Franchising

The statute that specifically governs franchising – although limited to retail franchising – is the Medium-Small Retail Promotion Act (MSRPA). Section 11 requires the franchisor to disclose certain items to the prospective franchisee before concluding a franchise agreement. The Ministerial Order to Implement the Medium-Small Retail Promotion Act also adds a list of items to be disclosed. The ministerial order was most recently amended in 2021.

Another source of regulation of franchising is the Anti-monopoly Act (AMA), which is the Japanese competition law. The Guidelines on Franchising elaborate how the AMA applies to franchising. The guidelines were also amended in 2021.

The laws apply to both foreign and domestic franchising. However, in considering amendments to the regime, the regulators seem to be concerned solely about unit franchise agreements of domestic franchisors, and not about master franchise agreements between a foreign franchisor and a domestic franchisee.

As stated in question 1.1, the MSRPA applies only to retail franchising. One caveat is that ‘retail business’ is considered to include the food industry pursuant to the Japan Standard Industrial Classification (JSIC) of 1973, when the MSRPA was enacted. It is unclear whether the amendments to the JSIC in 2002 that identified the food industry as an independent industry sector have narrowed the scope of application of the MSPRA.

The Small and Medium Enterprise Agency (SMEA) is responsible for enforcing the MSRPA. The SMEA is the external bureau of the Ministry of Economy, Trade and Industry (METI). METI takes the lead in policy making, including the consideration of amendments to the MSPRA and its implementing ministerial order.

The text of the MSRPA does not grant the SMEA or METI investigatory powers. Instead, the agencies demand voluntary reports from franchisors when investigating problems relating to franchising.

The Japan Fair Trade Commission (JFTC) is responsible for enforcing the AMA. The JFTC has investigatory powers, as well as the quasi-judicial power to decide on cases involving breaches of the AMA.

Recently, the alleged oppression of franchisees by franchisors has become a social problem, especially with regard to franchise networks of convenience stores, among others. METI, the SMEA and the JFTC are thus taking a more stringent approach to franchising – at least in the convenience store sector – than before.

The Japan Franchise Association (JFA) is the body that represents the franchise sector in Japan. To be eligible for membership of the JFA:

• a franchisor must have 10 or more franchisees that have been in business in Japan for two years or more; and
• the ratio of terminated franchisees to all franchisees must have been under 20% over the past two years.

A franchisor in business for one year or more is eligible to become an associate member of the JFA. A franchisee or franchise broker can become a study member.

Membership of the JFA gives a franchisor good standing. However, many franchisors are not members.

The franchise market is quite mature in Japan. According to the most recent statistics of the Japan Franchise Association (JFA), there were 1,308 franchisors in Japan as of the 2020 fiscal year, including 372 members of the JFA.

The most prominent sector is the convenience store sector. Many visitors to Japan are impressed with the fact that convenience stores in Japan are so different from those in other countries, in that they are advanced retail complexes that offer a variety of products and takeaway foods. According to JFA statistics, 558 of Japan’s 1,308 franchisors are active in the food industry, including:

• fast-food restaurants;
• izakaya (Japanese pubs); and
• ramen (noodle) stores.

The largest convenience store franchisors are 7-Eleven, Lawson and Family Mart. 7-Eleven has more than 20,000 stores, while the other two have around 15,000. Most of the stores are directly franchised. There are also limited numbers of stores operated by the franchisor.

Master franchising is often used when a foreign franchisor enters the Japanese market. It is also used domestically when a franchisor from one region in Japan expands into other regions. The development model is also used when a foreign brand enters the Japanese market. In this case, the local area developer operates all stores in Japan directly. A Japanese franchisor that intends to enter foreign markets will also employ either of these two models.

For domestic franchising, unit (direct) franchising is the most common structure: the franchisor simply grants franchises to local franchisees without any master franchisor. Most franchisors of convenience stores do not rely on master franchisees within Japan and control more than 10,000 franchisees directly.

The main differences are found in the degree of control. The advantage of the area development model is that the franchisor can better control the units’ operations, as the developer directly operates the stores. In the case of master franchising, the franchisor’s power extends only to the master franchisee. The sub-franchisees owe contractual obligations only vis-à-vis the master franchisee.

On the other hand, the master franchise structure may better facilitate adaptation to the demands of the local market, given the broader discretion that unit franchisees may have. In the area development structure, the franchisor may be tempted to impose global standards, which may not be palatable to local consumers.

