Regulation 4087/88 adopted a definition for "franchising" as being a bundle of legal rights and obligations which apply to a specialised form of distribution involving permitted use of "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". Regulation 4087/88, Article 1 (3)(a).

The typical franchise agreement is drawn up by the franchisor in accordance with the law of a particular country and with a view to protecting the identity and reputation of the franchise network by placing certain obligations on the franchisee, including, the duty to purchase and to re-sell only products which are manufactured by the franchisor or by parties designated by it; prohibiting the franchisee from engaging in a competing business or from selling the franchised business without the consent of the franchisor; requiring the franchisee to comply with the franchisor's standards for maintenance of the operation; requiring the franchisee to pay a franchise fee and often requiring the franchisee to make a capital investment and to contribute to a common franchise network advertising budget. Although the definition quoted above was omitted from Regulation 2790/1999, which superseded Regulation 4087/88 (as of 1 January 2002), it is still a valid framework for summarising the law of franchising in Europe.

In all European countries, one can see business operations (usually in the fast food distribution field) which may appear outwardly to be franchise operations (familiar signs, logos, business methods). In fact, many of these may be wholly owned and operated by the trademark owner and hence may not be franchises per se. This Chapter will focus on the European legal rules which directly impact upon the above-defined type of franchise, involving a franchisor and a third-party franchisee. Given some local differences, the law of franchising in Europe is represented by a well established body of legislation and case law. The examples given here may be taken as representative of the law of Europe on the subject.

No European country has a detailed statute which specifically addresses all the major legal issues which may arise in setting up and operating a franchise. However, useful starting points are the definition (as above) and Regulation 2790/1999, setting forth rules regarding permissible vertical restraints of the type necessary to bind the franchisee to the precise manner of conducting business required by the franchisor and thereby limiting the ability of the franchisee to compete or behave otherwise.

Even before the promulgation of Regulation 4087/88, the ECJ had set forth in quite some detail the legal regime applicable to franchises and the limits of private parties to agree upon restrictive contractual terms. In Pronuptia de Paris v. Schillgallis (Case 161/84, decided 29 January 1986) [1986] ECR 353, the court was faced with a franchising operation involving wedding clothing and accessories. When the German franchisee defaulted on her royalty (franchise fee) payments, she argued by way of defence that the franchise agreement violated the antitrust provisions of Article 81 of the EU Treaty. The Court determined that each franchise agreement must be examined on the basis of its individual legal provisions and economic basis and then broadly upheld as permissible restraints imposed by the franchisor with respect to measures necessary to restrict access by competitors to the

franchisor's special know-how, as well as restraints necessary to retain the identity of the common name or brand within the franchising network, but cautioned against measures that involve market-sharing and price maintenance or prohibit franchisees from obtaining approved products from other franchisees. Similarly, Remia ("Nutricia") BV v. EC (Case 42/84 decided 11 July 1985) [1985] ECR 2545 (validity of non-compete clause).

Regulation 2790/1999 creates a presumption of invalidity for franchise agreements where the franchisor controls a market share in excess of 30%. It also prohibits certain restrictive clauses in franchise agreements (resale price maintenance; prohibition of cross-supply between franchisees of the same franchisor; absolute territorial restrictions).

Local laws relating to contracts and unfair contract terms, employment, retail trade, unfair competition and trademarks also come into play, as do local laws relating to the operational specifics of the business, for instance

health and food safety, in the case of food distribution franchises. In Germany, for instance, it has been held by the German Supreme Court ("Bundesgerichtshof' (BGH)) that a franchise agreement whereby the franchisee becomes a virtual employee, with no freedom of independent decision but bearing substantial commercial risks, will be invalid and can result in a duty by the franchisor to reimburse the franchisee for the investment. BGH (German Supreme Court) NJW [1987], page 639; BGH [1982] (Der Betrieb, page 846). Similarly, under the German UWG ("Gesetz gegen den unlauteren Wettbewerb", Law Against Unfair Competition), it has been held invalid for the franchisor to set up arrangements which create a saturation program of franchisees in the same

geographic area. OLG Munich (Munich Higher Regional Court), NJW [1986], page 1880 (unfair snowball or pyramid scheme to recruit new franchisees); LG (Regional Court) Karlsruhe NJW-RR [1989] page 822

(licence fee grossly disproportionate to economic realities of the prospects for the business). [

In Germany, the law of franchising is further embodied in various other laws (such as Section 242 of the Commercial Code, on good faith dealings in business transactions, which has been interpreted as meaning that the franchise agreement must have a term limit which allows the franchisee a reasonable time within which to recover the investment). Many cases hold that under some circumstances the franchisee may have some of the protections of an employee (Eismann case, BAG (Federal Labour Court) NJW [1997], page 2973, and BGH NJW [1999], page 218). The German Supreme Court in S. v. E. GmbH (140 BGH Z [1998] 11-25, decided 4 November 1998, examined in detail the factors determining a "franchisee" as opposed to an "employee" or "employee-like" person) but there is a tendency to rule against employee status unless the facts preponderate in that direction. BGH Case VIII ZB 27/02, decided 16 October 2002

(no finding of employee status).

