COMPETITION • FRENCH LAW • RESTRICTIVE AGREEMENTS
A franchise agreement binds one undertaking, the franchisor, to another, the franchisee, responsible for using an ensemble of intellectual property rights (brand, trade name, logo, designs and models, copyrights, know-how, patents) in the resale of given products or services to the end user. The franchise contract is not only a distribution system, but also a way to take economic advantage of an array of knowledge. It is a collaboration between the franchisor and the franchisee, the former making original and specific know-how available to the latter, to be developed in keeping with proven marketing techniques and regularly updated.
Protecting the distinctive signs and know-how of the franchisor implies the use of contract terms in the franchise agreement that are capable of being caught by the prohibition on restrictive agreements. The lawfulness of a franchise contract from the perspective of competition rules is predicated on the restrictions to competition imposed on franchisees being proportional to their goal and offset by positive effects. In other words, restrictions must not go beyond what is necessary to protect know-how and network identity. Where these conditions are met, the agreement may be favorably assessed using the rule of reason, especially where the manufacturer and the distributor are each judged to hold less than 30% of the market share, and where it contains no clauses prohibited by the Vertical Restraints Regulation used by French competition authorities as a guide even when the contract does not fall within EU law.
Network identity leads franchisors to establish prices that they recommend the franchisees implement, such that end users find the same prices at network outlets regardless of location. Setting identical or minimum resale prices that franchise network members in the same trading zone are required to apply constitutes a prohibited practice. However, arranging prices for resale by independent traders grouped under the same trade name is not an anticompetitive practice where traders are not located in the same zone or, if they are, where the franchise sets maximum or suggested prices that are not tantamount to resale price maintenance.
The right to use the franchisor’s distinctive signs and know-how is often granted on a limited territory. According to the Paris Court of Appeal, territorial exclusivity does not harm competition where the contracting parties control a limited market share. The same is true where the density and scale of the entire network set up by the franchisor does not present a significant obstacle to the normal play of competition on the relevant market.
Franchise agreements often contain non-compete clauses mainly concerning the post-contractual stage. Non-compete clauses are is inherent to franchise agreements insofar as they protect know-how, which should only benefit network members, and give the franchisor the time to set up another franchisee in the exclusive zone. These clauses must however remain in proportion to their objective – protection of the network’s know-how, identity, and reputation. To be valid, a non-compete clause must be limited in time and space.
Even though the issue is a controversial one, the French courts have tended to uphold clauses prohibiting the re-joining by a former franchisee, either directly or indirectly, of a franchise network or a comparable distribution network for a period of two to three years on the same territory. However, the judges adopted a solution that brings the rules for non-reaffiliation clauses closer to those for non-compete clauses. Thus, a non-reaffiliation clause is anticompetitive when the know-how it protects is of low technicality, specificity and originality and when its temporal (3 years) and geographical (5 km) scope is disproportionate to the objective pursued.
Finally, the grant of a right of first refusal to the franchisor, valid for the entire duration of the contract and a year after its term, is, by limiting the possibility for competing distribution groups to purchase independent stores, likely to have the effect of artificially restricting competition on the food-based retail distribution market – except it cases where it allows the franchisor to secure the investment made over several years with the franchisee – who benefited from the support of the brand, the fitting of its store, sales and promotion advice and the provision of specific management software – by preventing the appropriation by a competitor of the positive results stemming from the partnership, while offering the same price to the distributor as the price offered by that competitor.
A franchisor may require the franchisee to sell or use products that meet minimal objective quality specifications, or only products the franchisor or designated third parties have manufactured, if it is not possible in practice to define objective quality specifications due to the nature of the products. For any and all items that must be frequently renewed, the franchisor may define and impose specifications that will allow the minimal uniformity essential to maintaining the network’s identity to be obtained. Exclusive supply terms for such products are therefore lawful. For all other products, such as furniture, display windows, label sets, trestles, paper bags, etc., the network image is adequately preserved by a precise definition of the necessary objective qualities; exclusive supply is not warranted. An exclusive supply obligation relating to material available on the market and to which it is possible to apply objective quality specifications is anticompetitive.
While it is possible for a franchisor, in order to ensure the unity of the network, to enforce brand identification and product presentation elements through the adoption of specifications, there is no justification for one of its subsidiaries to be the sole provider of this type of service, since the identity of the network is protected by the franchisor’s approval of each store and the improvements made to it.