October, 2000 (Franchise seminar in Ljubljana) The text has been re-approved by Ms. Zimmer for publishing at the SFA web site in 2005

Chantal ZIMMER
French Franchise Federation

1 – The impact of the new block exemption on the franchise industry

A - The former situation:

Before the 22nd of December 1999, the situation of franchising regarding the European competition law was very comfortable and very easy for the franchisors to comply with: the franchise industry had since the 1st of February 1989 its specific block exemption. That means that the whole “sector” or all the franchise networks, whatever their size and their effect on the market were, were exempted from the article 85 and 86 of the Treaty of Rome (now articles 81 et 82 of the Treaty of Amsterdam). The article 85 of the Treaty prohibits agreements between two enterprises that restrict or distort competition. The franchise agreement is one of those with its exclusive territory clause or the exclusive purchase clause etc....

As it has been demonstrated by the national associations and the European association, following the decision of the European court of justice in the Pronuptia case, that franchising was at the contrary, a pro-competitive strategy with benefits for the consumer, the European commission exempted the franchise industry from this article of the Treaty of Rome under the provisions of the so called block exemption. This exemption has been given for 10 years, ending in December 1999 and prorogued to May 31st 2000.

What was important at that time?

• The components of the franchise system, (that means the trade name, the know how and the assistance provided to the franchisees by the franchisor), have been recognized, first by the court of Luxembourg and then by the European commission.
• The result of those components is that they are providing to the franchise NETWORK its identity and its reputation which have to be protected. In consequence all the provisions of the franchise agreement which were necessary to protect the know-how or the trade name were authorized by the block exemption.

More over, the application of the exemption, by the franchisors, was very easy. All what was allowed was written in the block exemption.

B - The new situation:

The new block exemption which came into force on the 1st of June 2000 and for 10 years is no more a specific exemption for franchising. It concerns all agreements, which contain vertical restrains.

The Commission thought that the franchising industry became in 10 years powerful and that it does not anymore need any special protection.
Secondly the commission did not want that the European enterprises could choose a development strategy only in regards of the legal advantages or disadvantages and not in regards of the components of their strategy.

Therefore it is not the type or name of the agreement which is predominant but the different clauses which have to be analysed to comply with this text.
v The main trend: there is a major new way of thinking.

As the Commission wanted more liberalism for the enterprises, it changed the whole structure or philosophy of its policy.

Before, only the clauses that were written were authorised. In this new text every thing is authorised. Only the written provisions are forbidden.

That is a real cultural revolution for the franchisors who have to get used to it. If it gives them more freedom, it also obliges them to think over each of their provision. The consequence of more freedom is less legal security.
 
What are the main questions for a franchisor?

• What is your position on your market? If the franchise network’s turnover does not represent more than 30%, then, the agreement will have the benefit of the block exemption. If you have more than 30%, you have to ask for an individual exemption. The question is, what is my market, I can I define my market?
• Do you restrict or control your franchisees on their price fixing? If yes the agreement is not enforceable. The franchisor can only recommend prices or fixed maximum prices. The right to fix maximum prices is a progress comparing to the former situation.
• Do you restrict your franchisees to sell passively in other territories? If yes, the agreement is not enforceable.
• Do you restrict your franchisees to sell actively in other territories? If you operate a selective distribution, (that means that your franchise concept is weak, with a weak trade name and a weak or non existent know how) your agreement is not enforceable.
• If you need to impose to your franchisee non competition clauses such as an exclusive purchase obligation, that means that your franchisee has to buy from you or from indicated suppliers more than 80% of his total purchases of the contract goods or services, the duration of this restriction must not be more than 5 years, and it must not be tacit renewable.
• If you need, in order to protect your know how, a non-competition clause after the termination of the agreement, this restriction must not be for more than one year, and the restriction must only be limited to the premises or the land from which the franchisee has operated during the agreement.
• Regarding internet: the block exemption considers internet as passive selling. The consequences of this position for franchising is that, as the franchisor cannot forbid passive selling to his franchisees, he cannot forbid them to create their own website.
• Nevertheless, if the franchisee uses the name and logo of the network, then the franchisor can oblige him to respect the conditions of using this image, as for example a graphic charter etc…

Those are the main questions for a franchisor. It is important to underline that the block exemption does not mention the term of franchising. In order to facilitate, the application of this text, the European commission has elaborated guidelines, which are explaining how the economical actors have to interpret the block exemption.

