In Part I and Part II of this series of articles we discussed the need to take the common sense precautions of registering any applicable intellectual property and performing appropriate due diligence on potential franchisees. These matters handled, we now turn our attention to drafting the franchise agreement. In this and subsequent articles, we will identify a couple of potential risks that may be mitigated by informed drafting of the franchise agreement. These issues represent only a very small portion of the important matters that should form the subject of your franchise agreement. However, these are recurrent issues which we see on a fairly regular basis and which may represent a difference between the legal environment in Taiwan and that in your home jurisdiction.
One such issue involves the granting of preliminary injunctions in franchise-related disputes. In general, courts proceed slowly in Taiwan. It may take years for a court to render a judgment in a dispute between a franchisor and franchisee making it advisable to seek injunctive relief in certain circumstances, particularly in cases where the franchisee’s behavior is causing ongoing damage to the franchise brand.
Taiwan courts will grant preliminary injunctive relief. However, they grant such relief hesitantly and only in situations in which the franchisor can demonstrate to the court’s satisfaction that the franchisor would be irreparably and seriously damaged if the preliminary injunction is not granted. There is no bright line rule as to what constitutes irreparable and serious damage. In most cases, the court attempts to balance (i) the damage which would likely be caused by the defendant’s continued behavior and (ii) the negative effects which would likely (or certainly) be caused by granting the injunctive relief being sought. Suppose a franchisee were to begin to operate a competing business under a different brand within the defined territory, all in clear violation of the franchise agreement. A Taiwan court deciding whether to grant the franchisor’s request to enjoin its franchisee from continuing to operate the competing business would weigh (i) the damage to the franchisor’s brand on the one hand against (ii) the economic impact of closing the competing business (e.g., lost employment opportunities, wages, etc.). More often than not, Taiwan courts do not grant such preliminary injunctions. The success rate for preliminary injunctions at the Intellectual Property Court is approximately one in three.
Despite this apparent uphill battle to obtain a preliminary injunction, there are a few ways for a franchisor to increase its chances of success. They are:
3. Make it about trade secrets
Taiwan courts are more willing to grant preliminary injunctions if trade secrets are involved. In order to be protected under Taiwan law, trade secrets need to be: (a) commercially valuable, (b) only known to a limited group of persons, and (c) reasonably protected by the owner. Protected trade secrets include technical information as well as commercial information. Franchisors should carefully identify trade secrets in the franchise agreement and explicitly set out how such trade secrets are to be used and protected by the franchisee.
4. Place reasonable limitations on non-compete provisions
Taiwan courts are only willing to grant preliminary injunctions enforcing non-compete provisions if these provisions are bounded by reasonable time and geographic constraints. As an example, a court would be more willing to grant a preliminary injunction prohibiting a franchisee from running a health food restaurant within three kilometers of the original franchise business location for a period of two years, compared to one prohibiting the franchisee from operating any restaurant in Taipei City for a period of ten years. A Taiwan court would most likely strike down an overly broad non-compete provision rather than reformulate the boundaries of the provision, even if the agreement granted the court the authority to modify the provision. In an extraordinarily small minority of cases, a court may modify the scope of a non-compete provision after discussions with the parties. We cannot, however, overemphasize the rarity of such an occurrence. Therefore, we recommend drafting these provisions such that they offer adequate protection but do not overreach.
In our next article we will look at governing law provisions and enforcement of foreign arbitral awards. If you have any questions or require additional information on franchising in Taiwan, please contact Greg Buxton at firstname.lastname@example.org.Written May 18, 2021 By Gregory A. Buxton, Bryan Tan, Yi-Kai Chen.