Franchising in Malaysia: What you need to know

^INTRODUCTION

In Malaysia, franchising operates within a carefully regulated framework governed by the Franchise Act 1998 (“FA 1998”). In “Navigating the Franchise Landscape in Malaysia”, we explored the fundamentals of franchise regulation in Malaysia, shedding light on the legal obligations and intricacies involved. Building upon that foundation, this article aims to dig deeper by analysing the recent amendments to the FA 1998, which came into force on 28 April 2022 through the Franchise (Amendment) Act 2020 (“FAA 2020”). These amendments bring significant changes to the regulatory landscape, impacting both franchisors and franchisees alike.

^{KEY AMENDMENTS TO THE FRANCHISE ACT 1998}

For ease of reference, we have compiled some of the more significant amendments to the FA 1998 to provide a comparative analysis of the regulatory framework before and after the amendments took effect in the following tables:

(a)        Broadening the Applicability of Franchise Registration Requirement

Prior to the amendment, foreign franchisors were only required to obtain approval under Section 54 of the FA 1998 (“Section 54 Approval”) from the Registrar of Franchise (“Registrar”) to sell a franchise in Malaysia to their franchisees. However, following the amendment, foreign franchisors are now mandated not only to obtain Section 54 Approval, but also to register their franchise under Section 6 of the FA 1998 (“Section 6 Registration”). Gone are the days of differentiation between local and foreign franchisors. Both local and foreign franchisors are required to submit the same application form and Franchise Disclosure Document along with the required documents set out in Section 7 of the FA 1998. Despite this additional step, the new online system, MyFEX 2.0 streamlines the process by consolidating both applications for Section 54 Approval and Section 6 Registration.

(b)        Introducing Consequences of Non-Compliance

Prior to the amendment, the FA 1998 was silent as to the consequences of failing to obtain franchisee registration. Following the amendment, failure to register a franchisee before commencing business is now a punishable offence for both local and foreign franchisee, creating a level playing field where compliance is not just encouraged, but mandated.

The amendment also introduced penalties for non-registration of a foreign and local franchisor where before, the general penalty applied.

(c)        Setting a Timeframe for Franchise Registration

Prior to the amendment, franchise registrations were indefinite until they were suspended, terminated, or cancelled by the Registrar. Following the amendment, franchise registration now comes with a clear expiration date — a five-year term prescribed by the Registrar which may be renewed within thirty (30) days from the expiration of its registration. By stipulating a specific timeframe for franchise registration, franchisors and franchisees have a clear understanding of when their registration expires, providing them with predictability in their operations and planning.

(d)        Mandating Public Display of Franchise Registration

Following the amendment, franchisors and franchisees are now required to prominently display their franchise registration in their place of business and failure to do so constitutes an offence. This enhances transparency and provides consumers with readily accessible information about the franchise businesses.

(e)        Removing Outright Nullification of Franchise Agreement

Prior to the amendment, the absence of terms outlined in Section 18(2) of the FA 1998 (“Section 18 Terms”) in a franchise agreement would render such agreement null and void. The amendment has removed this provision. However, any deviation from the Section 18 Terms is now an offence. This means that the failure to include any Section 18 Terms while not nullifying the franchise agreement, would constitute an offence.

For a complete list of all amendments, you are encouraged to refer directly to the Act itself at this link.

^{TRANSITIONING TO MYFEX 2.0}

The Registrar introduced MyFEX 2.0, a new online system, on 28 July 2022, replacing the previous MyFEX 1.0. Simultaneously, the Registrar issued a circular announcing the expiration of all registrations made under MyFEX 1.0, effective 28 April 2022. Consequently, all existing franchisors and master franchisees previously registered under MyFEX 1.0 are mandated to re-register their franchise registrations via MyFEX 2.0 within a three-year grace period from 1 August 2022. Failure to comply with this requirement within the grace period may result in the Registrar issuing notices for suspension, termination, or cancellation of franchise registrations. Once franchisors and master franchisees have completed the re-registration of their franchise registrations via MyFEX 2.0, they must subsequently re-register each of their franchisees previously registered under MyFEX 1.0. The official fees are waived for re-registration provided the process is completed within the three-year grace period, i.e., by 31 July 2025.

Prior to the implementation of MyFEX 2.0, a Franchise Disclosure Document (“FDD”) would automatically be generated once the application was submitted. Following the implementation of the MyFEX 2.0, both local and foreign franchisors are now required to manually submit the FDD in a prescribed form along with their application. Franchisees are also no longer able to independently submit applications for registration with the Registrar. The franchisees application process is now exclusively managed by the franchisor, who must submit the registration application using their account on MyFEX 2.0.

