Emir is a corporate and commercial lawyer in Susandarini & Partners, an Indonesian law firm in association with Norton Rose Group. He has a wide range of experience advising on incorporating and operating businesses in Indonesia, including anti monopoly, intellectual property, and information technology.

He is now enrolled as a Master of Laws student in Maastricht University, specifically in Intellectual Property Law and Knowledge Management (IPKM) program.

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Indonesian Franchise Law: Institutionalized Perplexity?

Introduction[1]

This week, a very good friend of mine who happened to be a distinguished franchise consultant in Indonesia sent me link to his provocative-heading article: Indonesian Franchise is Lousy!! (Franchise Indonesia Payaaah!!)[2]. This article essentially captured the expression of many Indonesian franchisors that addresses Indonesian businessmen currently are not ready for franchising system. Conclusively, my friend had found that the drawback lies in the franchisors itself, whereby, whether deliberately or not, had put a side a process of developing its franchisees’ entrepreneurship.

However, having thoroughly reading his article, I believe that the drawbacks in Indonesian franchise are not solely resting among franchise practitioner; the problem might lies in the bigger picture, the franchise law itself. It is not a secret that the Indonesian franchise law has been heavily criticised due to its obscurity. There have been many seminars, conferences, meetings, and other forums that have brought up the drawbacks of this system as its main course. Additionally, the issuance of the latest revision of the ministerial regulation on franchise[3] still could not put the critics to rest.

I have been a legal practitioner who believes that the law of one particular matter has to be put under a correct rationale. The parameter in this mater is actually modest, if the majority of the targeted community is reluctant, there might be a problem with the law. In contrary, if the majority of the targeted community is tolerant, the law might be correctly put. Unfortunately, having considered the above, Indonesian franchise law might falls within the first situation, therefore, I would like to discuss such situation in this article and try to find out whether there is a problem with the franchise law.

Franchise History in Indonesia

Due to the lack of information, unfortunately I have not been able to present the accurate information on the time of the first franchise business entered into Indonesia. However, I do remember that when I was still a fourth grader in 1985, I had a fried chicken sold by one well-known franchised American restaurant for lunch. There was no franchise regulation at that time; the first franchise regulation was issued 12 (twelve) years after I experienced my first bite on the fried chicken, it was on 18 June 1997 the Indonesian Government issued the first regulation on franchise[4].  The Government Regulation No. 16 of 1997 (“GR16/97”) was issued with the purpose of:

  1. increasing the opportunity for Indonesian workers to participate in the labor market; and
  2. increasing the possibility of Indonesian businessmen in expanding its business and gain benefit through technology transfer[5].

GR16/97 had established the basic foundation of franchise business in Indonesia, it is known for the requirement to oblige the franchisor to render a written information on these specific maters: (i) its business activities; (ii) intellectual property rights; (iii) the requirements that will apply to franchisee; (iv) the support given by franchisor; (v) the rights and obligation of each parties; and (vi) the termination, cancellation and extension of the franchise agreement[6]. Fundamentally, this regulation introduced the obligation of rendering the franchise disclosure documents (franchise prospectus) in Indonesian law.

10 (ten) years after its issuance, GR16/97 was replaced by the current franchise regulation, the Government Regulation No. 42 of 2007 (“GR42/07). According to its elucidation, the issuance of GR42/07 has to serve the purposes of: (i) encouraging Indonesian businessmen, specifically small-medium enterprise to be a competent franchisors; (ii) creating the information transparency (through the registration of franchise agreement and prospectus); and (iii) giving the legal and business certainty for both the franchisors and the franchisees[7].

GR42/07 covers more comprehensive issues related franchise business compared to the previous regulation. It establishes these following matters: (i) franchise business criterion[8]; (ii) the minimum requirement of franchise agreement[9], (iii) the minimum requirement of and the obligation to provide a franchise prospectus[10], and (iv) the obligation to register the franchise agreement and prospectus[11]. Essentially, this regulation consists of significant improvement from the previous regulation. However, it is not flawless product, many critics also being addressed to the current regulation.

