How to avoid being scammed by the franchisor

The popularity of franchising has a downside: the number of scammers is growing just as rapidly. Under the guise of a unique business, exaggerated franchises are sold that ruin unlucky franchisees.

Classic franchising is beneficial to both parties: the franchisor expands its network, covering new regional markets without investment on its part, and the franchise buyer reduces the risks that are inevitable when working from scratch. The franchise scheme is simple and convenient at the same time. There is nothing surprising in the fact that the number of franchise outlets and the number of franchise companies in our country is increasing every year. However, this popularity of franchising has a downside: the number of scammers who sell inflated franchises and ruin unlucky franchisees is just as rapidly increasing.

There are several scams in this area. Unscrupulous franchisors sell franchises of non-existent brands and sell low-quality equipment or products to their franchisees that do not meet the requirements. Moreover, at first glance, such a “partner” may look very solid and inspire confidence, and his offer seems to be extremely profitable. In fact, he is misleading the franchisee, distorting or withholding certain facts and promising mountains of gold. Often, under the sonorous brand of the franchisor, network marketing is hidden, which has nothing to do with franchising. All this significantly harms the development of franchising in Russia and compromises its very idea.

A couple of years ago, experts argued that about a fifth of all proposals on the Russian franchising market can be classified as unscrupulous. Now we can already say that at least a quarter of franchisors deceive their potential partners. Depending on the scheme used, such dishonest behavior by franchisors can have different consequences for franchise buyers.It is conditionally possible to single out the two most common fraudulent schemes in the field of franchising – inflated franchises and pseudo-franchises.. 

What are inflated franchises

Exaggerated franchises, at first glance, are not much different from real ones, except that they seem surprisingly more profitable than most offers. As a rule, a company selling exaggerated franchises has a very sonorous and pretentious name – “international association”, “transnational holding”, “largest international company”, etc. The cost of such a franchise can start from a modest amount of 25-30 thousand rubles and further almost to infinity. 

Unlike real offers, such “bubbles” have nothing in the basis, and the apparent generosity of the franchisor turns out to be a complete fraud. An “international company” exists only on paper, and this paper does not always have legal force. Sound trademarks are not registered with Rospatent, the company has neither its own developments, nor any valuable technologies, nor, of course, reputation. Since such “companies” are constantly closed and then opened under other names, the franchisor, of course, is not going to provide any significant assistance to his unlucky franchisees. It is important for him to sell his franchises as soon as possible before his company is declared bankrupt.

How to recognize a pseudo-franchise

After receiving a lump sum (initial lump-sum payment) from the franchisee, the scammers provide him with a large pile of documents that also have neither legal force nor application. At first, a false franchisor can even provide its customers with minimal assistance in the form of consultations, special (as a rule, not very favorable when compared with other offers) conditions from suppliers of equipment or products (not of the highest quality), promotional events. However, such support does not give a special result and ends quickly. As a result, the franchisee receives a dubious trademark unknown to anyone and useless documents, while losing all their investments in the business.

How to recognize a pseudo-franchise

A pseudo-franchise is somewhat different from an inflated franchise (we repeat, this division is conditional). If the latter can be called at least some attempt to create your own brand, even if it does not have any convincing basis, then the pseudo-franchise is initially disguised as a well-known and promoted trademark. To do this, a designation is selected that is as similar as possible to the degree of confusion with a previously registered foreign trademark. This can already be regarded as a violation of paragraph 3 of Art. 1484 of the Civil Code of the Russian Federation. 

According to the Rules for Drafting, Filing and Considering an Application for the Registration of a Trademark and Service Mark, a designation may be considered confusingly similar to another designation if it evokes direct associations with the latter among consumers, and in some details it may well differ from the original. Similarities can be determined by various parameters, but for franchising, the most relevant visual similarity, which is determined by the font, graphic writing and color combination, as well as the overall visual impression that develops when comparing two brands – the original and the bad copy.

For a franchisee who has acquired such a franchise, the consequences may be more unpleasant than in the case of a phony franchise. By purchasing a shell franchise, he simply loses his money, but at least he gets a brand name that he can use. When acquiring a pseudo-franchise, he may be criminally liable under Art. 180 of the Criminal Code of the Russian Federation, to which all participants in such a criminal scheme are subject. Large companies with a name carefully monitor all cases of illegal use of their brands and win cases in court to protect them. In the case of a pseudo-franchise, it will be difficult to prove that the franchisee did not know that he was not dealing with the rightful owner. Although the fake brand is similar to the original, it still has distinctive features.

Such “franchises”, as well as the franchising agreement proposed with them, of course, cannot be registered with Rospatent, and if this condition is not observed, the agreement is recognized as void (clause 2 of article 1028 of the Civil Code of the Russian Federation). Unfortunately, the level of legal literacy of our population is not yet very high, and novice entrepreneurs sometimes believe in the explanations of their franchisor that the contract and trademark were not registered with Rospatent due to the high cost, uselessness, length of the procedure, etc. Excuses can be any. The lack of registration at the moment can be explained by scammers even by the fact that the documents have been submitted for a long time, the certificate will be issued soon, but “only today, only now” a happy potential franchisee can get the rights to use the promoted brand for mere pennies,

Needless to say, these promises are not true. And even if we assume that the applications were nevertheless submitted, they will be or have already been rejected under Art. 1483 of the Civil Code of the Russian Federation. The trademark registration period is about 9 months. But even after the decision is made, the applicant may delay the receipt of a decision to refuse registration by extending the response time to the examination request for another six months. In any case, whatever the reasons for the absence of a registered contract and trademarks, you should not take his word for it and give him your money.However, even the presence of a real certificate of registration should not lull your vigilance. If you yourself do not have the necessary knowledge and experience, seek the help of a competent lawyer who works in the field of franchising. Let him study all the documents before making a deal. It is quite possible that the certificate shown to you concerns completely different classes of goods and services, since in relation to the necessary groups of goods and services, the same trademark could have been previously registered by another legal entity that has nothing to do with your franchisor.

What is raw and "alternative" franchising

What is raw and “alternative” franchising

The so-called “raw franchising” is similar to exaggerated franchises. Young little-known and not very successful companies are trying to use the franchise scheme to expand their presence in other regions, without having real opportunities to make good offers to their potential franchisees. Simply put, at the beginning of work, both the franchisor and the franchisee will be practically at the same level of development, so, of course, there can be no talk of any support from the franchisor, and the benefit of the acquired franchise is extremely doubtful.

Unscrupulous franchisors can also use various frauds with contracts. These include camouflage by contract. This scheme, in all its main features, resembles the scheme of work of large and well-established copyright holder companies, but at the same time, the franchisee receives alternative contracts for signature, which are not registered with Rospatent. Such schemes for “replacing” a franchise agreement with a contract of a different type are used not only by one-day companies, but also by some successful enterprises with a good reputation. 

Among the reasons for their strong reluctance to enter into a commercial concession agreement, they themselves name the imperfection of Russian legislation in the field of franchising, according to which the right holder is given too much responsibility for the activities of its users. But again, whatever the real reasons for concluding an alternative agreement, we should not forget that without mandatory registration it cannot be considered a franchise agreement. 

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