Legislation regulating commercial activities in Latvia

All commercial activities undertaken in Latvia either by Latvian citizens, non-citizens or foreigners are regulated by two main legislative acts. The first of them, proclaimed in Riga on 4 May 2000 is the Commercial Law, where all forms of commercial activities, rights and obligations of legal entities, as well as the regulations of their actions are given. The second is the Law on Competition, which was proclaimed in Riga on 23 October 2001. Both of them apply to franchising venture, be it the franchisor or franchisee having its business activities in Latvia. Other laws, which regulate specific aspects of the business activities, should also be taken into account when thinking of starting entrepreneurial activities in Latvia. It is advisable that before registering a venture, an advice of a certified consultant is asked and all legal aspects are discussed.

Legislation regulating intellectual property protection in Latvia

There are a few special laws and several Cabinet Regulations in Latvia that regulate intellectual property protection. The Patent Law, proclaimed in Riga on 30 March 1995 (in the very near future the new Patent Law to be adopted) applies to inventions that may be used for commercial purposes. This Law regulates the personal and property relationships resulting from the use of these inventions.

Another law regulating intellectual property rights is the Law on Trademarks and Indications of Geographical Origin, proclaimed in Riga on 16 June 1999. The judicial relationships in the field of brand registration, brand and geographical name usage and protection are regulated by this Law.

The Copyright Law, proclaimed in Riga on 27 April 2000 regulates the rights of the authors and obligations of users of works of science, literature, art (any kind of it). All these laws touch upon the franchising venture aspects to some point. The more detailed description of main points of the Laws related to franchising will follow.
Cabinet Regulations No 252 “On Industrial Designs” proclaimed in Riga on 8 April 2004 (prot. No 20, § 8) regulate the commercial and manufacturing application and usage of an object or an article created as a result of artistic design or construction.

Cabinet Regulations No 420 “On the Customs Control Measures for the Protection of Intellectual Property” issued on 10 September 2002 (prot. No 38, § 1).

Contiguity of the current legislation and resolutions with the franchising agreement in Latvia

Different aspects of the franchising agreement in relation to specific aspects of the above mentioned laws are discussed in detail below. As mentioned before, there is no unified law regulating franchising business and agreement formation in Latvia. Therefore the legislative basis of franchising agreement can be derived from different agreement types, whose terms and conditions are regulated by the above mentioned seven laws. The five further discussed agreements are licensing agreement, lease agreement, authorization agreement, commercial agency and distribution agreement and enterprise and commission agreement.

Franchise contiguity with the licensing agreement
In Latvian legislation the licensing agreement is regulated by Articles 40 - 46 of the Copyright Law, Article 26 of the Law on Trademarks and Designations of Geographical Origin, Article 38 of the Patent Law and Article 43 of Cabinet Regulations No 252 “On Industrial Designs”.

Article 41 of the Copyright Law states that "a licensing agreement is an agreement whereunder a party – the subject of copyright – allows the other party – the work user – to use the work, and determines the way of the work use, agreeing on conditions of such use, the amount of remuneration, and procedures and terms of payment thereof ". The concept "work" means the result of the author’s creative work in any materialised form. Therefore in terms of classification it makes no difference whether the franchise product is goods or services, because a marketing concept is transferred as an intangible thing (intellectual property) under the licensing agreement. The franchisor is often said to transfer "the integrity of commercial activities methods", "a system" or "knowledge". The European Union regulation on release of franchise agreements from the ban on competition characterizes the franchise agreement as transfer of the integrity of material or intangible things, such as trademarks, shop signboards, design samples, copyright, know-how or patents to the franchisee for rendering of services or selling goods.

Franchise contiguity with the lease
The lease is regulated in detail in Section 14 of the Civil Law. Article 2112 of the Civil Law states that lease is an arrangement whereunder one party assigns or promises use of any yield-bearing thing to the other party for a specific rent. Article 2113 of the Civil Law specifies that rights may be the subject of lease too. Transfer of rights is the basic condition of the franchise agreement. The lease, or the licensing agreement, does not provide for the lessee’s obligation to exercise rights directly, however provisions of the Civil Law establish such obligation by implication: Article 2150 of the Civil Law requires that the lessee should use the lease object with care and wisely, and Article 2151 – to exercise rights according to the purpose intended at letting the lease object. The purpose of franchise is to increase sale of goods or services by assuring distinction capacity and safe, uniform and verified use of the name (brand) or trademark. In case of the franchise agreement the purpose of the lease is to be translated wider, understanding assurance of the firm’s distinction capacity, rather than only promotion of turnover thereby. To achieve such purpose, uniform arrangement and servicing, and use and strict observance of instructions, knowledge and know–how given by the franchisor should be assured. Thus lease regulations under the Civil Law actually provide for the franchisee’s obligation to observe the franchisor’s business and marketing concept, and hence assure the franchisor’s supervision rights.