Basic Rationale: Welfare Distribution or Fair Competition?

In order to get a better understanding of one particular law, it is always useful to understand the basic rationale that underlying its establishment. For instance, the establishment of franchise law in the European Union countries derives from the fair competition standpoint. It was started with the Pronuptia case between Pronuptia de Paris GmbH and Pronuptia de Paris Irmgard Schillgalis (Hamburg)[12]. The Pronuptia case was essentially about the implementation of Article 85(3) of the EEC Treaty[13], which basically provide an exemption of a restricted certain type of clause/provision in the vertical agreements[14]. The European Court of Justice (“ECJ”) basically decided that[15]:

  1. It is permissible to have a provisions that guarantee the protection of the know-how and assistance against the competitors;
  2. It is permissible to have control over franchisee provided that such control is intended to maintain the franchise identity and reputation; and
  3. It is permissible to have a price recommendation provided that it does not lead to concerted practices between parties.

In this case, the ECJ basically allowed certain exemption to Article 85(3) of the EEC Treaty in the franchise transaction, the decision on the Pronuptia case lead to the issuance of Block Exemption Regulation[16] in Europe. The Block Exemption Regulation basically provides that the exemption as stated in the Article 85(1) of the EEC Treaty is indeed applicable to vertical agreements. However this provision required a general rule: the market share threshold of the products/services concerned is not exceeded 30% of the relevant market. Therefore, it would be suffice to say that the applicability of the Block Exemption Regulation is depending on the market share analysis.

From the above-mentioned discussion, it is clear that the European Union countries adhere the fair competition as its basic rationale. In Europe, a franchise transaction shall be regulated so that it would not create any unfair competition practices.

Indonesia in this matter might see the need to regulate franchise from a different angle. GR16/97 as a first franchise regulation gives us a hint on this matter; Article 6 of GR16/97 stipulates that a franchise business shall be done in stages with the purpose of developing the small and medium size enterprise[17]. Therefore, GR16/97 determines that franchise transactions shall aim for the small medium size enterprise development. GR42/07 that replaced GR16/97 takes a significant forward steps in this matter, since it being drafted as a manifestation of the principle of Partnership in the Small Enterprise Business Act[18]. In other words, Indonesian law sees franchise transactions as one form of partnership.

So, what is a Partnership principle? Indonesian Micro, Small, and Medium Business Enterprise Law (“SME Law”) stipulates that a Partnership is a cooperation in business relation, whether directly or indirectly based on the principle of mutual need, trust, strength, and benefit, which involves micro, small, medium size business enterprise (“MSM”) with big size business enterprise[19].  Article 26 of Indonesian SME Law provides that a Partnership shall be done with many forms, with franchise being one of them. This provision strengthens an argument that Indonesian law sees franchise as one form of a Partnership.

Partnership in Indonesia shall be conducted with the aim among others to establish a Partnership between MSM and big size business enterprise, establish inter-partnership amongst MSM, and also to prevent market domination and business centralization that may bring disadvantages to the MSM[20]. Furthermore this Law also provides that the Partnership shall include the transfer of a know-how in production-processing, marketing, capitalization, manpower, and technology[21].

Based on the previous discussion, we may conclude that franchise is one form of partnership and therefore franchise shall have the aim of establishing partnership between MSM and big size business enterprise, establishing inter-partnership amongst MSM, and at the same time shall protect MSM from market domination and business centralization. This understanding shall be the basic tool for us to understand the basic rationale of franchise law in Indonesia.

