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Legal context

The European Union lacks a common legal framework on franchising, although some relevant legislation may be found in the Regulations and case law. Therefore, it is the member states that regulate this matter in their national laws.

It can be theorised that this is the reason why franchising is underperforming in the European Union, especially compared with the United States, as it may be hampering the implementation of franchises for cross-border distribution of goods between member states.

Because of the absence of an EU regulation on franchising, in-depth knowledge of individual member states’ regulation on franchising is, unquestionably, needed for any franchisor to penetrate European markets with a high rate of success. This generates technical barriers for trade and growth.

As a logical response, there is a trend in Europe towards self-regulatory means. In this regard, national franchise associations have created codes of conduct. Although self-regulatory effort could theoretically improve the situation, unfortunately, franchise associations tend to be composed of franchisors rather than having a balanced composition of franchisors and franchisees. As a result, their proposals are not always in accordance with the balance of powers between franchisors and franchisees.

Moreover, the relevance of codes of conduct depend heavily on the concrete power of each national franchise association. Therefore, self-regulation efficacy must be assessed on a case-by-case basis.

On the other hand, it must be taken into account that certain member states have approved legal provisions on franchising. Moreover, national commercial laws often impact on franchising in different ways.

In this chapter we will describe the above-mentioned Regulations and case law from the Court of Justice of the European Union (CJEU) that relate to franchising, before exploring relevant specialities in national European jurisdictions.

European Union regulatory framework

Franchise-specific provisions in EU Regulations

Given the atypical nature of the franchise or franchise contract, it has been difficult to get a unified approach as franchises are subject to multiple regulations within the European Union. Such unified definition of what a franchise or franchise agreement is could not be drawn from either case law or academic writing until the legality of the franchise was questioned in the Pronuptia CJEU case,2 in which we find a proper definition given by academic literature that was reasonably accepted:

Franchising is a contractually governed form of commercial cooperation between independent undertakings, whereby one party, the franchisor, gives one or more other parties, the franchisees, the right to use his trade name or mark and other distinguishing features, in the sale of products or of services . . . .3

In the case of most European countries, the concept of franchise is included through the Commission Regulation (EEC) No. 4087/88 of 30 November 1988 on the application of article 85(3) of the Treaty to categories of franchise agreements, which provides for a definition for both the franchise concept – ‘a package of industrial or intellectual property rights relating to trademarks, trade names, shop signs, utility models, designs, copyrights, know-how or patents, to be exploited for the resale of goods or the provision of services to end users’– and the franchise contract – ‘an agreement whereby one undertaking, the franchisor, grants the other, the franchisee, in exchange for direct or indirect financial consideration, the right to exploit a franchise for the purposes of marketing specified types of goods and/or services’.

Likewise, the Commission Guidelines on Vertical Restraints gives another definition: ‘[f]ranchise agreements contain licenses of intellectual property rights relating in particular to trademarks or signs and know-how for the use and distribution of goods or services’,4 although it does not constitute a precise definition of either franchises or franchise agreements.

Case law of the CJEU

It is evident that there was a clear need to lay the necessary basis to establish the true importance of franchises, not only by the decision on the Pronuptia case or the Commission Regulation 4087/88 EEC, but by the questions raised and introduced by various CJEU case laws that, although some of them are no longer in force, still serve as benchmarks for obligations of franchisees and franchisors, among other matters. To set some examples, we can look at the Yves Rocher Commission Decision No. 87/14/EEC,5 Computerland Commission Decision No. 87/407,6 ServiceMaster Commission Decision No. 88/6047 or Charles Jourdan Commission Decision No. 89/94/EEC,8 cases with an essential relevance in terms of franchise relationships obligations.