The Japanese market has significant local peculiarities. Consumer tastes are often different from those in other areas of the world – particularly in the food industry. Further, consumer demand for service is high. Japanese consumers prefer to be well taken care of and are less sensitive to price. Room to adapt to the specificities of the local market may thus be important.

The Japan Franchise Association defines a ‘franchise’ as follows:

Apparently, this definition refers only to business format franchising. The definition is most often cited in court decisions dealing with franchise disputes.

The subject of the disclosure duty under the Medium-Small Retail Promotion Act (MSRPA) (see question 1.1) is a person that presides over a ‘qualified chain-store business’. Section 4(5) of the MSRPA defines a ‘chain-store business’ as “a business in which, according to a standard contract, goods are continually sold, directly or by a designated third party, and assistance over the operation is continually given, principally to medium or small sized retailers”. A ‘qualified chain-store business’ is a special type of chain-store business, defined by the act as “a chain-store business for which such a standard contract is employed as provides that a trademark, a trade name or any other sign is licensed to, and initial franchise fee, security deposit or any other fee is to be paid by, a member at the time of acquiring a membership”.

With respect to the Japan Fair Trade Commission (JFTC) Guidelines, Paragraph 1(1) defines ‘franchising’ as “a form of business in which the Franchisor gives the Franchisee the right to use a trademark or trade name, and controls, guides and assists the operation of the Franchisee in sales of goods or services in a uniform manner”. The guidelines recognise that a franchise agreement “generally” includes clauses in relation to the following and limits the scope of its application to such franchises:

• the licensing of the franchisor’s trademark or trade name to the franchisee;
• control or guidance of the franchisee to ensure a uniform image of the business towards third parties and to support the franchisee’s operations;
• the payment of fees with regard to the above; and
• the termination of a franchise agreement.

When concluding a franchise agreement, a pre-contractual disclosure duty applies. The disclosure duty may be based on:

• the MSRPA;
• the Anti-monopoly Act (AMA) Guidelines;
• the JFA’s voluntary regulation (incorporating the requirements under both the MSRPA and AMA Guidelines); and
• the case law based on the good-faith principle in the Civil Code.

See also question 6.1 for details.

The registration of documents is not required.

There is no requirement to include mandatory terms under Japanese law. However, the franchisor is advised to pay attention to the AMA Guidelines, as they provide that certain contractual terms may constitute abuse of bargaining power, tying or restrictive conditions on trade, depending on the circumstances.

Although there is no statutory regulation of the termination of a franchise agreement, the Japanese courts have developed case law on ‘continuous contracts’, which emphasises the value of maintaining long-term contractual relationships and requires good cause or an unavoidable reason for a franchisor to terminate a franchise agreement before the end of the agreed term. Whether all doctrine applies to a refusal to renew an agreement on the expiry of a contractual term is disputed.

No answer submitted for this question.

No answer submitted for this question.

The AMA Guidelines on franchising provides that if a franchisor supplies goods to the franchisee, its restriction of the retail prices charged by the franchisee constitutes retail price maintenance. This is a type of unfair trade practice and constitutes a breach of the AMA if made without justifiable grounds. In case of retail price maintenance, the JFTC may issue a cease-and-desist order. It may also impose a surcharge if the cease-and-desist order is the second issued to the franchisor for retail price maintenance within a 10-year period.

No.

In many cases, the foreign franchisor finds a Japanese partner and grants it a master franchise. There are also cases where a foreign franchisor establishes a joint venture with the local partner and assigns to it the role of area developer.

Apart from the disclosure duty discussed in question 6.1, there are no other restrictions.

No.

In the case of retail franchising, the Medium-Small Retail Promotion Act (MSRPA) requires the franchisor to disclose specific items to a prospective franchisee. Although the statute itself is sector specific, the voluntary regulations of the Japan Franchise Association (JFA) – which apply to franchisors in all industry sectors – incorporate the disclosure duty under the MSRPA. As a result, the MSRPA’s disclosure requirement is extended to those franchisors which are outside the scope of application of the statute. Furthermore, the Anti-monopoly Act (AMA) Guidelines provide that disclosure of certain items is “desirable” and warn that failure to disclose them could constitute “deceptive customer inducement”, which is one of the unfair trade practices recognised under the AMA. The disclosure items under the MSRPA and AMA Guidelines do not entirely overlap, but the JFA’s voluntary regulation incorporates both items.