As I mentioned earlier, GR42/07 takes a significant steps forward in regulating franchise transactions. In terms of choosing a franchisee, Article 9 of GR42/07 obliges the franchisor to have cooperation with the local MSM as a franchisee, provided that such MSM fulfills all conditions required by the franchisor. Furthermore this provision not only regulates the choosing of franchisee but also regulates the process of choosing a local distributor, if one MSM fulfills all required conditions, a franchisor shall choose such local MSM as its distributor[22]. In other words, this provision provides MSM a priority to enjoy benefit from franchise; hence, this provision indeed confirms that the franchise regulation in Indonesia is regulated under a welfare distribution rationale. Conclusively, this means that franchise transactions shall be regulated with the purpose of giving assurance that MSM shall have benefit from franchise and also to prevent market domination and business centralization by big size enterprise.

Franchisor eligibility issue: Only for big business?

If welfare distribution is a basic rationale of franchise law in Indonesia, does that mean that only a big size enterprise may become a franchisor in Indonesia? Unfortunately, GR42/07 does not give a clear answer on this. GR 42/07 only defines a franchisor as an individual or business entity that grants rights to utilize/use its franchise to the franchisee[23].

To get a better understanding on this matter, I believe we have to look at the SME Law. So far, we already know from the SME Law that:

  1. franchise is one form of partnership;
  2. franchise shall have the aim of establishing partnership between MSM and big size business enterprise; and
  3. at the same time shall protect MSM from market domination and business centralization.

In addition, we also know that SME Law defines Partnership as cooperation in business relation, whether directly or indirectly based on the principle of mutual need, trust, strength, and benefit, which involves MSM with big size enterprise[24].

My interpretation on this mater is clear, based on such definition, a Partnership is a business relation between MSM and big size enterprise. However, Article 11(1) of SME Law stipulates that a Partnership shall also have a purpose of establishing Partnership amongst MSM, this is where the confusion begins; Article 11(1) of SME Law opens a door for a Partnership between MSM, which in this matter contradicts with the definition of a Partnership itself.

This confusion surely has an impact on franchise regulation for defining a franchisor. According to GR42/07, a franchisor can be an individual or a business entity; this definition is in a way inline with Article 11(1) of the SME Law, whereby an individual can be categorized as MSM[25]. However, these provisions also contradict with the definition of Partnership as provided by Article 1(13) SME Law, since according to the definition of Partnership, it should be a big size enterprise only (and therefore a business entity only and not an individual[26]) that has the eligibility of becoming a franchisor.

By following this logic, it will all make sense: the welfare distribution rationale; the protection for MSM Enterprise against market domination and business centralization; MSM’s priority for enjoying benefit from franchise; and choosing MSM Enterprise as a franchisee. It will suddenly made sense for the first time; Indonesia wants big size business as a franchisor so that it can distribute its welfare to the MSM.

However, the above-mentioned is merely a theoretically findings, which may not be applicable in practice. This is due to a reason that Article 1(2) of GR42/07 and Article 11(1) are still valid and has not been revoked and also are still being used everyday in practice to register new franchise.

Commission for the Supervision of Business Competition Regulation[27]: An attempt to drag franchise to fair competition rationale?

Since 5 March 1999, Law No. 5 of 1999 regarding the Prohibition of Anti Monopolistic Practices and Unfair Business Competition (“Anti Monopoly Law”) has been enacted. This law basically aims to increase the effectiveness of national economy, to create a favourable business environment through the regulation of fair business practices, and to prevent anti monopolistic practices and unfair business competition[28]. Basically there are 3 (three) main prohibitions in this law, namely:

  1. Prohibited form of agreements, which consist of: (i) Oligopoly; (ii) Price Fixing; (iii) Division of Territory (Zoning); (iv) Boycott; (v) Cartels; (vi) Trusts; (vii) Oligopsony; (viii) Vertical Integration; (ix) Closed Agreements; (x) Agreements with Foreign Parties if such agreement lead to anti monopolistic practices and unfair business competition.
  2. Prohibited form of activities, which consists of: (i) Monopoly; (ii) Monopsony; (iii) Market Control; and (iv) Conspiracy.
  3. The abuse of Dominant Position.