Franchises and European competition law

Although in most European countries franchise is included under the Commission Regulation 4087/88 EEC, rules on competition law have to be borne in mind. In this context, the provisions that fall within the scope of competition law are those terms that relate to price: where a franchisee charges a price for the product or service he or she offers and where the price relates to the exclusive rights granted in a franchise relationship to the franchisees.9 In such cases, competition law provisions are to be applied, since the setting of a certain price may raise suspicions with regard to market sharing, for instance, which constitutes a prohibited conduct under competition law. Therefore, special attention when drafting this kind of agreement should be taken.

In this regard, we need to focus on the Treaty on the Functioning of the European Union (TFEU), more specifically on its article 101, which sets out the conducts that shall be prohibited as incompatible with the internal market. The practice of concerted actions and market sharing fall within the scope of said article and, as noted, franchises can generate suspicions about the possible practice of this type of conduct because they also affect the functioning of the internal market and therefore competition. However, such restriction shall be ascertainable.

When giving a unified definition of the franchise concept, we raised attention to the Commission Guidelines on Vertical Restraints. The Guidelines on Vertical Restraints’ definition of franchise allows that franchise agreements can be included as a type of vertical agreement. However, although vertical restraints are, in principle, contrary to the provisions of article 101(1) TFEU, in general, the prohibitions laid down in this article do not apply to franchises. In other words, even if an agreement is found to be restrictive, it can still be considered legal if it falls under the provisions of article 101(3). If the agreement meets the conditions of article 101(3) TFEU, it indicates that article 101(1) TFEU does not apply.

Therefore, article 101(3) TFEU is found to be the exemption to article 101 TFEU. This appears displayed in the Commission Regulation (EU) No. 330/2010 of 20 April 2010 on the application of article 101(3) TFEU to categories of vertical agreements and concerted practices or the Block Exemption Regulation (VRBER). The VRBER states that ‘the benefit of the block exemption established by this Regulation should be limited to vertical agreements for which it can be assumed with sufficient certainty that they satisfy the conditions of Article 101(3) of the Treaty.’

Even though article 101(3) constitutes an exemption to the applicability of article 101(1), the VRBER sets a series of restrictions to such exemption in article 4. Among all these hardcore restrictions (as they call them in the VRBER), those that fully apply to franchises are mainly:

  • the restriction drawn in article 4(a): ‘the restriction of the buyer’s ability to determine its sale price, without prejudice to the possibility of the supplier to impose a maximum sale price or recommend a sale price, provided that they do not amount to a fixed or minimum sale price as a result of pressure from, or incentives offered by, any of the parties’; and
  • the restriction foreseen in article 4(b)(i): ‘the restriction of the territory into which, or of the customers to whom, a buyer party to the agreement, without prejudice to a restriction on its place of establishment, may sell the contract goods or services, except: (i) the restriction of active sales into the exclusive territory or to an exclusive customer group reserved to the supplier or allocated by the supplier to another buyer, where such a restriction does not limit sales by the customers of the buyer.’

While the first point provides for any action or clause that results in the franchisee being limited or restricted in being able to freely determine prices to the public to be banned (which does not prevent the franchisor from setting a maximum price range or recommending the selling price), the latter point, understood contrario sensu, leaves out the restriction to online sales;10 we will deal with this matter further on.

Likewise, article 5 VRBER sets the excluded restrictions and, in essence, regulates the non-compete clauses. As mentioned at the beginning of this section, franchises, as vertical agreements, can be left out from the prohibitions of article 101(1) TFEU. Such article alludes to those conducts that restrict competition within the member states, therefore, its terms not being applicable to franchises, the inclusion of non-compete clauses is crucial; that is, the obligation not to carry out activities that compete with those of the franchisor and its franchisees. In particular, article 5(1) specifies:

(a) any direct or indirect non-compete obligation, the duration of which is indefinite or exceeds five years; and

(b) any direct or indirect obligation causing the buyer, after termination of the agreement, not to manufacture, purchase, sell or resell goods or services.

This last provision is intended to prevent that, once the franchise contract has expired, the franchisee can continue to exploit a similar business, producing a public confusion that may lead to the belief that it is a general change of the initial franchising company11 rather than a new business that the former franchisee is carrying out.