The franchisor must also be aware that the courts have developed case law holding that a failure to provide sufficient information in the process of negotiating a contract may cause liability for damages should the franchisee perform poorly after commencing business and incur loss. This duty to provide sufficient information arises from the good-faith principle (Article 1(2) of the Civil Code) and the nature of the liability is tortious. One of the main differences between the disclosure duty under the MSRPA and that under the AMA Guidelines is that while the projected performance of the franchised outlet does not fall under the disclosure duty under the MSRPA, liability under the good-faith principle often arises from a failure to disclose unpromising performance projections to a franchisee. The AMA Guidelines lie in the middle and provide that projected sales or profits, when communicated to a prospective franchisee, must be reasonable in terms of both the basis for and the method of projection.

The statutory disclosure rules require no formalities. As part of its voluntary regulations, the JFA publishes the format for disclosure, which is downloadable from the JFA’s website. Only the Japanese-language version is available.

Neither the MSRPA nor the AMA Guidelines specify the procedure for disclosure. They do not even mention the timeframe required between the disclosure and the conclusion of an agreement. The JFA’s voluntary regulations recommend that a franchisor which has made disclosure wait seven days or more before concluding a franchise agreement.

There are none under the statutes. Liability arising from the good-faith principle might theoretically apply to franchisees; although in practice this is unlikely, given that the courts emphasise the inequalities in the amount of information available to the franchisor and that available to a franchisee.

For disclosure under the MSRPA, the Ministry for Economy, Trade and Industry may issue a recommendation to comply with the requirement and, if the franchisor ignores this, may publish the non-compliant franchisor’s name.

For disclosure under the AMA Guidelines, failure to disclose constitutes an unfair trade practice under the AMA and the Japan Fair Trade Commission may issue a cease-and-desist order.

For the disclosure duty arising from the good-faith principle, the consequence of breach is damages. Damages usually cover the costs that the franchisee incurred to establish the business and commence operations; and may further extend to costs incurred for sustaining the (unprofitable) business or even some of the losses incurred while continuing the operations.

There is nothing specific to franchising in this regard. Of course, the parties must comply with relevant laws and regulations, such as:

• zoning regulations (for the selection of sites);
• consumer protection regulations; and
• labour regulations.

No.

No answer submitted for this question.

There are no formal, substantive or procedural requirements for franchise agreements in the Civil Code. Moreover, there are no mandatory terms. Typically, a franchise agreement includes terms relating to:

• the payment of royalties and other fees;
• the relevant territory;
• the terms and conditions for renewal;
• restrictive covenants;
• training;
• operating assistance and support;
• advertising obligations;
• IP protection;
• confidentiality;
• termination and post-termination obligations; and
• dispute resolution.

No.

No.

No.

The parties are free to negotiate the terms of the deal. That said, some clauses imposed on franchisees – such as non-compete clauses or pre-fixed penalty clauses – may be rendered void by a court based on the general ‘public policy’ principle set out in the Civil Code or the Anti-monopoly Act, even if the franchisee has agreed to them. With regard to non-compete provisions, the courts will determine whether the restriction is excessive by considering the scope of the business and the geographical extent and duration of the non-compete clause.

The parties to a franchise agreement are obliged to deal in good faith in franchise relationships based on the principle of good faith as set forth in Article 1, Section 2 of the Civil Code.

There are no specific regulations on the renewal of franchise agreements; however, when a franchise agreement with a fixed term includes an automatic renewal clause, the courts may hold that a refusal to renew is justified only when there is a ‘compelling reason’ to bring the agreement to an end (Nagoya District Court, 31 August 1990; Kagoshima Appeals Court, 10 October 2000; Tokyo District Court, 11 May 2010).

There are no formal, substantive or procedural requirements that apply specifically to franchise agreements.

With respect to continuous contracts such as franchise agreements, from the perspective that the expectation of a party (mainly the franchisee in franchise agreements) that the contract will continue should be protected, the cancellation of the agreement is generally restricted. On the other hand, by focusing on the principle of freedom of contract, opinions recognising the freedom to cancel continuing contracts have been asserted. For example, in a case regarding the exercise of a right to terminate an agreement in a special store agreement for cosmetics, the Tokyo High Court held that an ‘unavoidable reason’ was not required to exercise the right to terminate an agreement. In addition, with regard to a refusal to renew franchise agreements, there have been cases in which it was held that the franchise agreement would end on the expiry of the term of the agreement unless there were special circumstances such as a violation of public policy or the principle of good faith. Moreover, with respect to franchise agreements in particular, there are many court precedents that have restricted the cancellation of contracts.

No.

As long as the recipient is a domestic corporation, no withholding taxes apply to franchising. On the other hand, if the payment is made to a foreign corporation, the impact of withholding tax will depend on any applicable double taxation treaties with the relevant jurisdiction.

