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The COVID-19 pandemic continues to significantly affect the franchise sector, along with many others. In May and July 2020 the German Franchise Association issued a guidance document which provided an overview of the COVID-19 Mitigation Act and the associated legal issues specific to franchising. A few months on, this article examines which issues remain the most relevant for franchising practice.
Special deals are common among competing burger chains. Although this may be detrimental to franchisees, the Munich Higher Regional Court recently decided that such deals do not infringe antitrust rules. This decision deserves particular attention, as it concerns the common situation of a franchisor using non-binding price recommendations in its advertising and once again clarifies how important the asterisk reference is in such cases.
Franchisors must typically consider the extent of concept protection if franchisees which have left the franchise system reuse the concept in a largely unchanged fashion or if third-party competitors (outside the franchise system) copy the concept's main features. A recent decision concerning a fast-food restaurant franchise reinforces the IP protection of gastronomic concepts against competitors' inadmissible imitations.
Case law from the highest German courts on franchise law matters is rare, which makes a recent Federal Court of Justice decision on the subject of bogus self-employment of franchisees – a perennial issue for franchise law practitioners – even more noteworthy. The case concerned claims for payment under a licence agreement and the question of whether the licence agreement was void due to the franchisee's bogus self-employment.
The Munich Regional Court I recently established a new precedent for competition restriction, which is prohibited in franchising systems under the Act against Restraints on Competition. The court found references to "participating restaurants" in a franchisor's TV advertising insufficient and in violation of the price maintenance prohibition. This decision deserves special attention as it relates to advertising with non-binding price recommendations, which is common among franchisors.
A recent Hamburg Regional Court decision is generally understood to have solidified the first franchise-related court judgment on bad faith regarding mediation clauses rendered by the Saarbruecken Higher Regional Court in 2015. However, at second glance, the Hamburg judgment provides a different reasoning for bad faith regarding a mediation objection and might therefore serve as a new application of bad faith in future franchise-related court proceedings regarding mediation clauses.
The Bochum Regional Court recently looked at whether a franchisee's contractual obligation to operate a business can be enforced by way of an interim injunction. To grant an interim injunction to enforce the obligation to keep the business open, it must be demonstrated that the franchisor faces serious losses at least equivalent to a threat to its survival or to drawbacks that cannot later be remedied.
No compensation claim for franchisee where franchisor must block customer data when agreement terminatedGermany | 24 October 2017
The Federal Court of Justice recently ruled that an authorised dealer, such as a franchisee, has no compensation claim in analogous application of the regulation governing sales representatives contained in the Commercial Code if the franchisor is contractually obliged to block the customer data provided to it by the franchisee, to discontinue using it and to delete it at the request of the sales intermediary when the contract is terminated.
The Federal Court of Justice recently criticised a franchising advertising flyer in terms of competition law. One interpretation of this judgment is that it makes the advertising of franchise systems significantly more difficult. However, this point of view does not ultimately do justice to the decision, as the judgment does not fundamentally question the typical advertising of franchise systems.
A Brandenburg Higher Regional Court decision regarding the payment of franchise and marketing fees in arrears shows the importance of a substantiated presentation of a claim, as well as the importance of accurate, transparent and comprehensible billing by franchisors. The court could not ascertain whether there were unpaid franchise or marketing fees, as the franchisor failed to present sufficient facts demonstrating the exact amount of the franchise and marketing fees in the respective timeframes.
The Federal Supreme Court recently ruled that a franchisor's supplement containing prices stipulated as being "non-binding recommendations" obtainable only "in participating markets" constituted an act of unfair competition as the disclaimer was insufficient. The judgment raises questions about disclaimers, franchisor advertising obligations and whether franchisors are prohibited from enlisting franchisees to participate in a promotion.
Sometimes a franchisee can no longer pay some or all of the price of goods purchased from the franchisor, the rent for the premises or the franchise fees. Deferrals or instalment agreements may be among the solutions. But what happens if the concessions of the franchisor or the efforts of the parties are inadequate and the franchisee falls into insolvency?
Franchise systems work based on the handover of know-how from franchisor to franchisee. To protect know-how, the franchisor can impose confidentiality obligations on the franchisee, even after the franchise agreement has ended. Methods of know-how protection should be dealt with in franchisee training in order to create awareness throughout the franchise system.
The Munich Higher Regional Court recently dealt with a case of termination without notice due to breaches of a franchise agreement by a franchisee. The court dismissed the franchisee's claim since the termination was ultimately valid. The court concluded that each individual breach did not justify termination without notice; only on considering all breaches together did termination without notice appear defensible.
A commercial agent has a right to compensation at the end of a contract for the customer base it has established. The Federal Court of Justice has yet to clarify whether this applies analogously to franchisees – although it recently confirmed that franchisors will no longer be exposed to such a claim if their agreements do not contain an obligation to assign the customer base and such an obligation does not arise from other circumstances.