In relation to franchise, Anti Monopoly Law provides a significant provision as stated in Article 50(b), according to this provision the restriction as stated in the Anti Monopoly Law does not apply to franchise[29], this means that franchise transaction can be excluded from restrictions stipulated in Anti Monopoly Law. With this provision, the franchise practitioner at that time felt a big relieve since they can freely have a clauses that regulate among others: price fixing, division of territory, and limitation of supplier, which generally exists in a franchise agreements.

However, this was not lasted long, on 7 December 2009 the Commission for Supervision of Business Competition issued a Regulation No. 6 of 2009 on the Guidance of the Implementation of Article 56(b) of Anti Monopoly Law in Relation with Agreements related to Franchise (“Reg6/09”). Reg6/09 basically stipulates that to able for being exempted under Article 50(b) of Anti Monopoly Law, a franchise shall fulfill these following conditions:

  1. It shall complies with the franchise criterion as stipulated under Article 3 of GR42/07;
  2. The franchise agreement shall be drafted according conditions as stated in GR42/07 and Indonesian Civil Code;
  3. The franchise agreement is one form of Partnership as stated in SME Law;
  4. Content of the franchise agreement does not violate the principle of the Prohibition of Anti Monopolistic Practices and Unfair Business Competition.

Reg6/09 does not discuss any further detail on the above-mentioned conditions, however it provides examples on the type of clauses which contradicts with Article 50(b) of Anti Monopoly Law, among others are:

  1. Resale Price Maintenance Clause: It is prohibited to have a clause that lead to a price fixing, however it is allowable to a franchisor to have a recommendation of a sale price.
  2. A clause that required purchasing supply only from franchisor or other party appointed by the franchisor (including a tie-in clauses): However it is permissible if such is intended to maintain the identity and reputation of the franchise.
  3. Division of Territory (Zoning): Zoning is only allowable if it is intended to develop the franchise system.
  4. Post Termination Non-Competition Clause: This clause is only permissible if it is intended to protect the franchisor’s intellectual property, reputation, and identity. In addition, this clause cannot be valid for a long period of time[30].

With this regulation, Indonesian law has been trying to regulate franchise from a fair business competition standpoint. If we take a look closer, the logic of Article 50(b) of Anti Monopoly Law and Reg 6/09 is in a way similar with the logic of Article 85(3) EEC Treaty and the Block Exemption Regulation that applies within European Union countries. Article 50(b) Anti Monopoly Law is the general exemption (similar to Article 85(3) of EC Treaty) and Reg6/09 is acting as the Block Exemption Regulation.

With the issuance of the Reg6/09, the regulator clearly wanted to regulate the unfair business competition effect of franchise, hence, put the fair business competition rationale into the franchise law. This, I might say, can be considered as a smart move if it is being harmonized perfectly with the welfare distribution rationale. However, many discussions amongst franchise practitioners have been raised from the issuance of Reg6/09 since it created new confusion in franchise community, especially when the previous confusion caused by GR42/07 and SME Law also have not yet been settled.

Conclusion

Indonesian franchise law still cause perplexity amongst practitioners and the confusion is in the level of the law itself, for instance, the provision which regulates the eligibility of franchisor still contradicts one to another. In addition, the 2 basic rationales have not yet been harmonised within law. Indonesian regulator shall make attempt to have the franchise law being perfectly harmonised so that it can achieved its purpose as stated in the current law: to distribute welfare and also to guarantee the competition fairness in franchise law.


[1] This article is my personal opinion and does not in any way can be interpreted or deemed as the opinion of Susandarini & Partners (in association with Norton Rose Australia) or any other offices of Norton Rose Group.

[2] Riyadi, Burang. “FRANCHISE INDONESIA PAYAAHHH…!! | Konsultan Franchise, Konsultan Waralaba, Bisnis Franchise IFBM.” Konsultan Franchise, Konsultan Waralaba, Bisnis Franchise IFBM. N.p., n.d. Web. 27 Dec. 2012. <http://www.konsultanwaralaba.com/franchise-indonesia-payaahhh/&gt;.

