Franchisor's change of control and its impact on renewing existing franchise contracts

Facts
Procedure
Decision
Comment

Can a franchisor be held liable if, following its acquisition by another industry player, it decides not to maintain the existing network of franchises but rather to deploy its own brand and outlets instead? On 3 April 2019 the Paris Court of Appeal held that a franchisor had not breached its duty of loyalty towards its franchisee in reorganising its business following its change of control.

Facts

Citer was a car rental subsidiary of PSA Peugeot Citroen, created in 1968. In 2011 PSA Peugeot Citroen announced the sale of Citer to Enterprise Holdings, the owner of Enterprise Rent-a-Car, National Car Rental and Alamo Rent-a-Car. Enterprise Holdings already had several outlets in France at that time – a majority of which were owned by Enterprise Holdings. Only a few outlets were franchised.

As Enterprise Holdings decided to deploy its own brands in France through its own branches and not to maintain the Citer network of franchises, Citer did not renew 18 French franchises operating in 32 French cities (out of 21 franchises) which all terminated on 31 December 2013.

A number of lawsuits opposed several French franchisees against Citer – in particular, they claimed that Citer had breached its duty of loyalty in the context of the reorganisation of its business to their detriment.

In the case at hand, Loc Avantage had entered into a franchisee contract with Citer on 13 March 2006 for two franchises near Paris. The franchise contract had a four-year term, which was tacitly renewable for two years. When the initial four-year term expired, it was tacitly renewed until 12 March 2012. In January 2012, two months before its expected expiry, Loc Avantage and Citer entered into a two-year new franchise contract, effective from 1 January 2012 and ending on 31 December 2013, which was not tacitly renewable.

Following Enterprise Holdings' acquisition of Citer, Citer eventually informed its franchisees that it would not renew the ongoing franchise contracts. In this context, on 17 December 2012 Loc Avantage was informed that its franchise contract would terminate one year later, on 31 December 2013.

Procedure

On 15 April 2014 Citer filed a lawsuit before the Paris Commercial Court against Loc Avantage to obtain payment of various sums due under a separate cars lease contract. Loc Avantage counterclaimed that, among other things, Citer had breached its duty of loyalty when it reorganised its business following its acquisition by Enterprise Holdings and applied for damages. On 9 February 2017 the Paris Commercial Court ordered Loc Avantage to pay various sums to Citer under the cars lease contract and dismissed its counterclaim.

On 10 March 2017 Loc Avantage appealed this decision before the Paris Court of Appeal. Citer maintained its initial claim. Loc Avantage also maintained its request for damages – in particular, it asserted as follows:

• Loc Avantage and other French franchisees had been misled by Citer at a national seminar of franchisees held in November 2011, during which Citer claimed that it wanted to develop a long-term commercial relationship with them and that its new shareholder would not modify the franchises. According to franchisees' statements to the press, Citer orally confirmed that new franchise contracts would be executed as soon as Enterprise Holdings organised its activities in France.
• The execution of a new franchise contract in January 2012, just before the then-existing one expired, demonstrated that Loc Avantage was justified in believing that the commercial relationship would last and be renewed as in the past. According to franchisees' statements to the press, they had executed these new franchise contracts having relied on Citer's statements that Enterprise Holdings would not stop them. As many other franchisees, Loc Avantage claimed that the execution of multiple new franchise contracts, all of which had a limited and short two-year term, was deliberately aimed at enabling Enterprise Holdings to simultaneously terminate all of them from the same date and set up its own outlets. It further claimed that this allowed Enterprise Holdings to take over the businesses developed by the franchisees at their own expenses without having to purchase them.
• Citer, which held the trademarks NATIONAL and ALAMO, abruptly completed its brand change following the sale of these trademarks to Europcar and informed the franchisees only on 31 December 2012 that this change would be effective from 1 February 2013.
• Citer made no communication to announce this brand change, thus confusing its clientele.

Consequently, Loc Avantage claimed €880,000 in damages for:

• loss of business from September 2012 to December 2013;
• loss of business for all of 2014; and
• loss of opportunity to change its activity in satisfactory conditions.

Decision

On 3 April 2019 the Paris Court of Appeal upheld the Paris Commercial Court's decision, dismissing all Loc Avantage's claims.

The court considered as follows:

• Since the initial franchise contract was to expire on 12 March 2012, it was normal for the parties to execute a new franchise contract on 20 January 2012. Further, Loc Avantage had failed to demonstrate that Citer had undertaken to renew the franchise contracts and maintain the existing network of franchises for the future. Notably, the court relied on the terms of the new franchise contract, which clearly stated that "the contract shall enter into force as from 1 January 2012 for a period of two years" and "it is not tacitly renewable".
• Loc Avantage's manager was a professional businessperson who in no event could have misunderstood the meaning of the new franchise contract that he had signed, including the fact that it was not renewable automatically and could not validly claim that Enterprise Holdings had breached its duty of loyalty.
• Citer communicated its brand change, having informed its clients that it would be effective from 1 February 2013. Notably, the court reiterated the terms of the pre-contractual disclosure documentation issued at the end of 2011 which mentioned that, as a result of its internal reorganisation, Citer could no longer have the right to use its trademarks NATIONAL and ALAMO.

Comment

To support its claim that the franchisor had breached its duty of loyalty in refusing to renew its franchise contract, the franchisee mostly (if not exclusively) referred to the circumstances which surrounded the execution of the new franchise contract (which had a short and non-renewable term). According to the franchisee, the franchisor:

• made its franchisees execute such contracts, the term of which were purposely short and non-renewable; and
• told them not to worry since its buyer would not change the existing network of franchises.

However, the court considered that the franchisee had failed to demonstrate its assertions. It relied on the terms of the franchise contract and the contents of the pre-disclosure documentation – both of which had anticipated this upcoming reorganisation. The new franchise contract expressly stated that it was not renewable and the pre-disclosure documentation expressly indicated that the franchisor could no longer have the right to use its trademarks.

Had the franchisee been able to demonstrate any misrepresentation by the franchisor when the new franchise contracts was executed, the court would probably have ruled otherwise. In the context of an internal business reorganisation, franchisors should therefore be careful in statements that they may make to franchisees, including in the pre-contractual disclosure documentation.

For further information on this topic please contact Raphael Mellerio or Bertrand Baheu-Derras at Aramis Law Firm by telephone (+33 1 53 30 7700) or email (mellerio@aramis-law.com or baheuderras@aramis-law.com). The Aramis Law Firm website can be accessed at www.aramis-law.com.