^{RECENT DEVELOPMENT IMPACTING FRANCHISORS AND FRANCHISEES}

In Guangzhou Light Industry & Trade Group Ltd & Ors v Lintas Superstore Sdn Bhd [2022] 4 MLJ 339 (FC), the defendant purchased canned food products from legitimate retail outlets in China and imported them for sale in Malaysia, allegedly infringing on the trademark rights of the plaintiff, the sole authorised distributor of the canned food products in Malaysia. The packaging of the canned food products explicitly indicated that they were intended for sale in China only. Consequently, the Federal Court ruled that the defendant could not claim the defence of parallel importation due to the territorial restrictions placed on the goods.

This case underscores the risks associated with parallel imports affecting franchising arrangements. To mitigate the incidence of unauthorized parallel importing, franchisors and franchisees could enhance their franchise agreements by incorporating provisions requiring the franchisors to label their products with authorised market or geographic limitations, sell products exclusively to distributors who have signed agreements with territorial restrictions, or implement minimum order quantities for all distributors.

In Mohammad Hafiz bin Hamidun v Kamdar Sdn Berhad [2021] MLJU 816 (FC), the defendant was accused of passing off the business indicium of the plaintiff, Mohammad Hafiz bin Hamidun, by selling products labelled as “Afiz Amidun”. The plaintiff, a renowned singer and songwriter, had ventured into the fashion and apparel industry by incorporating a company. The defendant argued that the plaintiff lacked the locus standi to bring the suit, contending that the goodwill associated with the label ‘Hafiz Hamidun’ belonged to the plaintiff’s company. However, the Federal Court recognised that an individual can possess direct ownership and interest in goodwill when an unregistered trademark becomes closely linked to that individual and accumulates goodwill. Consequently, the Federal Court affirmed the plaintiff’s ownership interest in the goodwill associated with his name.

This case highlights the risks that arise when businesses attempt to capitalise on the goodwill associated with the business indicium of a well-known individual, especially in cases where a franchise relies heavily on a well-known individual’s persona. In cases where the franchise is associated with a well-known individual, franchisees must be especially cautious not to engage in any activities that could be construed as passing off the business indicium of the well-known individual. It is important to obtain proper authorisation.

In Appraisal Property Management Sdn Bhd & Ors v Singham Sulaiman Sdn Bhd [2023] 2 MLJ 153 (CA), the initial proprietors granted sublicenses for the use of the “Jones Lang Wootton” trademark to Australian partners, who subsequently sublicensed it to the plaintiff for use in Malaysia. Later, the initial proprietors assigned the “Jones Lang Wootton” trademark to the third defendant. Despite this, the plaintiff applied to register the same trademark, which was allowed by the Registrar. Subsequently, the plaintiff alleged that the defendants misrepresented their business as associated with the plaintiff’s by using the “Jones Lang Wootton” trademark. The third defendant responded by filing an application to expunge the plaintiff’s trademark, contending that the plaintiff lacked proprietary rights and was only sublicensed to use it. The Court of Appeal ruled that the plaintiff, as a sublicensee, did not possess proprietary rights and therefore could not initiate a passing off action. Consequently, the Court of Appeal allowed the third defendant’s application to expunge the plaintiff’s trademark registration due to fraudulent acquisition.

This case emphasizes the importance for franchisees to meticulously understand the scope of their trademark rights. Although franchisees may be granted sublicenses to use certain trademarks, they should recognise that such sublicenses may not confer proprietary rights. Therefore, franchise agreements should clearly delineate the extent of trademark usage and any associated limitations on the franchisee’s rights.

^CONCLUSION

Understanding franchising in Malaysia entails embracing and assimilating the multi-faceted nature of the franchising landscape, such as legal regulations, market dynamics and cultural nuances. By staying informed, franchisors and franchisees can effectively protect their interests, foster mutually beneficial relationships, and thrive in the dynamic franchising environment of Malaysia. As the franchise industry continues to evolve in Malaysia, ongoing vigilance and adaptation will be essential for sustainable growth and success.

This article is not intended to be legal advice. For further information on the above or if you have any questions on intellectual property, franchising or TMT matters, please contact Lee Lin Li.

Lee Lin Li
Partner
T: +603 2050 1898
linli.lee@taypartners.com.my

Chong Kah Yee
Senior Associate
T: +603 2050 1831
kahyee.chong@taypartners.com.my

Veronnie Thu
Associate
veronnie.thu@taypartners.com.my