European Parliament resolution on franchising in the retail sector

By Dr Mansur Pour Rafsendjani, Partner, Noerr Munich | Noerr LLP

On 12 September 2017 the European Parliament passed a resolution on the functioning of franchising in retail (2016/2244(INI)). In the resolution, the European Parliament takes the view that franchising regulation should be harmonised across Europe.

Content of the European Parliament resolution

The Parliament states that many Member States have enacted legislation, but that this is inconsistent and its focus has often been only on certain aspects, such as imposing disclosure obligations in the pre-contractual stage. However, the current legislation is not adequate, since franchising is prone to unfair business practices. And the fragmented legislative situation also hinders the future development and expansion of franchising across Europe, according to the Parliament. In this respect, Europe is well behind the US, and the European Parliament thinks the reason for this is the lack of harmonised European legal standards. While there are also codes of conduct of individual franchise associations, these are often drafted by franchisor associations and do not always reflect the interests of franchisees. There is also a need for initial and continuing training in franchising. The resolution also addresses competition law. There is the Block Exemption Regulation (Regulation (EU) No 330/2010 of the Commission of 20 April 2010 on the application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices) which is also applicable to franchising. However, it is proposed in the resolution that the competition effects of franchising should be examined once again from an antitrust perspective. The resolution also states a position on the aspect of taxation: one ought to make sure that franchising is not used for tax evasion purposes by paying franchise fees in low-tax countries.

Developments in Germany

What is interesting in this context is that for some time in Germany franchising has been under review with regard to a possible need for codification. In fact, Germany has no such thing as a specific Franchise Act. Instead, franchising is treated as a unique, blended type of contract. Yet, as early as in 2013 the Federal Ministry of Justice obtained an opinion on franchising from the German Bar Association, the subject of the inquiry being the need for statutory regulation of franchise agreements in general and pre-contractual disclosure obligations in particular. The German Bar Association did not consider regulation at national level useful due to the development of the European single market, but instead advocates initiating legislation modelled on the Commercial Agents Directive (Directive 86/653/EEC of the Council of 18 December 1986 on the coordination of the laws of the Member States relating to self-employed commercial agents) at European level. However, according to the Bar Association, due to the large differences between individual franchise systems, there should be no overall codification; instead, a minimum standard of pre-contractual disclosure and the related documentation should be specified. In March 2015 the Federal Ministry of Justice then called for tenders for a research contract to compare laws, looking at the statutory special provisions on franchise agreements and in particular the pre-contractual disclosure obligations as well as their economic impact in various jurisdictions. The focus was to be on analysing provisions to protect the franchisee from the asymmetric distribution of information and also from the risks associated with the discrepancy between  economic risk on the one hand and entrepreneurial decision-making freedom on the other.

Conclusion

It is striking that in the European Parliament resolution the positions taken focus mainly on protecting franchisees. The interests of franchisors are given little weight. However, franchisors may have the chance to state their positions in the upcoming discussion and legislative process – an opportunity they should not pass up.

So what comes next? The European Parliament has now formally instructed its President to pass on the resolution to the Commission and the European Council. According to our information, Directorate-General GROW (and within it, Unit E4 Business-to-Business Services) will now deal with the matter. In some cases the competent Directorates-General see no need for action (such as recently in the field of robotics). But it is also conceivable that DG GROW may come to the conclusion that harmonised pan-European legislation is necessary and will thus prepare a corresponding legislative initiative.

It remains to be seen whether the activities developed by the German Federal Ministry of Justice and the European Parliament will actually lead to the amendment and codification of franchise law, in a similar manner to the numerous provisions existing at federal and state level in the US.

Compliments of Noerr LLP, a member of the EACCNY