The guidelines describe the franchise concept in details. The guidelines also describe, through an example, the situation for a franchise concept. This example shows that even if some clauses could be anti-competitive, if they are indispensable to protect the identity and the reputation of the network (protection of the trade name and of the know how), they can be valid. This brings us to the former situation, before the 1st of June 2000.

This also brings us to the conclusion that, if the franchise concept complies with the definition given by the European code of ethics, that means that if it is a real franchise concept with a strong know how and a strong trade name, and if the franchisor attitude complies also with the rules of the code of ethics (if he respects the independence of his franchisees and only imposes restrictions which are indispensable to protect the brand and the know how), the new block exemption will not be a major problem for this type of franchise system.

2 - The European Code of Ethics

The code of ethics is the foundation stone of franchising in Europe.

The aim of the code is to define franchising and to describe the relations between the franchisor and the franchisees in order to protect fair behaviour and balanced rights and duties of the parties. Transparency and loyalty are the key principles of fair behaviour.

The first code has been elaborated in 1971, by the French franchise federation and it has been rewritten in 1989 to take in account the evolution of franchising.

In 1971, the code has been elaborated by the franchisors who forecasted a strong development of franchising in France and who choose to develop an auto-regulation policy in order to avoid a law on the franchise agreement, which needs flexibility.

The promotion of fair behaviour through the code was and still is the main objective of the French franchise federation.

In 1990, the European franchise federation decided to harmonize the national codes and to promote a unique European code. This text entered into force in 1992. All the franchise association’s members of the EFF have to promote this text and they have to only admit as members the franchise concepts that comply with the code.

Until today, the experience demonstrates that when the partners are wise enough to respect self-regulation rules, the governments do not need to intervene in regulating the industry.

3 - Prospects of franchising in small CE countries – Slovenia and the developed world

The general economical situation in developed countries, development of the purchase power, development of the offer of goods and services, bring us on a hyper competitive market with very strong actors.

On this market the small and medium enterprises have to react and to find solutions to stay on the market.

• As the consumer is looking for brands (it is almost a society or a cultural phenomenon),
• As the consumer is more and more informed and therefore more and more exigent,
• As the consumer has the choice between competing products and distributors,
• The retailer has to be more and more professional and performing.

The franchise system is one solution for him. The franchise system brings him the well-known brand, the know how, the communication capacity, etc… In general franchising brings him the tool of a big company and leaves him the independence and the advantages of being entrepreneur.

At a macro economical level, the development of franchising enable the development of SME which are recognized as being much more dynamic, as creating employment and which failure rate is insignificant comparing to the traditional small enterprises.

On another point, it can also be observed that franchising has two significant impacts on the market:

• Through franchising a lot of traditional activities have been modernized and rationalized, as for example the hotels sector or hair dressing sector
• Through franchising new markets have been created and developed as quick printing, fast food, quick changing of mufflers etc… These new markets are often created in service activities.

In conclusion, it is undeniable that:

• Franchising contributes significantly to the modernization of the distribution sector in transferring know how, technologies and competencies.
• It contributes to the dynamism of the distribution in creating small and medium enterprises and employment,
• It contributes to the professionalization of the distribution in educating the entrepreneurs,
• It is a tool to stimulate the inter-brand competition,
• It contributes even to the evolution of the consumer and his needs that now can buy new services and new products with much more information and facilities. The consumer can, in that way, benefit from the strength of a big company but with the service and the attention of a small enterprise.
  

Franchising has proven its strength and there is no reason that it should not continue to grow in our developed markets where competition is always more and more aggressive and complex.