Franchising Needs Enhanced Legal Protection 

By Dr. Iman Sjahputra, SH., SpN., LL.M.

Every business field needs a regulation as an “umbrella” to protect the involved parties, since without a concrete regulation, a businessman will always surrounded by uncertainty. Franchise as a developed business is not an exception. It was emerged and developed in United States more than a century ago when a sewing machine company, “Singer”, started to establish this business concept as a way to expand the distribution of its product.

From the perspective of the ‘trait’ of the business, franchise is a business which emphasize in the aspect of “opportunity.” An opportunity to expand business by utilizing supports from others. The franchisor shall assist the franchisee in managing the franchise, and the franchisee shall set aside its profit to the franchisor, which all of those will be regulated in a contract.

In Indonesia, franchise was known since the 70-ies when Shakey Pisa, KFC, Swensen, and Burger King entered Indonesian market. In 1997, Ministry of Trade of Indonesia recorded that there were 259 franchises in Indonesia. This business has met its fall during the 1998 monetary crisis and it has been rising since 2003.

Franchise shall obtain special attention from the government since it may generate several benefits to Indonesia, for instance, the development of quality of local employment in business management. However, the expansion of foreign mini-market franchise in Indonesia lately, namely Seven Eleven, Lawson, and Family Mart is alleged to ruin local mini-markets’ business due to their superiority in various aspects.

Basically, the foreign party only grant license to local businessmen, and all of the permits are using the Indonesian party’s name. Then, both parties will only use the license agreement as a ground for their relation. If there is a dispute arising between them, the civil law will apply.

Indonesian franchise still need stricter and more precise regulation. Indonesian Law No. 42 Year 2007 Concerning Franchise jo. Regulation of the Minister of Trade No. 7/M-Dag/PER/2/2013 are considered not sufficient to regulate the administrative and procedural requirements, while the specific regulation regarding license based on Law No. 15 Year 2001 Concerning Trademark has not been published until the date of this article. These quandaries have been reducing public’s trust in conducting franchise in Indonesia. Therefore, political will from the government to implement a better regulation for franchise is a necessity to perform a better development of franchise in Indonesia.

Actually in any field requires regulation as an "umbrella" to protect the parties involved. So in the business field likewise. Because no concrete regulations and qualified, then entrepreneurs would always overshadowed uncertainty and might crumble.

Likewise with the business which is now growing, such as franchise. Many interpretations are attached to this type of business. But if we read the literature about the franchise, from the nature of the business, franchising is a business that emphasizes the aspect of "opportunity".

What does it mean? Before we discuss the meaning, it is better to look at the origins of the type of franchise business for a moment.

“Franchise” is from French language which means freeform service. It could be said that the based is freedom. This business is born and developed in the United States over a century ago when the Singer sewing machine company began to introduce the concept of franchising as a way to expand the distribution of its products.

Along with the times, it is known as a business venture that stressed to an "opportunity". The opportunities to develop a business by help other party. That is why franchising is often associated with a pattern of business that is closely related to the contract of market goods or services. In the contract, it governed the form of "profit sharing" between the franchise owner (franchisor) and the franchise receiver. Franchisors must supervise the franchisee to use trademark or service from the franchisor.

In Indonesia, the franchise known since the 70's when the entry Shakey Pisa, KFC, Swensen and Burger King. Looks very rapid development began around 1995. In 1997, the data of the Ministry of Industry and Trading (MoIT) recorded about 259 companies of the franchise receiver in Indonesia.

This business is slipped due to the impact of the financial crisis in 1998 and rupiah became crushed compared to the USDollar. The business then bounced back since 2003.

As stated above, the franchise business is a form of business with the nature of the arrest of opportunities, so it is dependent on growth. So it is not surprising if we see a growing number of franchise businesses to the country, especially from foreign franchise.

It should be attention and guidance from the government if the franchise from foreign, because can bring many benefits to Indonesia, for example, improving the quality of local employees and business management.

Essentially, the franchise can build competencies in business can increase revenue for the state. In addition to the increase in the local competence, the ability to develop brands and local services-will is fueled.

We see many foreign franchisors that dominate the culinary world in Indonesia as well as Mc Donald's and KFC. Both these American companies have a lot of profits with the franchising system. However development of foreign mini franchises such as Seven Eleven, Lawson, and Family Mart often gets the spotlight in Indonesia in recent years, because of potentially deadly suspected mini-traditional businesses. The number of foreign mini market into Indonesia of course is a rival to the local minimart.

In principle, foreign only license the trademark to the local entrepreneurs to use the trademark in Indonesia, while all the formalities using the name of Indonesian partners. Then both parties have relied only on trademark licensing agreement held, so in case of a legal dispute between the two sides, usually the civil law will be the benchmark of settlement.

The presence of many franchise outlets in Indonesia does need an umbrella law which firm and clear. Unfortunately, Government Regulation No. 42 Year 2007 on Franchise jo. Decree of the Ministry of Trade of Republic of Indonesia No. 7/M-Dag/PER/2/2013 considered less enough to set the terms of the administrative and procedural, that would cause concern for the franchisor and franchisee in its implementation, while the licensing regulations as hoped by Law No. 15 of 2001 on Trademark until now even has never come.

As a result the matter of trademark licensing can not be protected by the franchisor on the trademark which licensed to third parties because until now, there is no president decree which regulate about license. This is certainly caused concern for the franchisor and franchisee in the execution of the franchise.

All of this of course requires the political will of us to realizing its implementation regulations. If not, all laws which made only enjoyable to read, but difficult to implement because there is no enforcement of the law.

* Author is an Advocate and domiciled in Jakarta