This franchise matter also relates to unfair business-to-business commercial practices and consumer protection that are regulated under competition law in the Unfair Commercial Practices Directive.12 This is so since conflicts may arise as a consequence of the franchisee perceiving the franchisor’s exercise of discretion to be unfair.13 A certain level of discretion is vested to the franchisor because of the need of flexibility when performing the franchising contract – an inherent trait of the multilateral nature of franchising.

Article 4(a) VRBER sets a hardcore restriction (or ‘blacklist clause’) that appears to also be regulated in the Guidelines on Vertical Restraints14 regarding agreements or concerted practices having as their direct or indirect object the establishment of a fixed or minimum resale price or a fixed or minimum price level to be observed by the buyer.15 In such a manner we refer to the resale price maintenance (RPM). Conducts carried out directed to the practice of RPM activities represent a hardcore restriction as they will affect the internal market, since they restrict price competition because it may be considered intra-brand competition, and such constitutes an infringement of the provisions laid down under competition law.

As the RPM is a hardcore restriction, those franchise contracts containing provisions that enable the franchisors set franchisees resale prices is forbidden and therefore provisions allowing that to happen are considered void. Hence, here the aforementioned special care when drafting the contract becomes patent.

This restriction to the VRBER was ruled against in the Pronuptia and Yves Rocher cases we alluded to at the outset, in which concerted practices having as their object the establishment of such minimum resale prices are considered to be anticompetitive in their very nature. However, as we introduced earlier on, this kind of restriction does not prevent the franchisor from setting a maximum price range or recommending the selling price, conducts that are permitted under competition law, not being considered to restrict either competition or the functioning of the European market as it can be derived from the proclaims of the CJEU. In the Pronuptia case, the Court found RPM a restriction of competition because of its effect on inter-brand competition: ‘certain provisions restrict competition between the members of the network. That is true of provisions . . . which prevent franchisees from engaging in price competition with each other.’ The Court, however, found that price recommendations do not restrict competition ‘so long as there is no concerted practice . . . for the actual application of such prices’.16

Likewise, in the Yves Rocher case, contracts containing minimum price clauses were notified to the Commission. As per the observations made by the Commission, Yves Rocher ended up deleting the RPM provisions present in its franchise contracts before the Commission granted an exemption.17 In this case, the Commission ruled that ‘the resale price maintenance clauses and the prohibition on cross supplies between franchisees prevented the machinery for correcting price differences within the network from operating’ but did authorise through the issue of a list or catalogue of recommended prices by Yves Rocher to its franchises. The Commission noted that franchises were ‘free to set their retail selling prices at a lower or higher level, it being understood that it was recommended to them not to sell at a higher price than given in the catalogue’.18

Besides, as previously introduced, we will also cover the territory hardcore restrictions drawn in article 4(b)(i) VRBER, which refers to the restriction of active sales into the exclusive territory or to an exclusive customer group reserved to the supplier or allocated by the supplier to another buyer, where such a restriction does not limit sales by the customers of the buyer. Here the issue of what may happen with online sales arises with regard to the territory matter. According to the restriction established in article 4(b(i), it is possible to prohibit the realisation of active sales outside the territory or clientele assigned exclusively to the franchisee when another territory or clients are assigned either to the franchisor or to another franchisee. However, the online sale could not be considered an active sale; rather, the Commission understands that these are passive sales, so that the franchisee can sell and advertise products freely, as if the internet is considered passive selling, any restriction is per se anticompetitive.19

Relevant regulation in member states

Franchise-specific regulation

Where found, franchise-specific national laws have a heterogeneous nature. Therefore, they must be analysed on a case-by-case basis.

Notwithstanding the above, provisions regarding pre-contractual disclosure of information are frequently found – in France,20 Italy,21 Romania,22 Spain23 and Sweden.24 Likewise, it is customary to include provisions on registration obligations and its effects (eg, Lithuania,25 Spain26) and mandatory content within a franchise agreement (eg, Italy,27 Romania28).