[3] Minister of Trade Regulation No. 53/M-DAG/PER/8/2012 Regarding the Implementation of Franchise Business.

[4] Government Regulation No. 16 of 1997 Regarding Franchise.

[5] The General Section of the Elucidation of GR16/97.

[6] Article 3 of GR16/97.

[7] The General Section of the Elucidation of GR42/07.

[8] Article 3 of GR42/07 stipulates that a Franchise shall fulfill the following criterion: (i) It shall have business uniqueness; (ii) Its profitability is proven; (iii) It has a written standard in the goods and services offered; (iv) Easily taught and applicable; (v) Continuing support; and (vi) It has a registered intellectual property rights.

[9] Article 5 of GR42/07.

[10] Article 7 of GR 42/07.

[11] Chapter V of GR 42/07.

[12] ECJ Decision Case No. 161/84 dated 28 January 1986.

[13] This Article basically provides an exemption for certain type of agreements so that the restriction as stated in Article 85(1) of the EEC Treaty does not apply to such agreements.  Restrictions as stated in Article 85(1) of the EEC Treaty essentially are restriction related to unfair business competition, among others are: price fixing, limitation of production or supply, and market sharing.

[14] According to the Commission Regulation No. 330/2010, the Vertical Agreement means an agreement or concerted practice entered into between two or more undertakings each of which operates, for the purposes of the agreement or the concerted practice, at a different level of the production or distribution chain, and relating to the conditions under which the parties may purchase, sell or resell certain goods or services. Therefore, a franchise agreement also falls within this term.

[15] ECJ Decision Case No. 161/84 dated 28 January 1986.

[16] The Block Exemption Regulation was entered into force as Block Exemption Regulation on Franchise Agreements on February 1989 until May 2000, the regulation subsequently replaced by Block Exemption Regulation on Vertical Restraints, which consists of more types of agreement beside franchise. The current version of Block Exemption Regulation is Commission Regulation No. 330/2010 of 20 April 2010, which valid until 31 May 2022.

[17] Article 6 of GR16/97.

[18] Law No. 9 of 1995 Regarding the Small Business Enterprise. This law is now being replaced by Law No. 20 of 2008 Regarding Micro, Small, and Medium Business Enterprise, please note that all discussion in the principle of partnership in this article will refer to the provisions of the Law No. 20 of 2008.

[19] Article 1(13) of the SME Law.

[20] Article 11(b) and (g) of SME Law.

[21] Article 25(2) of SME Law.

[22] Article 9 of GR42/07.

[23] Article 1(2) of GR42/07.

[24] Article 1(13) of SME Law.

[25] According to Article 1(4) of SME Law, big size enterprise shall be a business entity; therefore an individual cannot be categorized as a big size enterprise.

[26] Please see footnote number 25 above.

[27] Commission for Supervision of Business Competition Regulation No. 6 of 2009

[28] Article 2 of Anti Monopoly Law.

[29] Article 50(b) of Anti Monopoly Law reads as follows: Excluded from the provisions of this law shall be the following: (b) agreements related to intellectual property rights, such as licenses, patents, trademarks, copyright, industrial product design, integrated electronic circuits, and trade secrets as well as agreements related to franchise.

[30] Unfortunately, Reg6/09 does not give us clarity on the maximum allowable time.

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U.S. patent office declares ‘the Steve Jobs patent’ invalid (not final yet)

Quoted from FOSS Patents: This week, USPTO (United States Patent and Trademark Office) issued an Office action to reject  20 claims of U.S. Patent No. 7,479,949 on touch screen technology which has been famously referred as “the Steve Jobs patent”. However, this decision is still in its preliminary stage, and therefore the final decision may be different. Nonetheless, this could be a good sign from USPTO in order to put a patent-frenzy in good order and hopefully could also reduce the number of patent wars.

Please click the below original link for details.

FOSS Patents: U.S. patent office declares ‘the Steve Jobs patent’ entirely invalid on non-final basis.

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