By G. Yeshanthan Nair
When stepping into the world of franchising, fairness is not just a courtesy, it’s a legal requirement. Section 20 of Malaysia’s Franchise Act 1998 serves as a vital safeguard against discriminatory practices within franchise systems. For both aspiring and current franchisees, understanding this provision is key to protecting your rights and ensuring a level playing field.
Let’s dive into what this section means, why it matters, and how to use it as a guide in navigating the complex relationship between franchisors and franchisees.
Key Takeaways
- Core Rule – Section 20 prohibits franchisors from unreasonably and materially discriminating between franchisees in terms of fees, royalties, goods, services, equipment, rentals, or advertising—if such differences cause competitive harm.
- Meaning of “Unreasonable and Material” – Treatment is unlawful when it lacks valid justification (unreasonable) and significantly harms a franchisee’s ability to compete (material). For example, giving lower supply prices to some franchisees without a sound reason may qualify.
- Five Legal Exceptions – Different treatment is permitted if it is: (i) time-based due to market or cost changes; (ii) support for under-resourced franchisees; (iii) in line with government programs; (iv) remedial measures for struggling franchisees; or (v) other reasonable distinctions aligned with the Act’s purpose.
- Why It Matters – Section 20 protects franchisees from favoritism that could tilt the competitive playing field. It promotes transparency, fairness, and trust in franchisor–franchisee relationships.
- Action for Franchisees – Monitor whether your fees and support match others in similar markets, ask for valid reasons for any differences, and document all dealings. If unfair treatment is suspected, legal advice should be sought promptly—remember, the burden of proof is on you.
Protect Your IP Today.
What Does Section 20 Say?
At its core, Section 20 makes it illegal for a franchisor to “unreasonably and materially discriminate” between franchisees when it comes to:
-
- Franchise fees
-
- Royalties
-
- Goods or services
-
- Equipment
-
- Rentals
-
- Advertising services
Such discrimination becomes a violation only when it causes competitive harm to a franchisee who is disadvantaged compared to another who receives favorable treatment.
However, not all differences in treatment are unlawful. The Act outlines five specific exceptions where such differential treatment is permitted.
Understanding “Unreasonable and Material Discrimination”
Not all differences in treatment among franchisees amount to discrimination under the law. For a franchisor’s conduct to be considered a violation, it must meet two key criteria, firstly it must be unreasonable, meaning the action lacks valid justification or business necessity, and secondly materiality, meaning it significantly affects the disadvantaged franchisee’s ability to compete.
For instance, if a franchisor offers lower prices on essential supplies to selected franchisees without a sound reason, leading others to lose business, such conduct may be deemed both unreasonable and materially harmful.
The Five Legal Exceptions
Section 20 (a – e) provides a clear list of acceptable circumstances under which different treatment may occur:
-
- Time-based differences
Franchisors may offer different terms to franchisees who signed up at different times, provided these differences are reasonable and based on market evolution or cost adjustments.
-
- Support for under-resourced franchisees
Franchisors may offer lower fees or more assistance to individuals with insufficient capital, training, or experience. This encourages inclusivity and entrepreneurship.
-
- Government or agency programs
When the government promotes new product lines or services, franchisors can differentiate terms to support those efforts.
-
- Remedial measures for struggling franchisees
Franchisors may tailor special terms to help franchisees fix operational issues or comply with their agreements.
-
- Other reasonable distinctions
This catch-all allows flexibility as long as the differentiation aligns with the purpose of the Act and isn’t arbitrary.
Why This Section Matters to Franchisees
Franchisees often operate within strict contractual boundaries. Section 20 ensures that these boundaries are not manipulated to favor some at the expense of others. If you’re investing your life savings into a franchise, the last thing you want is to discover that another franchisee is getting better deals without valid reason, putting you at a competitive disadvantage.
This section also reinforces transparency and trust in franchisor-franchisee relationships. It signals that the law supports a fair and competitive market environment.
Franchisees and Franchisors: Know the Rules of Fair Play
Franchisors are legally required to treat all franchisees fairly, especially when they operate in the same market, ensuring a competitive level ground. While the law permits certain justified distinctions, any unreasonable or harmful differences in fees, services, or support could constitute a breach. Franchisees should stay alert to potential red flags, maintain thorough documentation of all dealings, and seek legal advice if they suspect unfair treatment. Remember, the burden of proof lies with you!
Whether you’re a prospective franchisee reviewing an offer or an existing one re-evaluating your terms, use the following checklist based on Section 20:
-
- Are my fees and service charges comparable to others in similar locations or markets?
-
- If there are differences, has the franchisor provided valid, reasonable explanations?
-
- Am I being denied support or resources that others are receiving?
Franchising should be a mutually beneficial partnership. Section 20 is your ally in making sure that partnership is built on fairness, not favoritism.
Final Thoughts
Franchising is one of the fastest-growing business models in Malaysia. As the industry evolves, laws like Section 20 play a crucial role in ensuring sustainable and equitable growth. Franchisees must be empowered, not exploited and understanding your rights is the first step toward that empowerment.
Need help ensuring your franchise is legally compliant and protected from unfair practices?
At KASS International Sdn. Bhd. we specialize in franchise legal advisory, guiding you through compliance with the Franchise Act 1998, ensuring your agreements are fair, enforceable, and in your best interest.
Let us help you build a secure and successful franchise business. Contact us today for a consultation and safeguard your franchise the right way.