58th UIA CONGRESS
Florence / Italy
October 29 – November 2, 2014
CONTRACT LAW
COMPETITION LAW
Saturday, November 1, 2014
FRANCHINSING AGREEMENTS: IT’S
NOT ALL ABOUT LOCATION,
LOCATION, LOCATION!
NAVIGATING THE COMPETITION
LAW ASPECTS OF FRANCHISING
Astrid Ablasser-Neuhuber and Valentina Schaumburger
(bpv Hügel Rechtsanwälte),
ARES-Tower, Donau-City-Str. 11, 1220 Vienna, Austria
Tel + 43 1 260 50 0/ Fax + 43 1 260 50 133
astrid.ablasser@bpv-huegel.com
valentina.schaumburger@bpv-huegel.com
© UIA 2014
1. General remarks on franchise agreements in competition law
Generally, the European competition law does not distinguish between vertical restraints in principle
and vertical restraints in franchise agreements. This means that also
“for the vertical restraints on the purchase, sale and resale of goods and services within
a franchising arrangement, such as selective distribution, non-compete or exclusive
distribution, the Block Exemption Regulation applies up to the 30 % market share
threshold.”1
Attention needs to be paid however to the following specification with regard to market shares of
franchisors. If the franchisor does not simply provide goods, but “a bundle of services and goods
combined with IPR provisions which together form the business method being franchised, the
franchisor needs to take account of his market share as a provider of a business method.”2
There is however exceptions from the general rule cited above. The Commission’s Guidelines on
vertical restraints contain specific rules relating to franchise agreements
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on how to apply the BER to licencing IPRs (paras 24-26),
concerning efficiency gains pursuant to Art 101(3) AEUV (para. 190(1))
and non-compete clauses (para. 190(2)).
The report at hand will, in the following, give a brief introduction into the respective competition law
issue and continue with presenting particularities that apply to franchise agreements in that context. To
give practical guidance at one glance, each issue will end with a conclusion summing up the essential
points.
2. Non-compete obligations
2.1. Definition
Pursuant to the Block Exemption Regulation (in the following: the BER),3 a non-compete obligation is
defined as
“any direct or indirect obligation causing the buyer not to manufacture, purchase, sell or
resell goods or services which compete with the contract goods or services or any direct
or indirect obligation on the buyer to purchase from the supplier or from another under
taking designated by the supplier more than 80 % of the buyer's total purchases of the
contract goods or services and their substitutes on the relevant market, calculated on the
basis of the value or, where such is standard industry practice, the volume of its
purchases in the preceding calendar year.”
Such clause will be exempted not from the prohibition of Article 101(1) TFEU4 where its duration
exceeds five years pursuant to Article 5(a) BER.
2.2. Context of franchising
1
Commission Notice, Guidelines on Vertical Restraints, C(2010) 2365, para. 190.
Ibid., para. 92.
3
Commission Regulation (EU) No 330/2010 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, OJ
2010/L 102/1.
4
Consolidated version of the Treaty on European Union and the Treaty on the Functioning of the European
Union, OJ 2012/C 326/01.
2
The European Court of Justice (in the following: ECJ) was seized to clarify the status of noncompetition obligations in franchise agreements already in the mid-eighties. Considering the
competition enhancing effects of franchising, it held in Pronuptia that it was necessary to prohibit a
franchisee “from opening a shop of the same or a similar nature in an area where he may compete
with a member of the franchise network.”5
Having thus opened the possibility of legitimating the first aspect of the non-compete obligation, the
ECJ allowed as well for the second aspect concerning purchase under certain circumstances: “[A]
provision requiring the franchisee to sell only products supplied by the franchisor or by suppliers
selected by him may be considered necessary for the protection of the network's reputation.”6
This approach taken early by the ECJ was taken over by the European Commission when it drafted its
Guidelines on vertical restraints:7
“A non-compete obligation on the goods or services purchased by the franchisee falls
outside Article 101(1) when the obligation is necessary to maintain the common identity
and reputation of the franchised network. In such cases, the duration of the non-compete
obligation is also irrelevant under Article 101(1), as long as it does not exceed the
duration of the franchise agreement itself.”8
It should be highlighted at this point, that the ECJ as well as the European Commission did not discuss
justification of the respective clauses. They both took the stance that non-compete obligations in
franchise agreements do not fall within the prohibition of Article 101(1) TFEU due to their
competition enhancing effects.9 This verdict is however subject to certain conditions (see 2.3. in
detail).
2.3. Conclusion
To sum up the above, a non-compete clause in franchise agreements is considered necessary and not
restricting competition, where
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•
the obligation is necessary to maintain the common identity and reputation of the
franchised network,
does not exceed the duration of the franchise agreement,
obtaining those products from other franchisees is not prohibited.
In such case, its duration may even exceed five years. Put differently: “The transfer of substantial
know-how usually justifies a non-compete obligation for the whole duration of the supply agreement,
as for example in the context of franchising.”10
3. Exclusive supply clauses
3.1. Definition
Whereas non-compete obligations constrain the purchaser, the pendant restricting the supplier is an
exclusive supply clause. Exclusive supply is defined as
5
ECJ C-161/84 Pronuptia of 28.1.1986, para. 16.
Ibid., para. 21.
7
Commission Notice, Guidelines on Vertical Restraints, C(2010) 2365.
8
Ibid., para. 190(2).
9
Cf. Schröter/Jakob et al., 2 B Art 101 AEUV, para. 843.
10
Commission Notice, Guidelines on Vertical Restraints, C(2010) 2365, para. 148.
