Tag Archives: Corporate Commercial

Franchising in Mongolia: Licensing your IP

This is the third part of our look at the uses of intellectual property in Mongolian franchises. You can find the first part here, and the second part here. We will discuss the use of licensing agreements as part of franchise IP management.

While in general, franchisors do own their intellectual property, this is not always strictly the case. In many franchise businesses, trademarks and other intellectual property elements may instead be owned by a parent company or even an affiliated company. In such cases, intellectual property is usually licensed from the legal entity that owns it to the franchisor, which then has the right to sell franchises and sub-license the use of intellectual property to the franchisees.

If the franchise agreement has been properly drafted, then this licensing/sub-licensing relationship between parent company or affiliated entity and the franchisor will be reflected in the wording of the agreement. There are quite a few places in a franchise agreement where special care must be given to properly set out who actually owns trademarks and other intellectual property if the franchisor itself is not their owner.

Pursuant to the Law on Trademarks and Geographical Indications, any licensing agreement is subject to state registration with intellectual property authority, otherwise such licensing agreement is deemed invalid.

Whenever someone uses, without permission, a trademark (sometimes even a trade dress) that is the same as or confusingly similar to that of a franchise system, that is a case of trademark infringement. It is becoming increasingly common to find the look, feel and design of one franchise business being copied elsewhere. In some of these cases, there is clearly an intent to pass off the copycat operation as a franchise.

A strong franchise system depends on a strong brand and must therefore protect its trademarks, copyrights, trade secrets and trade dress. For these reasons, franchisors need to spend a lot of time, attention and money to maintain, improve and protect their intellectual property. Their franchisees, in turn, will benefit from a strong protection strategy, as it ensures the rights for which they have paid, over the stated term.

Franchising in Mongolia: Intellectual Property is More than Trademarks

In the first part of this series we have discussed about trademarks as part of franchise system. In this part we will discuss about other elements of intellectual property that may be utilized in franchise system.

Other critical element of intellectual property in franchise systems are copyrights. Pursuant to law copyright protects the fixation of the expression of an idea in a tangible form, whether written, verbal, graphical or other objective forms. Copyright exists in a variety of items commonly used by a franchise: training videos, marketing material, ads, websites, music, logos and software. There is significant value to the copyright-protected materials incorporated into a franchise system and, like trademarks, these elements are licensed by the franchisor to the franchisee for use in the franchised business. And, unlike trademarks, copyrights do not have to be registered in order to be protected.

Trade dress is what makes a franchise system unique and distinctive from others, including the overall visual look, feel and impression of a location. Some part of trade dress may be protected by copyrights.

Not all franchises involve trade secrets (i.e. confidential information), but it is typical to see franchise systems maintaining some aspects of their operations as strictly confidential and maintained as trade secrets. In Mongolia there is no law that regulates specifically trade secrets or business aspects of trade secrets. However pursuant to Law on Corporate secret, any corporate information, document, research, method, solution, project and etc. which holds economic value may be considered confidential corporate secret (trade secret) and may be protected from divulgence. In the context of the franchise arrangement, the need and desire to share information with franchisees competes with the legal necessity of limiting the distribution of true trade secret material. Reasonable steps to ensure the identification and protectability of trade secrets include: confidentiality or non-disclosure agreements and clauses; marking of claimed trade secret material, limiting the distribution to “need to know”, password protected computer systems and databases, and locks on cabinets and doors. In some cases, a franchisor’s trade secrets are not even divulged to the franchisee, such as the specific recipes or bulk ingredients required to create a quick-service restaurant chain’s signature sauces.

Patents are usually not included in franchise systems, but they can be. Patent registrations are intended to protect an inventor’s rights to specific inventions, such as a newly engineered product, medical device, drug or other innovation. Unless a franchise system has specifically developed its own equipment, it generally will not include any patents within its intellectual property.

