Some people say franchising doesn’t play a big role in Germany.

Some people say franchising doesn’t play a big role in Germany. A number of recent court decisions have, however, proven the opposite. Franchise systems have long been an important factor in the German economy. As a consequence, the need for clear rules governing such relationships is enormous. Unlike other European countries (such as France, Belgium and Spain), Germany does not have specific franchise laws, and therefore, many legal aspects of franchising are still under discussion.

German distribution law is currently a hot topic and came before the German Federal Court of Justice (Bundesgerichtshof or BGH) in February 2015. The BGH had to decide the highly debated question of whether or not a franchisee may claim an indemnity for loss of clientele similar to the claim that a commercial agent may bring upon expiry or termination of the franchise agreement. Clearly, indemnity payments to a person who is no longer in a franchise relationship are not desirable. On the other hand the franchisor may benefit from the customer base that was developed by the franchisee. Disputes on the existence of an indemnity claim for the franchisee are therefore not unusual. It was hoped that the court’s decision would bring more clarity for both sides.

The bad news is: the court has not settled that burning question. The good news for the franchisee is that the decision strongly indicates that a franchisee may have an indemnity claim if certain requirements are fulfilled (details below). The good news from a franchisor’s perspective was the clear message that the barriers for such an indemnity claim by the franchisee are quite high. In particular, in businesses that mainly serve large numbers of walk-in customers, it will be very difficult for a franchisee to comply with the requirements set by case law, meaning that an indemnity claim is unlikely to succeed in such cases.

Over the years, German case law has developed specific rules that apply to franchise relationships. It is settled case law that specific statutory rules governing agency contracts may by analogy also apply to other distribution relationships, including franchising, if the business relationship is more than a simple seller-purchaser relationship. For instance, in the case of distributors it is settled case law that the distributor may claim an indemnity in the same way as a commercial agent if two conditions are met:

  • the distributor is integrated into the distribution organization of the principal, similar to an agent and
  • the distributor has the contractual obligation to disclose customer data to the principal upon termination of the agreement at the latest, which will allow the principal to continue the business with those customers

In the case at hand, the BGH expressly left open the highly disputed question of whether the same rules may apply to franchise relationships. According to the BGH, that question did not need to be decided, as the second requirement was not fulfilled anyway, i.e. an obligation for the franchisee to transfer customer data to the franchisor was not provided in the franchise agreement. Interestingly, the franchisee was, however, obliged to return the premises to the franchisor, which could then factually continue the business and benefit from the existing, mainly anonymous, customer base there. The BGH held that such factual continuity of the customer base is not sufficient to justify an indemnity claim. The court also rejected the franchisee’s argument that in such cases the transfer of customer data is useless or impossible, which should not discriminate against the franchisee. According to the court, the mutual interests are not comparable to the interests of agents and principles. Therefore, the agency rules governing the indemnity claim cannot be applied as an analogy.

Only shortly before this decision, in December 2014, a Higher Regional Court (OLG Schleswig) rendered a similar decision in another case. This may indicate the clear trend that courts will increasingly apply stricter requirements to the existence of an indemnity claim outside of agency relationships. Having said that, this does not mean that franchisors in the fashion and retail mass business can relax. Courts will still consider each individual case. For the time being, the safest way for the franchisor to avoid an indemnity claim will be to avoid any contractual obligation for the franchisee to disclose customer data to the franchisor. Vice versa, the franchisee will have an interest to agree on a corresponding obligation, which may, however, be nearly impossible to fulfill in mass businesses. It should be noted that such a disclosure obligation does not need to be explicitly stated in the franchise agreement to trigger the indemnity claim; it may be sufficient that the franchisee in fact discloses the information and the franchisor accepts it. With those principles in mind, both sides have a certain level of certainty regarding their mutual rights, which ultimately is good news for all.