In particular, franchise agreements may also be subject to the German law on standard contracts (pursuant to provisions of the Civil Code dealing with "Standard Contract Terms", which are mandatory for certain contracts) and may further be subject to the revised German law of obligations in the Civil Code ("Gesetz zur Modernisierung des Schuldrechts", from 1 January 2002) and the Consumer Credit Act (VerbrKrG, "Verbraucherkreditgesetz"). German statutory law and numerous cases invoke the principle of "culpa in contrahendo" (wrongdoing in contracting) in favour of the franchisee, where the franchisor has failed to disclose information essential for the franchisee to make an informed contracting decision. OLG Munich NJW [1994], page 667.

In France, the pre-contractual disclosure duties of the franchisor are made more specific by statute. The Law Doubin (Law dated 31 December 1989) and its companion Decree 91-337 of 4 April 1991, require a variety of detailed disclosures including the proposed franchise business, its location and its activities, the activities expected of the franchisee, the background of the evolution of the franchise network and other specific investment information, including the state of the marketplace in which the business is expected to operate. These laws are supplemented by various related civil and criminal code provisions, such as Article 1166 of the Civil Code (relating to rescission of illegal contracts). For example, in the Hypromat case, residential neighbours near a franchised car washing operation complained about it as a nuisance, and the French Cour de Cassation (French Supreme court) adjudged the franchisor and franchisee co-liable, in the proportion 2/3 and 1/3. Hypromat France v. Soginorpa, Recueil Dalloz [1998] (case decided 21 May 1997), Jurisprudence pages 150-153.

Somewhat at the other end of the regulatory spectrum, it has been held in France by the Conseil de Concurrence (Competition Commission) that minor promotional items required by the franchisor to be purchased by the franchisee did not constitute violations of French competition law (Affaire Zarmier CC 96/D-36 (decided 28 May 1996)) to which the French Court of Appeal added the comment that, since there was no statutorily fixed "threshold of sensitivity" each such case must be evaluated by the courts on its own facts and merits and with respect to the potential for negative impact on the freedom of competition. Zannier, Recueil Dalloz [19991 (decided 18 March 1997), IR, pages 24-25.

Rules similar to the French ones exist in Spain, including EU Regulation 2790/99 which of course applies in all EU countries; Law No. 7/98, of 13 April 1998 (Terms and Condition of the Contract); Article 62 of Law No. 7/96, on the regulation of retail commerce; Law of Agency No. 12/92, of 27 May 1992; various provisions of the Civil Code; Law No. 3/91 on Unfair Competition; and Law No. 16/89, of 17 July 1989, on the Defence of Free Competition, as implemented by Royal Decree No. 157/92.

Italy has not yet enacted specific legislation to regulate the franchise relationship and instead uses established principles of contract law and

commercial law to regulate franchising in relation to the pre-contractual disclosure issue and contract negotiation issues. The impact and the results are substantially the same as in France, Germany, the UK and most other EU countries.

Italian rules governing "standard adhesion contracts" may sometimes be applied by the courts to franchising arrangements, thereby mandating terms which will bind the parties, whether expressed in their agreement or not. For example, Article 1337 of the Italian Civil Code may require the franchisor to disclose to the prospective franchisee all the relevant economic terms of the proposed operation and otherwise to act in good faith (also required by Articles 1366 and 1375). As in Zannier, the Italian courts exercise substantial discretion in determining what "good faith" means under specific circumstances. Thus, in Februo v. Stefanel (Tribunale di Chieti, 29 October 1987, in JIFDL, 1991, page 39), the Chieti District Court applied the doctrine culpa in contrahendo to franchising and banned a post-negotiation term (a personal guarantee from the prospective franchisee) that was introduced into the proposed contract terms by the franchisor without fair prior notice and after the "negotiations had reached a certain advanced stage of collusiveness".

Many European countries also have franchise associations whose members are bound by the European Code of Ethics for Franchising (ECEF), itself a response to Regulation 4087/88. The ECEF now requires its members to give prospective franchisees "full and accurate written disclosure of all information material to the franchise relationship, within a reasonable time prior to the execution of [the] binding documents." In Italy, for example, the local rules require franchisors to disclose to the prospective franchisee a copy of the franchise agreement; (if requested) the franchisor's balance sheet for the previous three years and a summary of legal proceedings against the franchisor; addresses and telephone numbers of franchisees already in the franchise system and information on the number of franchisees for each of the previous three years; and the franchisor's projected budget.

In the new EU Accession Countries, specific franchising laws will be adopted or franchising will be accommodated within the existing structure of laws relating to contracts, real estate, commercial law, product liability law, antitrust and consumer protection. In Poland, for example, this occurs through various provisions of the Civil Code and other laws relevant to the specific franchising operation in question.

Interesting Europe-fact: The reported Decisions of the European Court of Justice for the three years 1954-6 are in one volume comprising just 383 pages, whereas for the year 2001 alone there are seven volumes comprising 4,390 pages.

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