It is very important for franchisor, as well as franchisee, to take the time to fully analyze and review any franchise agreement, disclosure document and respective attachments before signing them. While the above information serves as a general overview, as always, one should seek their own legal advice when reviewing a franchise agreement. Only then it is possible to obtain specific information and recommendations relevant to particular circumstances.

Establishing a Mongolian Franchise Business: Protect Your Intellectual Property

In a recent blog post we discussed the franchise business model and it’s rapid growth in Mongolia. In a new three-part article series, we will dive deeper into franchise agreements in Mongolia and look at intellectual property, which is one of the most important aspects of a franchise system, and its importance.

Intellectual property law and business law have many areas that overlap. Franchising, in particular, is a unique business model, with the franchisor’s intellectual property at its core.

As such, intellectual property is one of the most important elements of any franchise. Within the franchise agreement, one of the core assets and rights that franchisor will be granting to franchisees will be a license permitting a franchisee to utilize their intellectual property and, in turn, franchisor is declaring to a franchisee that franchisor owns the intellectual property and will protect and defend it. So, it is important for franchisor to make sure that they actually own and can protect intellectual property that they are purportedly licensing to franchisees. Especially, when entering into a franchise agreement with franchisee, who will operate in another country.

These days most people are familiar with the term “intellectual property”, but not everyone understands the differences between various types of it. Intellectual property may include trademarks, copyrights, trade secrets, trade dress (i.e. the look, feel and distinctive elements of a franchise system, such as the interior design, layout and other visual aspects of a franchise location) and sometimes patents under which franchise businesses operate.

Trademarks are perhaps the most commonly recognized and well-known element of intellectual property. The Mongolia Law on Trademarks and Geographical Indications defines trademarks as expressions with distinction, which are used by legal entity or individual in order to distinguish their products or services from that of others. Trademarks can include business names, taglines, service names, logo designs and specific color or color combinations, etc. They are among the visual components of a franchise business.

Just because franchisor has used their trademark for many years it does not mean that trademark is legally protectable nor that they own it. First, franchisor needs to properly register their trademark with intellectual property authority. Secondly, if franchisor is entering into franchise agreement with franchisee, who will operate in another country, franchisor needs to register their trademark in the country where franchisee will operate as well. This way franchisor asserts their ownership of trademark and ensures protection of their trademark from other infringers (such as copycats and confusingly similar marks).

Mongolia’s Double Taxation Treaties

Many countries have entered into tax treaties (also called double tax agreements, or DTAs) with other countries to avoid or mitigate double taxationDouble taxation is the levying of tax by two or more jurisdictions on the same declared income, asset or financial transaction. Double liability is mitigated in a number of ways, for example:

  • the main taxing jurisdiction may exempt foreign-source income from tax,
  • the main taxing jurisdiction may exempt foreign-source income from tax if tax had been paid on it in another jurisdiction, or above some benchmark to not include tax haven jurisdictions,
  • the main taxing jurisdiction may tax the foreign-source income but give a credit for foreign jurisdiction taxes paid.

Another approach is for the jurisdictions affected to enter into a tax treaty which sets out rules to avoid double taxation. In the all over the world, over 3000 double taxation agreement (DTAs) are in effect.

Mongolia has entered into “The Agreement for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital” with other 25 jurisdictions as of 2017. Namely,

