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Franchising in Costa Rica, a new horizon
[/vc_column_text][us_separator][vc_column_text css_animation=""]The franchise business model is nothing new in the Costa Rican socioeconomic reality. This is largely due to its proximity, both politically and geographically, to the United States of America. Let us remember that the United States is the country that saw the emergence of the first franchise model (Singer Co. in 1929) as well as some giant companies that operate using this figure (McDonald's, Coca-Cola, and General Electric, among others).
The National Franchise Center (CENAF) reports that there are 355 franchises operating in our country, of which 289 are foreign and 66 were established in Costa Rica. Currently, when investing or establishing in Costa Rica, these franchises must navigate an atypical legal framework, as regulation of the issue is achieved by integrating and interpreting the provisions of special laws, such as the Trademark and Other Distinctive Signs Law or the Law for the Protection of Representatives of Foreign Companies, with general laws such as the Civil Code and Commercial Code, relevant case law, Principles of Law, and Uses and Customs.
The above creates an environment of uncertainty and legal insecurity, which discourages investments of this type in the country by generating skepticism among parent companies. This article does not seek to delve into the legal basis of the franchise business model, but rather into the policy of its future. Both Costa Rican doctrine and jurisprudence recognize three of the basic and indispensable elements of this business model: know-how, trademark rights, and royalties. However, this is not sufficient to define the scope and rules regarding the legal protection of franchises, and more in-depth regulation of the issue is necessary.
For this reason, CENAF (National Center for the Promotion of Franchising), the Ministry of Foreign Trade (Comex), and Representative Ada Acuña Castro are promoting a comprehensive legal reform to establish clear and practical rules of the game. To date, they have made significant progress, including being able to subject some sub-franchises to the simplified tax regime, granting seals of quality to ensure legitimacy, and, most importantly, introducing into the legislative process the bill for the regulation and promotion of franchises, File No. 23,448, which seeks to align the regulation with other Latin American countries (such as Mexico) that have established this model.
The bill includes several essential aspects, such as the requirements for a franchise agreement, the definition of a franchise system, the need to specify the type of franchise model, establishing a minimum five-year term for each contract between the franchisor and the franchisee, the need to submit a Franchise Offering Circular (FOC), and, in general, basic rules regarding the rights and obligations of both parties.
Likewise, and also within this bill, there are aspects that should be criticized and reviewed, such as, for example, the purported obligation for franchisors to have at least three years of business development in the respective sector, or the article called "prohibition of passive sales," by which franchisees could serve customers outside their exclusive territory, always at the request of the same. Despite this, it is of utmost importance that the deputies of the Legislative Assembly take advantage of the opportunity to legislate on the issue, in conjunction with state policies seeking economic reactivation, to achieve a legal framework that provides legal and commercial security to large companies that wish to enter the country.
Lexincorp Costa Rica recommends and encourages its clients to adapt their franchise models to international regulations, even though they are not required to do so. This not only provides order in their legal files and protects against future claims, but also prepares their businesses to enter new territories. For any questions, please do not hesitate to contact us atpandre@lexincorp.com.[/vc_column_text][us_separator][vc_column_text]
Written by: Philip André[/vc_column_text][/vc_column][/vc_row]
