Franchise and New European Rules on Vertical Restraints

Franchise agreements have specific features that allow them not to be considered as restrictions of competition, despite the existence in these agreements of clauses that are generally considered to be vertical restrictions of competition. The new Regulation (EU) No. 2022/720 on the application of Article 101(3) of the TFEU to categories of vertical agreements,  which entered into force on June 1, 2022 (the « Regulation »), (See our June 2022 News), which does not cover expressly franchising and does not provide a definition of franchising, is no exception to this rule. The Regulation and its Guidelines nevertheless provide clarifications concerning certain modes of distribution which also apply to franchise agreements.

The franchise system is – classically – not considered as restriction of competition

Despite the lack of any mention of franchising in the Regulation, the Guidelines recall that the franchising regime does not fall within the scope of Article 101(1) of the Treaty on the Functioning of the European Union (« TFEU ») because of its specific characteristics (use of a trade name and uniform business methods, payment of royalties in return for the benefits granted, etc.), which are justified, in particular, by the transmission of know-how by the franchisor to the franchisee and the protection of the franchisor’s intellectual property rights.

Certain practices, generally considered as vertical restraints, benefit from a favorable regime when they are stipulated in a franchise agreement, and when the market share of the franchisor and that of the franchisee do not exceed 30%. Thus, non-competition clauses applicable during the term of the agreement and exclusive supply clauses may have an indefinite duration, provided that their duration does not exceed the term of the agreement (whereas their duration is in principle limited to 5 years by Article 5.1 of the Regulations). The Regulation and the Guidelines do not innovate on these points.

News developments provided by the Regulations or Guidelines apply to franchise agreements

By reference to existing distribution schemes

The Guidelines traditionally call for the assessment of vertical restraints included in franchise agreements by reference to the distribution system that best fits the franchise agreement in question. As a result, the following contributions may be applicable to franchising:

• In case of territorial exclusivity: the Guidelines call for reference to the exclusive distribution regime (See our May 2022 News).
   
• In the case of a prohibition on resale outside the network: the Guidelines call for reference to the selective distribution regime, and now allow franchisees and their customers to be prohibited by franchisor from selling to non-franchisees in the territory in which the franchisor operates its selective distribution network.
   
• Consequently:
   
  • The new definitions of active and passive sales are applicable to franchising. A franchisor cannot prohibit passive (unsolicited) sales to its franchisees outside their territory, however, restrictions on active sales are exempted.
     
  • Online sales: the franchisor may not prohibit the franchisee from selling online, or even from establishing or using its own online sales site, or from advertising online. The prohibition on the use of third-party platforms remains exempt, however, in application of the Coty case law now endorsed by the Guidelines.

By reference to other types of distribution

Other new developments of the Regulation and Guidelines (See our May 2022 News on exclusive distribution, and in June 2022 News about online sales) may also apply to franchise agreements:

• Dual distribution: where a franchisor sells to both franchisees and end-customers in the same territory, the exchange of information may now be exempted if the information is (i) directly related to the implementation of the agreement, and (ii) necessary to improve the production or distribution of goods or services. On the other hand, the Guidelines consider for instance that (i) exchanges of information on the supplier’s or buyer’s future prices as well as (ii) detailed information allowing the identification of the final customer cannot be exempted.
   
• Resale Price: The franchisor’s pricing policies must not conceal a minimum resale price, either directly or indirectly, except in the following cases:
   
  • New product launches, for a limited period of time; 
  • Promotional campaigns, for a limited period of time (from 2 to 6 weeks);
  • To prevent a franchisee from using a franchisor’s product as a loss leader and thereby damaging the brand image;
  • To allow franchisees to make an additional margin on additional pre-sales services, particularly in the case of complex products;
    In the context of a performance contract, if a customer contacts the franchisor who decides that the sale will be made by the franchisee.
     
• Dual pricing: The practice of dual pricing, whereby a franchisor sets different wholesale prices depending on the choice of distribution channel (physical or online) operated by its franchisee, is no longer considered a hardcore restriction, as long as (i) such price differentiation encourages or rewards the franchisee’s level of investment in the distribution channel in question, and (ii) does not have the purpose or effect of depriving the franchisee of the possibility of selling the products online (see above).

What Altaïr Avocats can do for you

• Setting up, developing and/or restructuring franchise networks;
• updating and auditing franchise agreements;
• advising master-franchisor and master-franchisee;
• assistance in the context of investigations by competition authorities;  
• representation in litigation before the competition authorities and in court.