Country In force since
1 The People’s Republic of China Jan 01, 1993
2 The Republic of Korea Jan 01, 1993
3 The Federal Republic of Germany Jan 01, 1997
4 The Republic of India Jan 01, 1997
5 The Socialist Republic of Vietnam Jan 01, 1997
6 The Republic of Turkey Jan 01, 1997
7 The United Kingdom of Great Britain and Northern Ireland Jan 01, 1997
8 The Republic of Hungary Jan 01, 1997
9 Malaysia Jan 01, 1997
10 The Russian Federation Jan 01, 1998
11 The Republic of Indonesia Jan 01, 1998
12 The Republic of France Jan 01, 1999
13 Czech Republic Jan 01, 1999
14 The Kingdom of Belgium Jan 01, 1999
15 The Republic of Kazakhstan Jan 01, 2000
16 The Republic of Kyrgyz Jan 01, 2000
17 The Republic of Poland Jan 01, 2002
18 The Republic of Bulgaria Jan 01, 2002
19 The Swiss Confederation Jan 01, 2002
20 Ukraine Jan 01, 2003
21 Canada Jan 01, 2003
22 The Republic of Singapore Jan 01, 2005
23 The Democratic People’s Republic of Korea Jan 01, 2005
24 The Republic of Austria Jan 01, 2005
25 The Republic of Belarus May 28, 2001

Mongolia’s double tax treaties with United Arab Emirates and Kuwait were terminated from 1 January 2015 and 1 April 2015 respectively. Mongolia’s double tax treaties with Luxembourg and The Netherlands were terminated from 1 January 2014 due to failure to provide for the balance and equity rights of parties.

The Mongolian Government Going Online

Mongolia may have a reputation of a sparsely populated nomadic country, but the Mongolian government in increasingly adopting the technologies of the 21st century to reach and serve the people even in the furthest reaches of the steppe. Several major government agencies have implemented systems to provide services online with great success. Foreign investors are able to take advantage of these systems to make doing business in Mongolia more effective and efficient.

The tax authority is one example. In 2014 the tax authority implemented a new online tax filing and tax payment system. A digital signature issued by the tax office is required to access the online tax portal. An individual authorized by a company to sign financial statements and tax returns must apply for a digital signature in order to be able to access the online tax portal system. The online tax filing and tax payments have proven to be more cost and time saving. The social insurance office has taken inspiration from this system and is now also online.

Recently several government bodies, such as Ministry of Finance, Bank of Mongolia, General Tax Administration, National Transportation Department and others, have collaborated and launch a website www.smartcar.mn. Through this site vehicle owners, both individuals and organizations, can pay vehicle taxes, driver’s insurance payments, traffic tickets and receive other vehicle related services.

The General Authority for Intellectual Property and State Registration recently announced that they are in process of preparation and implementation of a “One citizen, one registration” project. According to officials, one of the main purposes of this project is to create a unified national registration database for ownership and property related information of natural personas and legal entities. This project aims to eliminate duplication and discrepancies in information over multiple platforms and create a unified national registration database. Such database is planned to accessible online both for internal access for government bodies as well as to general public with certain limitations. This project envisages the use of digital signatures by individuals to obtain online services from government bodies. Currently, digital signatures used only by legal entities for online tax filing and public tenders (bidding). While this project is in planning stages and has yet to be approved by the Government, we have high hopes for successful implementation. Officials claim that, if this project gets approved, this will decrease the amount of paperwork, will be cost and time saving both for general public and government bodies, government services will be easier, more accessible and closer to general public, and for foreign investors.

At such rate of increasing online government services, it looks like in coming years we should expect less bureaucracy and more accessibility from Mongolian government bodies, which should contribute to increasing economic activity in the developing nation.

What You Need to Know About Registration of Foreign Pharmaceuticals in Mongolia

Pharmaceuticals imported to be sold within Mongolia are required to be registered with the Ministry of Health prior to import. The law provides for an “Express” registration process, as well as a “Regular” track. Express registration includes a sub-track “A” and “B”.

To be eligible for Track A Express registration, a pharmaceutical product must already have approval from a national regulator from a country recognized internationally as having effective pharmaceutical review and control processes, and must be sold on the market in that country. Such recognized bodies include the FDA in the USA, The European Medicines Agency (EMA), European Free Trade Association (EFTA) and the Ministry of Health, Labour, and Welfare in Japan. Track A Express registration provides for formal registration of the product within 30 days of the filing of the application for registration.