Moreover, according to Article 2127 of the Civil Law, the parties may supplement the main agreement with different side provisions, with regulations of side provisions of the purchase agreement being applicable thereto.

In case a thing is leased beyond the franchise agreement, the other party does not sustain any loss due to failure to use the same, on the contrary – in case of a material thing the same is worn out less. On the contrary, the franchisor has good reason to claim indemnity for losses (lost profit), in case the franchisee fails to fulfil its obligations appropriately. Of course, the obligation of evidence is a considerable obstacle in practice.

Franchise contiguity with the authorization agreement
In the Civil Law, the authorization agreement is included in the Section "Claims from Management of Somebody Else’s Property". Article 2289 of the Civil Law states that "under the authorization agreement one party (the attorney, the agent) undertakes to fulfil an assignment known to the other party (the principal, the grantor), while the principal undertakes to recognize the attorney’s action as binding thereupon."

The former Cabinet regulations on release of franchise agreements from the ban on the arrangement stated by the Competition Law is the only standard act defining the franchise agreement in the Latvian legal system. Contrary to conclusions of world famous scholars in the sphere of the franchise agreement classification, paragraph 1.1 of such regulations states that the franchise agreement is an authorization agreement of two enterprises whereby one enterprise – the principal – transfers its rights to exercise the integrity of rights of intellectual property (to wit, commercial names, trademarks, shop signboards, design objects and special professional information) to the other enterprise – the authorized company– for sale of goods or rendering services of a specific type to the consumer for direct or indirect financial remuneration in a specific geographical territory. Here contiguity of the authorization agreement with the license and franchise only appears when the principal transfers its own rights to the authorized company without losing the opportunity to use them too.

Franchise contiguity with the commercial agency and distribution agreement
Article 45 of the Commercial Law states that a commercial agent is an entrepreneur authorized to execute transactions with third persons or else to prepare execution thereof independently on behalf and in favour of another person (the principal). The material difference underlies the very definition of the commercial agency agreement, because the franchisee executes transactions on its own behalf and in its own favour, rather than in favour and on behalf of the franchisor.

The dealer (distribution) agreement is more like the franchise agreement. Although this type of agreement is not included in the Commercial Law, it is popular, because the dealer is an entrepreneur, whose enterprise is included in the manufacturer’s distribution network and who is obliged with regard to the manufacturer to sell the latter’s goods on its own behalf and at its own expense. The only difference between the dealer and the franchise agreement is that the franchisee is related to the distribution and marketing concept determined by the franchisor, while the dealer has no such liability. Distribution agreement may be a component of the franchise agreement.

Franchise contiguity with the enterprise and commission agreement
Although the franchise agreement cannot be classified as the enterprise agreement, the enterprise agreement is a frequent component of the franchise agreement, because European Union Regulation No 4087/88 on release of franchise from the ban on competition offers the franchise definition, training of the franchisee and assuring further consulting being among its material elements. Examining such legal relations, one is to admit that the franchisor is an entrepreneur training the ordering customer – the franchisee, as a specialist. It may be that the franchise agreement does not state the fee directly, because as often as not the same is included in the advance payment amount (lump sum).

Article 2321 of the Civil Law defines the commission agreement as "an agreement whereby one party entrusts the other party with selling some movable things at a known price, provided the consignee either pays such price or returns the thing proper after a definite period". Examining franchise relations from the consumer’s and the franchisee’s point of view, in case of the goods franchise there is indeed great similarity with the commission agreement, yet there are two problems: the commission agreement cannot be applied to regulation of services franchise, moreover the commission agreement does not provide for transfer of intangible things, intellectual property, the marketing concept, trademarks, know-how, making the material element of the franchise agreement. This is why there is more similarity between the commission agreement and the distribution agreement, whereby no intangible things (trademarks, know-how, etc.) are transferred. The franchisor does not transfer its intellectual property rights to the franchisee. S/he grants a license to use his/her intellectual property right.

Enterprise registration in Latvia

In Latvia a reform has taken place recently, which directly concerns the business (commercial activities) registration process, namely – the reform of the Commercial Law. One of the reasons of such reform (directly concerning the registration process) was that there were too many fictitious enterprises in Latvia, and many enterprises had the same names. Hence registration process became considerably more difficult after the reform of the Commercial Law against the pre-reform situation.