Typically, the franchise agreement contains covenants requiring compliance with the franchising manual.

Appropriate and clear drafting of the franchise agreement is important to ensure compliance with its operational standards.

The franchisor can make such changes as long as:

• the franchise agreement expressly allows the franchisor to unilaterally change the operational standards; and
• such changes are in accordance with the principle of good faith.

Franchisors usually register their trademarks and domain names in order to protect their brands.

The common method of determining whether a trademark has been registered is to use a database such as that available from the Japan Platform for Patent Information (formerly the Industrial Property Digital Library). However, because there is a time lag between the actual registration and the updating of the database, a prospective applicant often obtains an extract from the Trademark Register for important trademarks. An extract from the Trademark Register may ordinarily be obtained from the Japan Patent Office by submitting an issuance request in a designated form and paying the relevant fee. If, in relation to a trademark that a franchisor uses in its franchise business, the franchisor wishes to register a new trademark or considers the registered scope to be insufficient, the franchisor should investigate whether there are any trademarks of other companies that have already been registered and consult with experts (eg, patent attorneys and attorneys) about the possibility of infringement based on the results of the investigation.

Japan Registry Services comprehensively manages the database of Japanese domain names; and multiple registrars accept applications for the registration of individual domain names.

If know-how qualifies as a ‘trade secret’ under the Unfair Competition Prevention Act, its unauthorised disclosure by the franchisee will constitute an act of unfair competition and will be subject to an injunction order from the court. If the franchisee discloses a trade secret intentionally or negligently, it will also be liable for damages. Moreover, know-how and trade secrets are generally subject to confidentiality obligations in franchise agreements.

Franchisors and franchisees must comply with the labour laws and regulations. There are several labour laws in Japan, the most important of which are:

• the Labour Standards Act;
• the Labour Contract Act; and
• the Labour Union Act.

Where the Labour Standards Act applies, regulations on working hours and so on will apply to an ‘employee’ as defined in the act. In addition, various laws and regulations based on the Labour Standards Act will apply. Further, where the Labour Contract Act applies, a person will be entitled to the protections under the act, such as the abuse of dismissal doctrine, the rescission of an offer of employment doctrine and the termination of employment doctrine – all of which have been recognised and found to protect employees in previous court decisions. Moreover, if an employee under the Labour Union Act organises a labour union that meets the requirements of Sections 2 and 5 of the act (a legal union), that union is entitled to protection under the act, including:

• criminal immunity (Section 1);
• civil immunity (Section 8);
• acquisition of legal personality (Section 11); and
• remedies for unfair labour practices (Sections 7, 27, etc).

From time to time, a franchisor may second its employees to a franchisee to assist with the initial training of the franchise business. In this case, the franchisor must comply not only with the Japanese labour laws, but also with the immigration laws.

Labour Standards Act and Labour Contract Act: The definition of an ‘employee’ set forth in the Labour Standards Act and the Labour Contract Act comprises two elements:

• employment; and
• payment of wages.

In a recent case a Japanese district court found that a franchisee of 7-Eleven was not an ‘employee’ under the Labour Standards Act or the Labour Contract Act because, among other things, the franchise agreement specified that the franchisee was an ‘independent business operator’ (Tokyo District Court, 21 November 2018).

These laws generally do not apply to the franchise relationship; however, there have been several important cases on the issue of whether a franchisee is an ‘employee’ under the Labour Union Act. In one case, a union which was composed of franchisees filed a petition for relief with the Labour Relations Commission, claiming that the franchisor’s refusal to engage in collective bargaining constituted an unfair labour practice. The Central Labour Relations Commission denied the franchisees’ employee status and vacated the initial trial order; and each petition for relief was eventually dismissed.

The franchisor-franchisee relationship is one of the major targets of the Anti-monopoly Act (AMA). The Franchise Guidelines issued by the Japan Fair Trade Commission (JFTC) identify actions by franchisors against franchisees that raise issues from an anti-monopoly perspective.

According to the Franchise Guidelines, practices that may be considered anti-competitive include:

• enticing a prospective franchisee into the franchise business by creating a false impression that the franchise business is more advantageous than it really is, either by failing to disclose important facts or by making false or exaggerated explanations;
• demanding that franchisees trade only with a designated supplier and prohibiting franchisees, without good cause, from trading with other suppliers which could offer better conditions than the designated supplier;
• requiring franchisees to purchase a certain volume of goods and rejecting the return of excess goods;
• where royalties are calculated based on gross profit on sales, including the cost of loss, prohibiting franchisees from discounting prices to avoid disposal without good cause; and
• where a recommended retail price is lawful, imposing restrictions on the retail price of goods.