Track B Express registration provides for formal registration within 60 days of the filing of the application for pharmaceuticals which have been previously approved by relevant authorities of states which are party to Pharmaceutical Inspection Convention and Pharmaceutical Inspection Co-operation Scheme–PIC/S.

If a pharmaceutical product does not meet the requirements for Express Track A or B, it will be required to proceed with a regular registration process. The regular approval process will take 3-5 months, however this time may be extended if required.

Applications for pharmaceutical approvals in Mongolia are submitted to the “Human Medicine Board” which will make a decision as to registration of the pharmaceutical for sale within Mongolia. Products approved under the Express process are granted approval for 3 years, while products registered via regular process will receive approval valid for 5 years, after which the registration is required to be renewed.

If you are seeking to import a medicine product to Mongolia, our Mongolian lawyers are able to assist with all required registration actions.

Mongolia Set to revise Labor Law

A recent meeting of the Cabinet reviewed and discussed a proposed draft of amendments to the Labor Law. It was decided by the Cabinet that the proposed amendments will be submitted to Parliament to be formalized in law, along with the addition of some proposals from Cabinet members.

The Labor Law was ratified in 1999 and has been amended several times since. The law governs employment relationships within Mongolia. The Law and sets standards as to health and safety requirements, minimum wage levels, maximum hours of work, collective employment agreements and bargaining and resolution of employment disputes. The law prohibits employment discrimination on the grounds of social or property status, race, color or nationality, sex, religion or political views as well as unwritten contracts of employment.

The latest changes introduced via the Amendment Law on 21 April, 2017 provide detailed regulations regarding previously unclear provisions of the Labour Law, such as probationary periods, internship/apprenticeship periods, and part-time employment. The amendment also increased the level of fines for violations of the Labour Law by employers, in order to ensure the protection of employees’ basic rights.

The working group which drafted the current proposed amendments believe that a number of the law’s articles are outdated and don’t meet the needs of the modern labor environment. The newly proposed amendments seek to cover relations between employers and employees, clarifying rights and obligations. The amendments also include articles that would place restrictions on the employment of minors, workplace discrimination, establishing employment agreements without time constraints for permanent employment, part-time employment regulations, remote working regulations, basing salaries on skills and abilities, annual vacation requirements, and new regulations for vacation days for mining sector employees who work far from home for extended periods.

Lehmanlaw Mongolia LLP will be update further progress of the amendments to the Law on Labour in timely.

Mongolia Introduces Investment Protection Council

We would like to introduce the Investment Protection Council (IPC), one of the effective way to protect rights and interest of the investors and to resolve the disputes involving the foreign investors in Mongolia.

The Investor Protection Council needs to be established in concern with the facilitation of investment related dispute settlement and of favorable environment for the sustainable operation of investors. The Investor Protection Council is established based on an ordinance of the Prime Minister of Mongolia in Dec 2016. That council is composed of Chairman, 16 members, and Secretary. The main formation of the Council’s operation structure should be Council’s session. The decision will be made by majority of the Council members during the session.

The IPC’s Main Roles:

  • Preview and make preliminary prognosis on foreign investment related issues that will be discussed by Cabinet Session
  • Improve investment legal framework, remove duplications and breaches of laws, introduce investment related proposal that made by relevant organizations to Cabinet.
  • Make proposals on implementation of laws and resolutions related to investment, and introduce it to Cabinet. The council should be supernumerary and the Council’s operation should be permanent.

In addition above, one of the main roles of IPC is to protect investors’ right, and solve their grievance (except the cases examined under court or arbitrage). So far 83 compliant and claims submitted by investors to this Council’s Secretariat. As we have been classifying these complaint and claims, there are 40% of them was related to mining, 20% for road, transportation, construction, manufacturing, 10% for information, communication, space technology, 10% for bank, finance, tax, 5% for land, land proprietorship, utilization, 5% for national development, planning, and remaining percentage was claims related to fair competition, as well as supervision, pressure and burden, registration, and authorization activities of the law enforcement agencies.