The disclosure shall be notified before the signing of the contract, but terms vary. For example, French and Spanish law require the notice of disclosure to be issued 20 days in advance, with the longer period of 30 days in Italy, as established in the Italian Franchise Act. It must be noted that Swedish and Romanian law do not establish a term, though ‘reasonable’ anticipation in the Swedish Franchise Disclosure Act has been interpreted as around 14 days minimum. Sweden’s shorter anticipation term may facilitate faster establishment 0f a franchise network, but, on the other hand, it reduces franchisee protection, as often commercial evaluations and strategies must be assessed after the disclosure of information in order to calculate potential risks and opportunities.

We must highlight that unusual provisions can be found. Particularly notable is the obligation for the franchisor to have tested its commercial formula on the market before establishing a franchise agreement under the Italian Franchise Act.29 This raises the question of whether ‘pilot agreements’ are covered by the Italian Franchise Act or not.30

Non-specific regulation applicable to franchises

The absence of national specific regulations for franchises must not be confused with a liberal legal framework for franchising. Quite the contrary, member states without a specific regulation for franchises apply other regulations to franchising from varying perspectives.

On one hand, under civil law tradition, general provisions of both civil and commercial codes are applied to franchise relationships and agreements. Moreover, provisions regarding other agreements can be applied by analogy (as established in case law of domestic courts). Especially frequent is the application of the regulation of agency laws to the franchise relationship, considering that the franchisee has a similar nature to an agent.

On the other hand, case law in Germany and Germanic tradition countries considers franchisees as consumers for the application of consumer law purposes. Consequently, pre-contractual disclosure and ‘cool-off’ periods must be taken into account, with the obligation to not misrepresent estimations as factual data, franchisees’ rights to withdraw under certain circumstances, duty to act in good faith and culpa in contrahendo in the franchisor, when information disclosed is wrong or partial.

Self-regulation within the European Union

Because of a lack of clear regulations, national franchise associations have assumed the role of giving a framework for franchisors and franchisees through conventional regulation.

The European Franchise Federation

The European Franchise Federation (EFF) is an association that coordinates the actions of the national franchise associations or federations established in Europe.

The EFF has issued the European Code of Ethics, which intends to regulate the basis of relationships between franchisor and franchisees – or master franchisee and franchisees – but does not apply to the relationship between franchisor and master franchisee.

This European Code of Ethics has been assumed as part of the agreement between national franchise associations and their members, directly or with extensions, interpretations and amendments. This is the case with the British Franchise Association, the French Franchise Association, the Greek Franchise Association and the Italian Franchise Association, among others.

It must be noted that not all national franchise associations in the European Union belong to the EFF.

National franchise associations across the EU

The associative movement regarding franchising is not harmonious throughout the European Union.

First, we find countries with strong national franchise associations, who establish strong conditions to become a full member of each association. This group of national associations has issued conventional regulations, which are compulsory in order to maintain membership and have a strong influence in the marketplace. They may even influence court decisions, as a means to interpret customary practices in the sector.

Second, there are member states with young or not prevalent (ie, have a low number of members in relation to their market size) national franchise associations. This group of national associations may have issued conventional regulations but do not have the influence to press them upon the market.

Third, we find a handful of member states that do not have a national franchise association. These tend to be small-sized countries that are still moving towards the average economic power of the eurozone, such as the Baltic states, Cyprus and Malta.

Conclusion: future policies

Throughout all that has been discussed, we have observed how the lack of a proper and specific regulation of franchises generates an added complexity to this concept within the framework of the European internal market. Thus, the need for unification and harmonisation of franchising becomes tangible. In this regard, although franchising is symbiotic by nature, internal tensions between the parties are not rare. Hence, the need for unification and harmonisation of franchising becomes tangible, as a clear and consistent regulation provides a framework suitable for dispute resolution between parties.