An advertiser must display its identity on advertisements. Most advertisements do not have the space to list numerous franchisees and for this reason, supra-regional advertising by franchisors usually carries a footnote. According to the Dusseldorf Higher Regional Court, a footnote may breach the Act against Unfair Competition because the advertising does not list the identity of all participating dealers.
Every franchisee independently markets the franchise as a self-employed businessperson. This applies irrespective of the legal form that the franchisee selects for operating the franchise. The Regensburg Social Court recently considered whether a franchisee operating as a real estate agent was subject to statutory pension insurance contributions as a self-employed agent in accordance with the Social Code.
A landmark higher regional court judgment from 2011 provides crucial guidance on the form and extent of a franchisor's obligation to disclose the profitability of its franchise system. The court had to consider whether the franchisor had satisfied its pre-contractual disclosure obligations when presenting profitability projections to a prospective franchisee.
A higher regional court recently questioned the extent to which unfair imitation arises if a franchisee continues to operate a franchise restaurant with an identical range of products, but under another label and colour concept. The court decided that the continuation of the defendant's sandwich restaurant at the same location under the name 'fresh!' was not prohibited as a hindrance to fairness.
The Dortmund Regional Court recently held that statutory prerequisites regarding proper instructions apply to a contractually agreed withdrawal right; it made clear that before entering into a franchise agreement, it should be determined whether the franchisee has a right of withdrawal. If it is standard practice to include instructions on exercising a right of withdrawal in every agreement, these must comply with statutory requirements.
Franchisors must observe statutory information obligations when advertising. A reference to the franchise trading name entered in the Commercial Register and the address of the management headquarters must be provided, even if the advertised products are not sold there. Failure to state this information is a breach of competition law and the franchisor risks a warning.
The Federal Court of Justice recently held that that the expiry of a main copyright licence agreement does not lead to the expiry of the related sub-licences. The question is whether and to what extent this also applies to master franchising. Under a master franchising system, the franchisor concludes a master franchise agreement with a master franchisee, which is given the right to grant sub-franchises.
A contractual non-compete clause in a franchise agreement was at the centre of a case before the Dusseldorf Higher Regional Court. Its decision concerns the prerequisites for a franchisee's claim to information where it has reasonable suspicion of its franchisor having breached a contractually agreed non-compete obligation, and the right to claim damages from the franchisor.
The Dusseldorf Higher Regional Court recently ruled that a contractual duty of protection against competition on the part of the franchisor can arise only if the financial survival of the franchisee is at sustained risk due to competing activity. The court explicitly left open the question of whether the franchisor has a contractual obligation to protect against competition over and above the contractual provisions in principle.
Whether supplier rebates received by a franchisor are passed on to franchisees is a subject of practical importance in franchising. The Federal Court of Justice had previously ruled that a franchisor is not obliged by law to pass on these benefits to franchisees, except in cases where such an obligation has a contractual basis within the franchise agreement. The Dusseldorf Higher Regional Court recently confirmed this.
Contractual penalties are of great significance, especially in franchising. This is because losses arising from causes such as a breach of a non-compete provision or a confidentiality obligation relating to know-how are very difficult to quantify. The Erfurt District Court recently considered a contractual penalty clause and set strict criteria for its validity, in line with previous case law. In order for the clause to be valid, the court required penalties to be limited in cases of multiple breaches of the prohibition on competition.
The Dusseldorf District Court recently dismissed a breach of good faith claim. While the ruling did not concern a franchise system, its reasoning may be extended to similar situations within franchise systems. The judgment is therefore significant for franchise systems, especially since there are few rulings on the topic of imminent competition protection.
The Mönchengladbach Regional Court has held that a franchisee has no claim to compensation under Section 89b of the Commercial Code, analogously applied, if it is not contractually obliged after the end of the contract to transfer the customer base to the franchisor. The de facto retention of the customer base by the franchisor is not adequate to establish such an analogy.
The demarcation between the status of an employee and that of a franchisee determines which court has jurisdiction over disputes and whether labour law and social insurance law apply. In the commercial respect too, the demarcation can be significant for the franchisor, considering the social insurance law contributions which must be paid by the employer for its employees.
The Dusseldorf Higher Regional Court recently clarified in unexpectedly clear form that even a strict integration of a franchisee by contractual provisions which leave him or her only limited commercial discretion is not subject to any legal objection if these provisions are necessary, for example, for the maintenance of quality standards typical of the system.
The possibility of dismissing an employee without notice because he or she is suspected of a crime has long been acknowledged in German employment law, and these principles have often been applied to recurring contractual relationships in other areas of law. However, until recently the higher courts had not ruled on the application of the principles of dismissal on suspicion to franchising.