For example, in relation to the dispute related to the termination of the license of Mobicom Corporation with 100% – a business entity 100% owned by Japan, by the Communications Regulatory Authority, it was further discussed at the Investor Protection Council Meeting and it supported to resolve the investor’s claim. In doing so, KDDI, the Japanese investor, will make additional investments to expand Mobicom’s operations, which indeed has not been resolved over the past 10 years.

LehmanLaw Mongolia LLP suggests our clients this amicable mechanism to resolve the disputes involving them in Mongolia.

Using Customs Seizure to Stop Import of Infringing Products to Mongolia

Our firm’s Mongolian intellectual property lawyers have seen a lot of inquires in recent months from clients seeking assistance regarding counterfeit products which were being sold in Mongolia.

There are several mechanisms our Mongolian lawyers recommend to deal with counterfeit products in Mongolia.  One of the most important of these is utilizing Customs to restrict entry of counterfeit products or goods infringing registered trademarks from entering Mongolia.

This works by seizing infringing goods at Customs upon attempted entry into Mongolia. Before this may be done, the authentic goods bearing a validly registered Mongolian Trademark must be registered with Customs.

This registration process is relatively easy, requiring documentation of the registered trademarks, basic information regarding the trademark owner, a description of the products, and a list of items requested to be reviewed and protected by Customs. Our Mongolian lawyers will walk you through the process. The review procedure will talk approximately 30 days from the date of submission of the application, after which, the registered information will be forwarded to Customs entry points around Mongolia.

A written request for seizure of infringing goods, must be submitted along with a small cash deposit or bank guarantee. The customs office prefers having the deposit to avoid incurring any damages to importer before starting examination of infringing goods based on the original goods with customs registration.

Our Mongolian lawyers and clients have found such Customs seizures to be effective at blocking incoming shipments of infringing products. However it is important to note the applicant seeking to block the shipments must have a valid, registered Mongolian trademark in order to support such action by Customs.

Franchising Proves Effective for Many Foreign Brands in Mongolia

There are numerous tools a business may use to grow and expand, not just locally but also globally. Franchising is one of the many ways through which brand owners can rapidly grow their businesses and expand profits while delegating much of the cost and risk to a third party.

Franchising is commonly used in a wide variety of service oriented businesses, such as restaurants, hotels, health care, real estate and others, and is also used production and distribution of products. In Mongolia for example, over the last few years many global brands entered Mongolia via a franchise arraignment. Major brands to do so include Coca-Cola, Pepsi, Ramada Hotels, Shangri-La Hotels, Cosmopolitan, Re/max real estate, KFC, Burger King, Coffee Bean and Tea Leaf, Pizza Hut, Emart to name only a few. This strategy is chosen very deliberately due to the low risk of bankruptcy, and a higher chance of success for business to enter a franchising agreement. Research shows that an average consumer in the world spends one of every three dollars on product or service provided via a franchise model, demonstrating the economic significance of franchising.

In a franchise arrangement, the franchising party or Franchisor gives the Franchisee permission to not only use the Franchisor’s intellectual properties (trademarks, brand name, know how, goodwill, copyright, etc.) but also the Franchisor’s business operations system. In addition, Franchisees often benefit from the Franchisor’s distribution systems and marketing campaigns to sell the Franchisee’s products or services. In return, the Franchisee pays the Franchisor consistent fees and royalties, providing a steady stream of income for the Franchisor.

The franchise model provides several benefits for both the Franchisor and the Franchisee. Along with other benefits franchise agreements allow Franchisor companies to expand much more quickly than they could otherwise. A lack of funds and workers can cause a company to grow slowly. Through Franchising, a company invests very little capital or labor because the Franchisee supplies both. The Franchisor company experiences rapid growth with little financial risk.

