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15 September 2020
The EU Vertical Block Exemption Regulation (VBER) will expire on 31 May 2022 and the European Commission is reviewing its effectiveness to determine whether:
This article explores the process so far and examines what this review means for franchising.
A franchise or distribution agreement is at risk of infringing EU competition law if it has the object or effect of restricting competition and is capable of affecting trade within the European Economic Area.
The equivalent domestic competition rules apply if trade in an EU member state is (or is capable of being) affected by the agreement in question.
In order to maintain uniformity, protect know-how and operate a network effectively across sales channels and geographies, a franchise agreement will often seek to regulate areas such as:
However, competition law prohibits 'hardcore' restrictions (eg, restrictions of a franchisee's ability to set its own prices or a ban on its ability to sell online) and allows certain other types of restriction only if:
An infringement of competition law can lead to substantial fines for the parties concerned. The non-financial implications are equally severe, including:
A number of household brands have recently fallen foul of these regulations, including Guess, Casio, Hello Kitty, Nike, Universal Studios and Ping.
On 8 November 2018 the European Commission published an evaluation and fitness check roadmap for the VBER.
On 4 February 2019 the commission launched a public consultation, by way of an online survey, to collect views and information on the relevance of the VBER and its accompanying Guidelines on Vertical Restraints (VGL).
On 13 December 2019 the commission announced the publication of the national competition authorities' contributions to the review. The authorities highlighted a number of issues which they consider need to be addressed.(1)
On 5 February 2020 the European Commission published a summary of the discussion at a stakeholder workshop held in November 2019. The topics discussed included franchising-related issues (in particular, the transfer of know-how), as well as broader concerns.(2)
As touched on above, a key area of importance with regard to the VBER and franchising concerns the transfer of know-how.
Know-how is a crucial characteristic of the franchising distribution model. The know-how being transferred will not always be technical – it can simply be such know-how which enables a franchisee to present itself as offering the same quality of products or services as other franchisees. Nevertheless, this is the cornerstone of the model which allows for consistency across the network.
There is a distinct absence in the VBER of definitions of 'franchising' and 'know-how'. There also needs to be more clarity that both concepts are directly associated.
Concerns raised in the European Commission's consultations regarding retail price maintenance (RPM) also have particular application to franchising, with some franchise stakeholders commenting that RPM can promote the common identity and reputation of a franchise network.
Many franchisors will keenly wait to see whether there will be any further relaxation in this area to reflect the specific nature and identity of franchises.
In general, stakeholder responses to the European Commission's consultations highlighted that there should be clearer examples in the VGL of how vertical restraints may affect both franchisors and franchisees to enable an easier application of the VBER to particular issues which primarily affect the franchise relationship.
More clarity is needed in the VBER and the accompanying guidance to ensure that the important pillars of franchising – such as the transfer of know-how – are protected and more thought should be given to this specific arrangement so that franchisors and franchisees can benefit from the safe harbour of the VBER.
The majority of the respondents to the European Commission's consultation support the prolongation of the VBER, but the key topics highlighted by stakeholders show that there is a need for revision in light of the current market – particularly in terms of the explosion of the e-commerce market.
The review of the VBER provides a valuable opportunity for specific franchising concerns to be raised and hopefully taken on board so that a revised VBER provides adequate protection for franchises.
The review is now in the impact assessment phase, the purpose of which is to:
The impact assessment phase will take approximately 24 months, so a final determination is expected shortly before the VBER expires in May 2022.
For further information on this topic please contact Gordon Drakes or Rachel Bowley at Fieldfisher LLP by telephone (+44 20 7861 4000) or email (firstname.lastname@example.org or email@example.com). The Fieldfisher LLP website can be accessed at www.fieldfisher.com.
(1) Further information is available here.
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