In light of a recent Federal Supreme Court ruling, a valid obligation to participate in the pre-authorized withdrawal method will be difficult to secure under general conditions. Measures to mitigate the unreasonable detriment to the franchisee of using the method are worth considering. The advantages of agreeing to use the pre-authorized withdrawal method should be weighed carefully against the associated risks.
A Federal Cartel Office decision in which a company was found to have exerted pressure on its dealers in seeking to impose price stabilization measures has serious implications for franchisors. Parties exchanging information within franchise systems must bear in mind the broad interpretation of the term 'exercise of pressure' in the ruling, and internal communications should avoid the phrase 'price monitoring'.
In general, a franchisor cannot be held liable for the actions of a franchisee. However, an important exception to this applies to competition law. The Federal Supreme Court recently held that a franchisor was liable for a franchisee's advertising practices in breach of competition law, despite the fact that the franchise contract clearly informed the franchisee that such practices were not permitted.
When agreeing upon the jurisdiction which is to apply to a franchise agreement, a review must be made as to whether that law recognizes a fairness test for general conditions of business. If that is the case, a remote place of arbitration should not be agreed so as to avoid problems with the recognition and execution of arbitration awards.
When termination for good cause is invoked, it is often to end business agreements which have been projected into the long term. Furthermore, such agreements are often connected with major investments on the side of both parties. The law therefore sets out relatively onerous requirements that must be fulfilled before termination for good cause can take place.
A recent decision highlights that if a franchise agreement to be concluded in Germany is to be made subject to a foreign law, the question of whether that law provides a fairness test for general conditions of business must be asked. If German law is applied, a place of arbitration which is far away and outside Europe should not be chosen.
For a long time it has been unclear whether franchisees are required to make statutory pension insurance scheme contributions. However, a recent judgment of the Berlin-Brandenburg State Social Court suggests that they may be required to do so if, despite the lack of a formal legal bond, they are financially dependent on mainly one principal.
Externally a franchise system is perceived as a single business rather than as a group of legally independent entrepreneurs. However, it does not follow that the franchisor becomes contractually bound by contracts between the franchisee and the customer. The Federal Supreme Court recently dealt with a case which clearly illustrated the problem.
Repayment systems are evident in many franchise systems. The suppliers to the system grant the franchisor discounts depending on the purchase volume from franchisees. In a recent decision, the Dusseldorf Higher Regional Court dealt with this issue with refreshing clarity and confirmed that the law does not oblige the franchisor to pass on any part of these benefits to the franchisees.
The provisions on internet sales found in franchise agreements vary considerably, ranging from a total ban to a partial restriction with qualitative requirements imposed on the franchisee's internet presentation. The Berlin Regional Court recently ruled on whether a manufacturer was entitled to prohibit the sale of goods by a distributor via an auction platform.
Franchise agreements which are based on model agreements deriving from foreign law frequently contain a considerable number of clauses which - although lawful in their country of origin - cannot be enforced under German law. If the court establishes a large number of unreasonable clauses the consequences can be dramatic: it could hold the entire franchise agreement to be against good morals and therefore invalid.
Many franchise systems place an obligation on the franchisee to obtain some or all of its products from the franchisor or from suppliers designated by the franchisor. Such exclusive purchase obligations can restrict competition. A recent court decision has tightened the requirements governing the admissibility of a 100% purchase obligation lasting for more than five years in a franchise agreement.
A commercial agent may claim reasonable financial compensation from the enterprise for which it acted following termination of the commercial agency contract. There is initial agreement that a similar compensation claim can accrue to a franchisee against a franchisor, but whether the matter depends on an express contractual obligation to transfer the established clientele has not yet been clarified.
A German court has held, with regard to a German-US commercial agency agreement stipulating the jurisdiction of the US courts in case of dispute, that the mandatory provisions on a commercial agent's claim for compensation under German law cannot be undermined by such a stipulation. This update examines the implications for franchise agreements.
The 2002 Federal Ministry of Justice model instruction on the right of revocation is not in line with the Civil Code. It is thus unclear whether the model instruction is invalid, with the result that, where it is followed, the franchisee will be considered not to have been properly instructed on the right of revocation. A regional court recently stated its opinion on this issue for the first time.
In many cases franchisors receive purchase benefits from their suppliers in the form of price discounts (eg, rebates, quantity discounts, differential discounts) which are calculated according to the quantity of goods purchased by the franchisees. In recent years the question has arisen as to whether and to what extent the franchisor must pass on such benefits to the franchisee.
Many franchise agreements authorize the franchisor to collect amounts due (eg, franchise fees) directly from the franchisee's account. This has many benefits for both parties. However, granting direct debit authorization to the franchisor within a franchise agreement must be judged according to the law on standard terms and conditions. Therefore, a direct debit authorization clause must be equitable.