The abuse of a superior bargaining position has been the subject of heated debate since 2020. Considering the recent disputed cases and the results of a survey on transactions between convenience store franchisors and franchisees, on 28 April 2021 the JFTC revised its Franchise Guidelines to address the issue of unauthorised orders, 24/7 operations and the opening of dominant stores, to clarify the concepts underlying the AMA and prevent problematic behaviour.

There are no statutes, regulations or cases that specifically relate to e-commerce in the franchising context. The Act on Improving Transparency and Fairness of Digital Platforms (TFDPA) entered into force on 1 February 2021, with the aim of improving the transparency and fairness of digital platforms; but the TFDPA applies only to giant platformers.

Franchisors may prohibit franchisees from using e-commerce in their businesses to a certain extent. In this regard, it may be useful to refer to a Supreme Court decision which confirmed that a manufacturer was justified in imposing an obligation on its distributors to comply with the sales method prescribed in the distribution agreements (Supreme Court, 18 December 1998; this case concerned a distribution agreement rather than a franchise system). There are four categories of territorial restrictions in the Guidelines Concerning the Distribution Systems and Business Practices, and internet sales fall within the category of ‘passive sales’. Accordingly, a restriction will be legal unless it has a price maintenance effect. In fact, many franchise networks of convenience stores prohibit franchisees from engaging in online sales by themselves. Instead, the franchisors sell goods online and treat such sales as if they were made by the local franchisee at the place of the customer’s residence.

The Consumer Contract Act applies to contracts other than labour agreements and to consumers other than business operators. As franchisees are individual business operators and do not correspond to ‘consumers’, they will not be protected as ‘consumers’ under the Consumer Contract Act.

No.

The laws and regulations on cybercrime, e-commerce and other internet-related activities that apply to general commercial transactions under Japanese law also apply to franchising activities. The increasing regulatory trend to protect personal data should also be noted.

The Act on the Protection of Personal Information (APPI) of 2003, as amended, sits at the centre of Japan’s regime for protecting personally identifiable information. An amendment to the APPI will be fully implemented on 1 April 2022 and many corporations are making the appropriate changes in order to properly comply with the new regulations. The amendment will strengthen the rights of data subjects and impose new obligations on companies that collect and handle personal information. The European Commission has also adopted its adequacy decision on Japan, allowing personal data to flow freely between the two economies based on guarantees of strong protection of personal information.

The Basic Act on Cybersecurity, which provides the fundamental framework of cybersecurity policy in Japan, was passed in 2014. Article 7 clearly states the need for parties to “voluntarily and actively use their efforts to ensure cybersecurity”; and private businesses – including franchisors and franchisees – are expected to enhance their cybersecurity.

Typically, local franchisors tend to select the Tokyo District Court for dispute resolution in the franchise agreement. On the other hand, foreign franchisors tend to choose either foreign courts or arbitration tribunals. Recently, the Japan Franchise Association (JFA) released an alternative dispute resolution (ADR) procedure to resolve issues between companies that manage convenience stores and their franchisees. The JFA has now commenced an ADR procedure from 1 October 2021.

Arbitration is commonly used in franchising if a foreign franchisor is a party to the franchise agreement; whereas mediation is not commonly used in relation to franchising.

No answer submitted for this question.

There is no statutory class action legislation; but Japanese law permits multiple plaintiffs to file lawsuits, so multiple franchisees may bring a suit against a franchisor together. There are no specific implications on class actions in the franchise context.

Not applicable.

The Ministerial Order to Implement the Medium-Small Retail Promotion Act adds a list of items to be disclosed and was most recently amended in 2021.

The Japan Fair Trade Commission has revised its Franchise Guidelines to address issues such as unauthorised orders, 24/7 operation and the opening of dominant stores in order to clarify the conceptual basis of the Anti-monopoly Act and prevent problematic behaviour. Finally, the Japan Franchise Association has released an alternative dispute resolution procedure to resolve issues between companies that manage convenience stores and their franchisees.

Moreover, the Amended Act on the Protection of Personal Information was promulgated on 12 June 2020 and will come into force on 1 April 2022 in order to:

• increase awareness of personal information;
• balance protection and utilisation in light of technological innovation; and
• address new risks associated with the increasing transfer of cross-border data.

As the Japanese market is unique, franchisors that apply global standards without modifying them accordingly are seldom successful and often create difficulties for local master franchisees. Thus, franchisors should select a capable local partner in Japan and give it scope to adapt the brand to the Japanese market.