or by a registered franchisee/licensee in Mexico. If a foreign owner of a trademark wants to prove the use thereof through a registered franchisee, the corresponding franchise agreement (or a short form or summary thereof) must be recorded with the Trademark Office; this reduces the potential risk of having a third party filing a cancellation procedure of the trademark based on the lack of use by its original owner.

A franchise system, manuals, operation standards and other know-how may be protected in Mexico as a trade (industrial) secret, a legal figure that is regulated under the IPL. Due to their nature, trade secrets are not registered and, therefore, their protection relies on the ability of its owner to put in place the necessary measures to secure confidentiality.

Antitrust – In Mexico, antitrust matters are governed by the Federal Economic Competition Law (LFCE). The LFCE fails to establish provisions that deal specifically with franchises. There are no precedents from the Mexican Competition Commission (Cofece) establishing case law regarding franchise agreements from an antitrust perspective, nor working papers or other guidelines issued by Cofece discussing antitrust challenges in franchising. Notwithstanding the foregoing, when carrying out practices like setting prices or designating exclusive vendors for products, franchisors may want to contemplate that the two essential issues involving antitrust risks in franchise arrangements could be (i) the vertical relationship between franchisor and franchisees, and (ii) the horizontal relationship among franchisees.

Taxes – Withholding income tax is usually imposed on amounts paid from a Mexican franchisee to a foreign franchisor for concepts like initial franchise fees, royalties, technical assistance and marketing fees. Tax treaties between Mexico and other countries may reduce the applicable withholding tax rate, such as the tax treaty between the governments of the United States and Mexico, which limits the withholdings applicable to said type of payments, ranging between 0 percent and 10 percent.

Data Privacy –  Mexico, like many other jurisdictions, has a law that protects personal data; the Mexican Federal Law for the Protection of Personal Data in Possession of Private Persons protects all personal data processed by companies and requires them to implement diverse measures that impact their operation, structure and risk administration. Franchisors need to make sure that their franchisees are complying with this law and other related legislation when processing personal data, particularly when transferring the personal data of the franchise’s customers to franchisor.

Labor – Mexican laws fail to establish provisions relating to the possibility of the existence of labor relations between a franchisee and its franchisor or between the employees of the franchise and the franchisor. Notwithstanding the foregoing, it is recommended that franchise agreements include provisions regarding the absence of labor relations and non-representation between the parties.

Jorge Mondragon has been a Partner at Gonzalez Calvillo since 1998. He is active in the firm’s franchising and distribution practice group.