COMPENSATION
TO
MASTER
FRANCHISORS UPON TERMINATION
AND NON-RENEWAL OF MASTER
FRANCHISE AGREEMENTS IN BRAZIL
The 2012 Conference of the International
Distribution Institute (IDI)
Venice, Italy
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Establishment and Goodwill
 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
establishment.
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intangible
elements
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of
an
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Law, Doctrine and Court
Decisions
 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.
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 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.
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 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.
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The Franchise Agreement
 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 nonrenewal.
 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.
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 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.
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 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.
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 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.
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
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.
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The Behavior of the Parties During the
Master Franchise Agreement
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.
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Calculating the Value of Goodwill

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.
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THANK YOU VERY MUCH!
Luciana Bassani
[email protected]
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