The Franchisee also has numerous advantages that come from entering a franchising agreement. There is a low risk for the Franchisee due to the tried and tested formula. Franchisee gets the benefit of owning a proven business formula that has been tested and shown to work well in other locations. In addition, the Franchisee gets training and head office support from the Franchisor; this may be essential if the Franchisee is new to running a business and has no experience or business knowledge. And in a broader sense, global franchising is beneficial for the local government and economy as well, because jobs are created, and ownership remains local.

There are three major types of franchises – business format, product, and manufacturing – and each operates in a different way.

In business format franchises (which are the most common type), a company expands by supplying independent business owners with an established business, including use of its name and trademark. The Franchisor company generally assists the independent owners considerably in launching and running their businesses. In return, the business owners pay fees and royalties. In most cases, the Franchisee also buys supplies from the Franchisor. Fast food restaurants are good examples of this type of franchise. Prominent examples include KFC, Burger King, and Pizza Hut.

With product franchises, manufactures control how retail stores distribute their products. Through this kind of agreement, manufacturers allow retailers to distribute their products and to use the manufacturer’s name and trademarks. To obtain these rights, store owners must pay fees or buy a minimum amount of product for sale. In Mongolia there are several clothing retail stores that utilize this type of franchise, for example, United colors of Benetton stores, and Mango stores.

Through manufacturing franchises, a Franchisor grants a manufacturer the right to produce and sell products using its name and trademark. This type of franchise is common among food and beverage companies. For example, soft drink bottlers often obtain Franchise rights from soft drink companies to produce, bottle, and distribute soft drinks. For example, MCS Coca-Cola LLC obtained Franchise rights to produce, bottle and distribute soft drinks of the Coca-Cola company in Mongolia.

There are four basic types of franchise agreements: single-unit, multi-unit, area development and master franchising agreements.

A single-unit franchise agreement is the most common and is simply where a Franchisor grants a Franchisee rights to open and operate one single Franchise unit. In Mongolia, explicit examples are Caffé Bene, a coffeehouse chain, or Re/max, a real estate agency. All single units of these chains use the same trademark and same utilize the business operations system of the Franchisor. However, every single unit in Mongolia is owned by a different local company.

A multi-unit franchise agreement is where a Franchisor grants a Franchisee rights to open more than one franchise unit. For example, Tavan Bogd Foods LLC has multi-unit franchise rights to operate KFC restaurants in Mongolia, and Max Center LLC has multi-unit franchise rights to operate Burger King restaurants.

An area development agreement allows a Franchisee the right to open multiple units over an agreed amount of time within a specified geographic location and/or to own rights to their specific territory and earn money on each franchise sold in their territory through sharing of the franchise fee and ongoing royalties.

A master franchise agreement, also referred to as sub-franchising, gives a Franchisee the same rights as an area development agreement but also gives that Franchisee rights to establish franchises arrangements with other individuals or entities within the specified territory. A Master Franchisee assumes many of the tasks and obligations of the Franchisor such as training and support and receives a portion of the franchise fee and royalties. While technically there are significant differences there are times that master franchising and area development are used interchangeably.

The regulation of franchising varies country to country. While some countries have adopted separate franchising laws, many countries do not have a separate law that regulates franchising in its entirety. In most countries franchising is regulated in their commercial laws, commercial codes or civil codes, and in some countries it falls under regulation of several laws. In Mongolia franchise arrangements are regulated via Articles 333 – 338 of the Civil Code. The Civil Code provides the definition of a Franchise Agreement, and outlines the legal obligations and liabilities of the parties, terms of agreement, and non-competition terms. Intellectual property related aspects of a franchise agreement shall be regulated by relevant intellectual property laws.

It seems clear that franchising model in Mongolia is poised to continue to grow, as several global brands have announced their opening in Mongolia in the near future. Of course, prior to any franchise arrangement in Mongolia, a foreign business should seek out qualified advice from their Mongolian lawyer.