Steps before submitting an application to the Register:

Choice of the name:
The entrepreneur’s Firm consists of, first, indication of the business activities form, and, second, the name proper. Indications of the business activities forms are exhausted in standard acts (being as follows: Limited Liability Company, Joint Stock Company, Individual Entrepreneur, Limited Partnership and Full Company), however choice of the name needs more attention because it should not be identical to a name that has already registered with the Commercial Register regardless of the business activities form. The Commercial Register is a register where data on entrepreneurs are entered. The Register of Enterprises of the Republic of Latvia (Register of Enterprises) is a state institution authorised to keep the Commercial Register.
A public database has been established with the help of the Register, where one can verify whether the name designed has already been taken or not: http://www.lursoft.lv/. In order to obtain fully reliable information on whether a specific entrepreneur of the same name is registered with the Commercial Register, one is to contact the Register of Enterprises to receive a written confirmation.

Preparing foundation corporate documents:
It is quite difficult to state the exact charge for making such documents, however the Register of Enterprises proper prepares such documents, and according to their price-list, in case of a commercial company (Ltd., Full Company, Limited Partnership) it amounts to 50 – 60 LVL, individual entrepreneur – 10 LVL, a branch of the foreign enterprise – 10 LVL. In case of a Joint Stock Company it is better to contact specialised law offices, because the foundation process of a Joint Stock Company is rather complicated.

Fixed capital:
The amount of the fixed capital: Ltd. – 2000 LVL; JSC – 25000 LVL.

Establishing a fixed capital, the following shall be taken into account:

• The fixed capital may be formed from either money contributions, or property contributions, or both of the above;
• The share of the fixed capital consisting of money contributions shall be certified by a bank certificate of payment of the fixed capital (approximately 3 LVL).
• The share of the fixed capital consisting of property contributions shall be assessed by the expert’s reference. In case such share is less than a half of the amount of the fixed capital and less than 4000 LVL, such contribution may be assessed by the Company’s founders in the Foundation Agreement (in case of one founder – in the Foundation Resolution).

State charges:
State charges are obligatory (transfer to the account of the Register of Enterprises) and shall be paid before submitting the application for being entered in the Commercial Register to the Register of Enterprises. The state charges shall be as follows:

For entering IK (individual entrepreneur) in the Commercial Register – 20 LVL;

For entering SIA (limited liability company) in the Commercial Register – 100 LVL;

For entering AS (joint stock company) in the Commercial Register – 250 LVL;

For entering a branch in the Commercial Register – 20 LVL.

Registration of intellectual property in Latvia

Latvian legislation differentiates three different forms of intellectual property, rights to which can be registered in the country. Those forms are - trademarks, industrial design, and patents for inventions. A description of each of the intellectual property forms and the procedure of their registration is given below.

Trademarks
As defined by Latvian legislation, a trademark is any sign or a combination of signs, which consists of letters, words, numerals, graphics or designs or is three-dimensional. The trademark can be of any colour and be represented as any combination of above mentioned. Latvian legislation also recognizes specific types of marks as, for example, sound and light signals, to be subject to registration as a trademark.

It is important, that in Latvia trademark applications are not examined for novelty. The Patent Office may issue Registration Certificates for two identical trademarks, applied for registration in the same classes. Therefore the risk of being double registered for the same trademark must be taken into account, consequently, conducting the trademark search before filing, as well as monitoring after the registration is recommended.

The duration of the trademark protection in Latvia is 10 years from the date of filing of application. It is possible to file for trademark registration renewal after every 10 years. At present the time to get the trademark registered in Latvia is about 8-10 months. The official filing receipt is issued in 1-2 days after filing of the trademark. The cost for registration of a trademark in regard to three classes of goods and/or services is in the region of EUR 950.

Industrial Designs
Legal protection of industrial designs in the Republic of Latvia is granted to industrial designs that are novel and of individual character. A design protected by an industrial design right registered in Latvia is also eligible for protection under the law of copyright.

Protection of a registered industrial design is valid for 5 years from the filing date. The renewals of industrial design right can be made maximum four times each for 5 years, in total for up to 25 years from the filing date. At present, the average cost for registration of an industrial design in Latvia is around EUR 700.

Patents for Inventions
In case of application for patent protection the subject of an invention must have the following characteristics: it is new, possesses an invention level or inventive step, and is industrially applicable. This object of invention may, in particular, be a device, a process, a substance, a microorganism, or plant and animal cell cultures, as well as a new use of known devices, processes, substances and microorganisms for meeting other public needs for which they were not intended.

There is no substantial examination for patent applications in Latvia. The patent applications are examined only for formal observance of the law and for unity of invention. It is the obligation of the applicant to ensure that the patented invention is in fact new, it involves an inventive step and is industrially applicable. The application may be filed in Latvian, English, German, French or Russian. Only claims, abstract and textual matter on drawings (if any) is to be translated into Latvian.

The term of the registered patent is 20 years from the date of application filing. The average cost for obtaining a national patent, from filing till being granted, is in the region of EUR 1200. In addition, the patent is subject to annual maintenance fees payment.

* 1 EUR = 0,655 LVL (on May the 1st, 2004)