Amendment to Mexican Industrial Property Law

On January 25, 2006, an amendment to the Mexican Industrial Property Law was published in the Federal Official Gazette. The Amendment was published after a long discussion initiated by Congress in early 2005, and became effective on January 26, 2006. The amendment's final provisions were the result of a very effective lobbying campaign by major players in the franchising sector and, fortunately for the industry, Congress eliminated many of the overly restrictive aspects of the initial bill that could have unnecessarily hampered the industry. In the end, Congress' objective of providing more protection to franchisees was well balanced with the legitimate rights of franchisors. For example, certain ultra-protectionist provisions for franchisees originally contained in the bill, such as certain rights of first refusal in franchisees' favor and the right to request cancellation of registration of franchisor's trademarks in certain cases, were not incorporated into the amendment.

The amendment defines a "franchise" as an agreement that contemplates a trademark license and the transfer of technical knowledge or technical assistance. Under the amendment, franchisors will be required to provide a disclosure document containing the information required by regulations adopted under the law at least 30 days prior to execution of the franchise agreement. No time frame for disclosure or sanctions for non-disclosure were specified prior to adoption of the amendment. Under the amendment, if the disclosure information provided to a franchisee is not accurate, then such franchisee's agreement may be nullified, and in such case, the franchisee may claim damages during the first year following the execution of the agreement. Also, if the franchisor does not provide the required information, it may be subject to administrative sanctions (i.e., fines) by the Mexican Institute of Industrial Property (IMPI).

The amendment also establishes the minimum content requirements of a franchise agreement. The requirements include: (i) geographic zone where the franchised business will operate; (ii) characteristics of the investment required for infrastructure; (iii) policies related to inventory, marketing and publicity, as well as those related to the supply of goods and hire of suppliers, as applicable; (iv) policies and terms related to reimbursements, financing, and other payments established in the agreement; (v) the applicable criteria and methods to determine profits and/or commissions of franchisees; (vi) characteristics of the technical and operational training of franchisee's employees, as well as the terms under which franchisor shall provide technical assistance; (vii) criteria and procedure to supervise and evaluate performance, as well as the quality of services of both parties to the agreement; (viii) terms for subfranchising, if applicable; (ix) causes for termination of the agreement, (x) terms under which the agreement may be modified by mutual agreement of the parties; and (xi) provision establishing that franchisee shall not be obligated to sell its assets or shares to franchisor or third party appointed by franchisor, unless otherwise agreed to by the parties in the agreement.

The amendment establishes procedural modifications regarding the administrative procedures for before IMPI. The amendment also includes a provision which clarifies that the purpose of the Industrial Property Law (IPL) is to provide legal certainty to the franchising sector, as well as to guarantee non-discriminatory treatment for all franchisees of the same franchisor. In this sense, although the final draft of the amendment did not include the some of the strong pro-franchisee language contained in the original version regarding the uniformity of policies for franchisees, this provision implies that no discrimination among a franchisor's Mexican franchisees would be permitted. It is likely that future regulations may be enacted that would establish the specific content to be included in a Mexico offering circular, and such regulations may include an obligation to provide an offering circular in a prescribed form for all franchisees.

Overall, the amendment should not have any negative impact on the growth of franchising operations in Mexico. However, as of January 26, 2006, all franchise agreements in Mexico must comply with the minimum requirements established by the IPL, as amended, and any other requirement that could be established in any future regulations.

Alberto de la Peña is an associate in the International Practice Group of Haynes and Boone, LLP. He can be reached by e-mail at alberto.delapena@haynesboone.com.

Published: August 1st, 2006

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