INNOVATION OR KNOW-HOW
IN FRANCHISING ?
Guy GRAS – Eurocommerce SME Day – 21/10/2013 - Brussels
1
Reminder of what
the European Franchise Federation is
• A non-profit association created in 1972.
• An association bringing together 20 national
franchise associations.
• An association promoting and supporting the
development of ethical franchising in Europe.
2
What is franchising ?
1 - A system of marketing goods and/or services through a network
of SMEs.
2 - Agreements concluded between independent
traders (a « franchisor » / several « franchisees »).
3 - A system based on the transmission to franchisees of an efficient
« business package » belonging to a franchisor.
4 - The obligation, for franchisees, to respect and apply rules fixed
by the franchisor.
3
Franchising in the world
Source : National franchise associations from each country members of the WFC – Data consolidated by the EFF (August 2013).
Franchise Brands
(Estimate)
Franchise outlets/
points of sale
(Estimate)
North America
4,000/
5,000
830,000/
840,000
Latin America
4,000/
5,000
190,000/
200,000
Asia
14,000/
15,000
1,200,000/
1,300,000
Pacific
1,500/
2,000
90,000/
100,000
Middle East / Africa
1,000/
1,500
30,000/
35,000
Europe
13,000/ 14,000
540,000/
550,000
4
Franchising in Europe:
3 keys figures
 Number franchise brands/systems
→Min. 13.000
 Number of franchised POS/enterprises
→Min. 540.000
Number of employees in the points of sales
→Min. 3.000.000
Generally speaking, when we talk about
“franchising”:
We talk about “know-how”,
But we rarely speak about “innovation” and
"transfer of technology"!
WHY ?
6
1 - What is know-how in franchising ?
In Europe, know-how in franchising is the cornertone of the
business system.
For example, in franchise agreements, provisions that are not
justified by the implementation of the know-how are
forbidden.
« The provisions of franchise agreements which are strictly
necessary for the functioning of the system of franchise do
not constitute restrictions of competition for the purposes of
article 101 (1) of the treaty »
(Pronuptia Case 1988)
7
1 - What is know-how in franchising?
A know-how with two characteristics:
1 – An efficient commercial know-how:
Transmission of a competitive advantage in the market to
franchisees.
A commercial know-how more and more complicated,
increasingly expensive for the franchisor, and covers a large
scope of different kinds of expertise (marketing, IT systems,
communication, …).
8
1- What is know-how in franchising ?
2 - This commercial know-how is different from industrial know-how or
transfer of technology.
The commercial know-how is not considered as transfer of technology.
Since the beginning, industrial franchise agreements have not been
covered by the European regulation applying to franchising:
“ Industrial franchise agreements should not be covered by this
Regulation. Such agreements, which usually govern relationships
between producers, present different characteristics than the other
types of franchise. They consist of manufacturing know-how,
combined with trade-mark licenses.” BER 4087/1988.
9
1- What is know-how in franchising ?
This situation was confirmed by the last European regulation
in 2010:
«The exemption shall apply to vertical agreements containing
provisions which relate to the assignment of IPRs, provided
that these provisions do not constitute the primary object of
such an agreement.» BER 330/2010
 So, the agreements relating to IPRs are not covered by the
regulation applying to franchising but by the BER 772/2004
relating to the technology transfer agreements.
10
QUESTION
Does it mean that franchising does not
promote innovation and not constitute a
transfer of technology in the market ?
11
2. What is innovation ?
Innovation goes far beyond R&D!
“It goes far beyond the confines of research labs, and extends to users,
suppliers and consumers everywhere : in government, business, and
non-profit organisations; across borders, across sectors, and across
institutions”
(OECD Forum 2010)
 Innovation is not limited to industrial innovation !
12
2. What is innovation ?
The OECD (in its Oslo manual for measuring innovation) defines
four types of innovation :
1 - Product innovation:
A good or service that is new, or has been significantly improved.
This includes significant improvements in technical specifications,
components and materials, software in the product, userfriendliness, or other functional characteristics.
2 - Process innovation:
A new or significantly improved production or delivery method.
This includes significant changes in techniques, equipment and/or
software.
13
2. What is innovation ?
3 - Marketing innovation:
A new marketing method involving significant changes in
product design or packaging, product placement on shelves,
product promotion or pricing.
4 - Organisational innovation:
A new organisational method in business practices, workplace
organisation, or external relations.
14
3. What is innovation in franchising ?
• Concretely, the commercial know-how in franchising includes innovation as defined by the
OECD :
Product innovation:
- development of new product adapted to the market
Process innovation
- development of new commercial techniques for cross-channel or multichannel business models
15
3. What is innovation in franchising ?
• Concretely, the commercial know-how in franchising includes innovation as defined by the
OECD :
Marketing innovation
- new commercial promotions, determination of the right recommended
prices depending on the market,
Organisational innovation
- new ways of selling flowers, pastries or chocolate in shops.
16
3. What is innovation in franchising ?
Innovation in franchising is:
The transformation of commercial knowledge into a
business idea, creating added economic value in the
market.
17
3. What is innovation in franchising ?
•Legally, innovation in franchising is implicitly recognized in the European
Regulation:
‘intellectual property rights’ includes industrial property rights, know
how, copyright, and neighbouring rights” BER 330/2010
According to the guidelines of vertical restraints (pt189) :
« 2.5. Franchising
Franchise agreements contain licenses of intellectual property rights
relating, in particular, to trade marks 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.”
18
Conclusion
So, my conclusion is a question:
If the commercial know-how (including the notion of innovation) is at
the heart of franchising;
If the know-how is included in the notion of IPRs;
If the BER, on vertical restraints, does not apply to agreements whose
provisions on IPRs constitute the primary object of such a contract;
 then, could franchise agreements possibly be regulated by the
regulation applying to technology transfer agreements, and not by
the regulation applying to vertical restraints ?
19