6
“agreements that have as their main element that the supplier is obliged or induced to
sell the contract products only or mainly to one buyer (…) This may take the form of an
exclusive supply obligation, restricting the supplier to sell to only one buyer for the
purposes of resale or a particular use.”11
Following the clarifications in the Commission’s Guidelines on vertical restraints, such agreement is
exempted under the BER if the parties’ market shares do not exceed 30%; above the threshold, an
individual assessment needs to be conducted in order to potentially justify the respective clause by
means of Article 101(3) TFEU.12
In this regard, exclusive supply clauses differ from non-compete clauses as discussed above: on the
one hand, a non-compete clause would be considered as not infringing Article 101(1) TFEU under the
circumstances laid out in 2.3.; an exclusive supply clause, on the other hand, will restrict competition
and thus fall within the scope of the prohibition provision. It can however be justified.
3.2. Context of franchising
This justification on grounds of efficiency gains has already been granted to franchise agreements
concerning both, improvement of production and distribution of products as well as improvement of
supply of services. It is important to recall, that exclusive supply clauses normally come together with
some kind of territorial protection: the supplier normally does not agree to provide goods or services to
only one purchaser in total. Normally, he commits to exclusively supply to one purchaser in a certain
area.
In the first case of improving production and distribution of the products concerned, the franchise
agreement – including an exclusive supply clause and territorial exclusivity – was considered justified
where it enabled “the franchisor to extend its distribution network without the level of investment it
would need to open its own retail network” and “the franchisee to concentrate his sales effort on a
given area and to be more active in cultivating a clientèle there, thanks to the exclusivity.”13
Nonetheless, it was stated very clear that this exclusivity could not amount to an unlimited extend. The
justification was accepted in the case at hand only because consumers were not prevented from
purchasing the product outside of their resident area and because the franchisees were given the option
of cross-supply.
With regard to justification on grounds of improvement of supply of the services concerned, (again:
limited) territorial protection was tolerated in franchise agreements including exclusive supply clauses
for two reasons:
“[T]he limited territorial protection granted to the franchisees is necessary to obtain and
protect their investment (…). The limited territorial protection is also necessary to ensure
that the franchisees will concentrate their service activity on their own territory.”14
The Commission did not miss to emphasise the boundaries to territorial protection also in this case
when underlining the importance of the franchisees’ full rights to passive sales in other territories and
their complete freedom to determine their sales prices.
11
Commission Notice, Guidelines on Vertical Restraints, C(2010) 2365, para. 192.
Ibid., para. 193
13
European Commission, IV/30937 – Pronuptia of 17.12.1986, para. 34.
14
European Commission, IV/32.358 – ServiceMaster of 14.11.1988, para. 26.
12
3.3. Conclusions
Exclusive supply clauses togehter with territorital protection restrict competition. They can however
be justified by applying Article 101(3) TFEU, in case of
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•
efficiency gains in form of improvement of production/distribution of the products concerned
or of supply of the services concerned, and
the customers’ fair share of the benefit resulting from those improvements;
moreover, the prospective franchisees would have to be unwilling to undertake the necessary
investment to enter the franchise system if they were not provided with some protection
against competition.
From the above said and cited, not only those positive conditions would have to be met, but also do
some negative conditions need to be considered: Firstly, it does not seem compatible with Article
101(3) TFEU to grant absolute territorial protection. Franchise agreements including exclusive supply
with territorial protection should never eliminate the possibility of cross-supply between franchisees,
nor restrict passive sales into areas outside of their exclusive territory. Secondly, territorial protection
should not be paired with measures that could possibly restrict the franchisees’ freedom to determine
sales prices.
4. Pricing
4.1. Definition
Even agreements that would normally benefit from the exemption of the BER are caught by the
prohibition of Article 101(1) TFEU if they “the restriction of the buyer's ability to determine its sale
price, without prejudice to the possibility of the supplier to impose a maximum sale price or
recommend a sale price.”15
4.2. Context of franchising
Without leaving any doubt on the impossibility of justifying price fixing, the Commission gave an idea
of how to interpret this option of price recommendations with regard to franchising when it assessed
the pertinent agreement in ServiceMaster:
“The recommendation of sales prices to franchisees is not a restriction of competition
since franchisees remain entirely free to determine their own prices for the supply of
services and home-care products.”16
It argued that in light of the franchise agreement combing the recommendations with the possibility of
passive sales, a certain degree of price competition between the franchisees was guaranteed.17
Consequently, the agreement at hand was held to be exempt under Article 85(3) (i.e. Article 101(3)
TFEU).
The Commission repeated the same argument in Charles Jourdan, where, again, the competition
amongst franchisees (due to passive sales to customers and sales between franchisees) together with
the fact that “they are entirely free to set their selling prices”18 led to exemption under Article 85(3)
(i.e. 101(3) TFEU).
15
Article 4(a) BER.
Commission Decision of 14.11.1988, IV/32.358 – ServiceMaster, para. 20.
17
Cf. ibid., para. 27.
18
Commission Decision of 2.12.1988, IV/31.697 – Charles Jourdan, para. 42.
16
Following this line of argumentation, the Commission basically built on the early clarification by the
ECJ that
“[a]lthough provisions which impair the franchisee’s freedom to determine his own
prices are restrictive of competition, that is not the case where the franchisor simply
provides franchisees with price guidelines, so long as there is no concerted practice
between the franchisor and the franchisees or between the franchisees themselves for the
actual application of such prices.”19
4.3. Conclusion
Whereas there is no discussion about actually tolerating price fixing, the recommendation of prices
seems to be tolerated to a certain extent in the context of franchising agreements. As laid down by the
ECJ, such recommendation may not amount to actual collusion between the franchisor and the
franchisee or the franchisees amongst each other.
The Commission’s ‘magic formula’ for determining the extent still admissible seems to be “as long as
the franchisees remain entirely free to determine their prices”.
19
ECJ C-161/84 Pronuptia of 28.1.1986, para. 25.