Under the Commercial Code, a commercial agent is entitled to claim compensation, once the commercial agency agreement terminates, for the benefits which the principal will continue to gain without having to pay commission to the agent. A court held that such a claim does not arise if the commercial agent or franchisee was insolvent prior to or at the time of termination of the agreement.
The Federal Court of Justice has ruled that a contracting party is deemed a businessperson at the time of the conclusion of the contract through which he or she takes up or prepares for his or her activities as a businessperson. The decision means that it is no longer necessary to observe the provisions on consumer protection when entering into a franchise agreement.
A recent Federal Court of Justice decision indicates a new approach towards price fixing which is of great importance for promotion campaigns within a franchise system. It confirms that franchisors and franchisees can offer consumers a particular benefit in the form of additional free units of a product. However, a new implicit criterion of admissibility applies: the threshold of imperceptibility.
In the wake of a recent regional court decision, franchisors are advised to disclose expressly to potential franchisees both the origin and the age of figures provided during contractual negotiations with regard to expected profits and profitability. An argument that there has been contributory fault on the part of the franchisee will not prevail in most cases.
Section 89b of the German Commercial Code entitles a commercial agent to compensation upon termination of the contract, since throughout the duration of the contract the agent builds up an established clientele which the principal can continue to use. Two German courts recently awarded such compensation to franchisees for the first time.
The Federal Court of Justice has ruled that a franchisor was obliged to pass on to its franchisees all purchase benefits it had negotiated for franchisee purchases in framework agreements with suppliers. It based this conclusion on the interpretation of a general contractual clause which required it to pass on all "benefits...in order to achieve the best possible business success".
In a recent case the franchisor continuously sent its franchisees price lists and advertising material, and entered sales prices into a centralized IT system. Its communications failed to indicate that the prices given were non-binding recommendations. This practice was found to breach the provisions on pricing recommendations set out in German competition law.
Franchisees who are obliged to obtain services on a long-term basis will no longer be able to invoke a right of withdrawal, since this right has been rejected by Germany's highest civil court. Where a franchisee who assumes a recurrent obligation to obtain services nonetheless seeks to secure a right of withdrawal, this right must be expressly agreed by contract.
The Higher Regional Court of Hamburg has considered whether a franchise entry fee must be repaid proportionately in case of early termination of the franchise agreement. If a franchisor wishes to avoid repayment, the entry fee must be designed so that it is paid only in consideration of the system development costs advanced by the franchisor.
When entering into a franchising agreement the parties can agree on a saving clause, which protects the validity of the agreement should one clause prove invalid. However, a new ruling now provides that the entire agreement will be found invalid, notwithstanding the inclusion of a savings clause, if one party can prove that it would not have been concluded without the invalid clause.
Under German law a franchisee has the right to revoke the franchise agreement if it obliges him or her to buy goods from the franchisor on a regular basis. The franchisor must notify the franchisee of this right of revocation before the contract is concluded, and must meet certain strict requirements when doing so.
Two regional courts have confirmed that franchise agreements do not fall under EU rules which prohibit non-compete clauses of more than five years’ duration. However, the courts did not consider the possible invalidity of non-compete clauses that cover time periods lasting beyond the expiration of the franchise agreement.
A franchisor is obliged to protect its franchisees against competition if the parties have explicitly agreed on territorial protection in the franchise agreement. However, where there is no such contractual obligation, case law suggests that the franchisee will rarely enjoy such protection.
A recent Federal Supreme Court decision has clarified the extent of the franchisor's responsibility for its franchisees under the Act against Unfair Competition. The court has ensured that the financial burden resulting from a franchisee's misconduct rests with the law-breaching franchisee, not with the franchisor.
A German court has clarified that a party who concludes a franchise contract which marks the start of his or her entrepreneurial activity will be regarded as a merchant and not as a consumer. Thus, the stringent consumer protection provisions of the Standard Contracts Act will not apply to the franchise contract.
Franchisors must refrain from providing misleading information on the success of their franchise and must disclose all associated risks in order to avoid subsequent damage claims. Information which implies that success is guaranteed may lead to liability on the basis of a breach of pre-contractual disclosure obligations.
German law is very strict on the issue of resale price fixing. Franchise agreements that in any way restrict the franchisee's freedom to determine prices with respect to agreements entered into with third parties are prohibited, while even the recommendation of resale prices is forbidden for services or non-branded goods.
Although there is no special provision governing the termination of franchise contracts without notice in Germany, court decisions confirm that such terminations are generally admissible. However, this may only be effective if there is an important reason for termination, especially in the case of long-term franchise agreements.
This update sets out the conditions under which a consumer is entitled to revoke a franchising contract, and how this may be effected.