In the absence of such a clear, certain and consistent legal framework, uncertainty hinders the spread and growth of the franchising model. Thus, the European Union strives to achieve a specific Directive to adapt the national regulation of the member states to a unified concept and fundamentals. This not only would provide a true definition, clear and concise, of the franchise concept, but would also bestow the national franchise associations of the different member states with a new role, focused on cooperation in terms of franchising regulation and providing franchise contracts with new legal certainty. This would be achieved by, inter alia, regulating the key aspects of these types of contracts, and ensuring that they do not fall within the scope of anticompetitive practices by regulating a series of mandatory clauses that every contract should comply with.

Footnotes

[1]     Javier Fernández-Lasquetty Quintana is a partner and Alberto López Cazalilla is a member of the legal and business department at Elzaburu.

[2]     Judgment of the Court of 28 January 1986. Pronuptia de Paris GmbH v Pronuptia de Paris Irmgard Schillgallis, Case C-161/84.

[3]     Kneppers-Heynert E M, gave a general description in an article in the Bijblad Industriële Eigendom (1984, No. 10, p. 251) that was accepted in the Pronuptia decision.

[4]     Commision notice, 2010/C 130/01, Guidelines on Vertical Restraints, para 189.

[5]     Commission Decision of 17 December 1986 relating to a proceeding under article 85 of the EEC Treaty (IV/31.428 to 31.432 – Yves Rocher).

[6]     Commission Decision of 13 July 1987 relating to a proceeding under article 85 of the EEC Treaty (IV / 32.034 – Computerland).

[7]     Commission Decision of 14 November 1988 relating to a proceeding under article 85 of the EEC Treaty (IV/32.3S8 – ServiceMaster).

[8]     Commission Decision of 2 December 1988 relating to a proceeding under article 85 of the EEC Treaty (IV/31.697, Charles Jourdan).

[9]     As laid down in the Annex 3 of the Unidroit Guide to International Franchise Agreements.

[10]     Ortega Burgos, E and Terrazas Terrazas, C (2015). La franquicia. Cizur Menor (Navarra): Thomson Reuters Aranzadi p. 1165.

[11]     Ortega Burgos, E and Terrazas Terrazas, C (2015) La franquicia. Cizur Menor (Navarra): Thomson Reuters Aranzadi p. 1169.

[12]     Directive 2005/29/EC of the European Parliament and of the Council of 11 May 2005 concerning unfair business-to-consumer commercial practices in the internal market and amending Council Directive 84/450/EEC, Directives 97/7/EC, 98/27/EC and 2002/65/EC of the European Parliament and of the Council and Regulation (EC) No. 2006/2004 of the European Parliament and of the Council.

[13]     Whitner, Brito and Spandorf (2007). Paper at ABA Franchising Forum.

[14]     Paras. 223 et al.

[15]     ibid.

[16]     Paras. 23 and 24 of the Pronuptia Decision.

[17]     See Commission Note, OJ(EC) No. C 95/3 of 23 April 1986: Notice pursuant to article 19 (3) of Council Regulation No. 17 concerning Case IV/31.428 to 31.432 – Yves Rocher (86/C 95/04).

[18]     Yves Rocher case, para. 30.

[19]     Ortega Burgos, E and Terrazas Terrazas, C (2015). La franquicia p.1165.

[20]     See article L.330-3 of the French Commercial Code.

[21]     See section 4 of the Italian Franchise Act.

[22]     See article 3 of the Romanian Franchise Law.

[23]     See article 3 of the Spanish Franchise Regulation.

[24]     See Swedish Franchise Disclosure Act.

[25]     See articles 6.766 and following of the Lithuanian Civil Code.

[26]     See Third Chapter of the Spanish Franchise Regulation.

[27]     See section 3 of the Italian Franchise Act.

[28]     See article 8 of the Romanian Franchise Law.

[29]     As can be concluded from the wording in the article 3, paragraph 1 of the Italian Act.

[30]     Abell, M and Ricciardi, C (2018). The Franchise Law Review, fifth edition p. 377.


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