COMPETITION • EUROPEAN LAW • RESTRICTIVE AGREEMENTS
Franchise agreements were first defined by the Court of Justice in the following manner: “an undertaking which has established itself as a distributor on a given market and thus developed certain business methods grants independent traders, for a fee, the right to establish themselves in other markets using its business name and the business methods which have made it successful. Rather than a method of distribution, it is a way for an undertaking to derive financial benefit from its expertise without investing its own capital. Moreover, the system gives traders who do not have the necessary experience access to methods which they could not have learned without considerable effort and allows them to benefit from the reputation of the franchisor’s business name”. Article 1(3) of Regulation No 4087/88, repealed by Regulation No 2790/1999, used some parts of that definition in providing that a franchise agreement is, “…an agreement whereby one undertaking, the franchisor, grants the other, the franchisee, in exchange for direct or indirect financial consideration, the right to exploit a franchise for the purposes of marketing specified types of goods and/or services” and that franchise means 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 No 330/2010, which replaced Regulation No 2790/1999) is less categorical vis-à-vis franchises and does not take up those definitions. The Guidelines on Vertical Restraints define franchise agreements as vertical agreements, “contain[ing] licenses of intellectual property rights relating in particular to trademarks or signs and know-how for the use and distribution of goods or services. In addition to the license of IPRs, the franchisor usually provides the franchisee during the life of the agreement with commercial or technical assistance”.
Franchising agreements are covered by Regulation No 330/2010. According to the Vertical Restraints Guidelines, most obligations found in franchise agreements can be considered as necessary for the protection of intellectual property rights or to maintain the common identity and reputation of the franchised network and therefore fall outside the scope of Article 101(1) TFEU. Such agreements also, “usually contain a combination of different vertical restraints concerning the products being distributed, in particular selective distribution and/or non-compete and/or exclusive distribution or weaker forms thereof”. Article 3(1) of Regulation No 330/2010 presumes that agreements are lawful where they contain no hardcore restrictions as long as the supplier’s or the reseller’s market share does not exceed 30% of the relevant market. Beyond that level of market share, the agreement can only be exempted under a rule of reason or through an individual exemption.
Even though franchise agreements are concluded between non-competing undertakings, they may still be of harm to competition. The Vertical Restraints Regulation and its guidelines set out the legal framework for restrictions commonly found in franchise agreements.
1) Resale price maintenance
The franchisee, as an independent trader, must be able to freely determine its own pricing policy. If the franchisor imposes a minimum price on the franchisee, this constitutes an unlawful agreement. Franchisors may however provide recommended prices to franchisees as long as this does not affect the freedom of the latter to independently set their own resale prices. Where the market share of the supplier and of the reseller does not exceed 30%, the regulation exempts the practice of recommending resale prices. Beyond that level, the Commission Guidelines stipulate that the better the supplier’s position on the market, the higher the risk that resellers will align their prices. In that case, recommended prices are liable to lead to the fixing of a uniform price level and would be caught be Article 101(1) TFEU.
2) Restriction of sales
According to the Commission, the restriction on franchisees’ sales may be lawful if it is limited and/or necessary in order in particular to obtain and protect their investment and the franchisees retain passive service rights in other territories and remain free in the determination of their sales prices.
3) Exclusive purchase clauses
An exclusive purchase obligation covers two possibilities: the franchisor can impose an exclusive supply obligation for the contract goods or services and it may be that the supplier will require resellers to use a designated supply source for the purchase of equipment or improvements to premises. Characterized as a non-compete obligation, this clause is lawful when it is limited to five years, not tacitly renewable, and when the purchasing obligations represent less than 80% of the franchisee’s supply, regardless of the duration, as long as the supplier’s and distributor’s market share does not exceed 30%. Where above 30%, the guidelines stipulate that the non-compete obligation falls outside Article 101(1) when the obligation is necessary to maintain the common identity and reputation of the franchised network. The duration of the non-compete obligation is also irrelevant as long as it does not exceed the duration of the franchise agreements itself.
