u Non-competition clause: in commercial matters, a clause that is disproportionate is null and void and may not be adjusted by the judge
u Significant imbalance: definition of the “business partner”
u Arbitration Clause: confirmation of the restrictive interpretation of the obvious non-applicability of the clause
u Selective distribution: judicial liquidation of an authorized distributor and resale of products outside the network
u Publication by the French General Directorate for Competition Policy, Consumer Affairs and Fraud Control (DGCCRF) of the annual report of judicial decisions for 2015 with regard to restrictive business practices
Non-competition clause: in commercial matters, a clause that is disproportionate is null and void and may not be adjusted by the judge
Cass. Com., 30 March 2016, No. 14-23261, Ucar Location
Following the termination of his franchise agreement, a franchisee continued to practice the same activity from his former premises, in disregard of the non-competition clause contained in his franchise agreement.
The non-compete undertaking was divided into two distinct clauses:
u One of which prohibited the franchisee, for a one year period from exercising a competing activity from the same premises;
u The other imposing the same ban on him for the same length of time but in six departments.
Dissatisfied with this breach, the franchisor brought legal action against his former franchisee.
Taking the view that the non-compete clause was disproportionate in its territorial scope, the Appeal Court canceled it and dismissed the franchisor’s claims.
The franchisor thus filed an appeal before the Cour de cassation, accusing the Appeal Court of having annulled it in its entirety
u Compensation claim, concept of new customers” – ECJ, C-315/14 – Relevant for franchise systems in Germany?
u The termination indemnity claim in Franchise relationships
u Brexit: Implications on your European Trade Mark,
Copyright and Design rights
instead of reducing its scope.
It is true that in social matters the Cour de Cassation classically recognizes the power to adjust the scope of non-competition clauses when they are disproportionate (Cass. Soc., 18 September 2002, No. 00-42904; Cass. Soc., 20 October 2008, No. 07-42035). It is also true that the contract contained two clauses: an illicit one (covering six departments) and another theoretically lawful one (limited to the premises in accordance with the requirements of EU Regulation No 330/2010).
In accordance with its previous case law, the commercial chamber of the Cour de Cassation however rejected the appeal, thus excluding any possibility of revising a disproportionate clause.
The same solution was adopted by article L.341-2 of the French Commercial Code, ensuing from the Macron law, applicable only to the retail sector, which will enter into force on 6 August 2016.
The franchise networks must therefore be particularly cautious and balanced when drafting their non-compete clauses. If one of the conditions of validity is missing, the clause cannot be partially safeguarded: it will be annulled.
Franchise & Distribution Networks Newsletter
N°8 - 3rd Quarter 2016
Significant imbalance: definition of the “business partner”
CA Aix-en-Provence, 10 March 2016, No. 15/06564, Locam
Article L.442-6, I, 2° of the French Commercial Code prohibits the act of “subjecting or attempting to subject a business partner to obligations which create a significant imbalance in the rights and obligations of the parties.”
One of the conditions for enforceability of the text is the qualification of the parties as “business partners”, which involves a thorough examination of the business relationship between them.
In the case decided by the Court of Appeal of Aix-en-Provence, a professional, for the requirements of his business, had entered into a contract with a service provider for the creation and the rental of his website.
Due to unpaid invoices, the service provider served him formal notice to recover the sums due. In his defense, the professional notably relied on the invalidity of the agreement pursuant to article L.442-6, I, 2° of the French Commercial Code.
To find out if these provisions were applicable, the question arose as to whether the professional entering into a contract with a service provider for the creation and the rental of a website should be qualified as “business partner.”
The Court of Appeal very clearly refused that qualification by maintaining that the “contract in contention does not render
M. X a business partner of company Y. within the meaning of these provisions, but a simple co-contracting party renting a website for his professional needs.”
This solution is in line with other decisions which refused application of Article L.442-6, I, 2° of the French Commercial Code in similar contexts (for example, CA Paris, 6 March 2015, n° 13/20879).
It ensues from these decisions that the concept of economic partnership is characterized not only by a long term business relationship, but also by the common goal of the parties, the courts upholding the “common willingness to work together” (CA Nancy, 14 February 2013, No. 12/00378).
This is obviously the case of distribution or franchise relationships for example, but not of a mere customer-service provider relationship.
This interpretation of the text has to be approved.
It is worth noting that this interpretation directly opposes that given by the Commercial Practices Review Commission (Commission d’examen des pratiques commerciales) (CEPC, opinion n°. 15-01 of 30 September 2015; CEPC, opinion n°. 16-3
of 10 February 2016).
To circumvent the limit imposed by the courts, from 1 October 2016, litigants may attempt to abandon article L.442-6, I, 2° of the French Commercial Code and instead try resorting to future article 1171 of the French Civil Code which introduces the prohibition of significant imbalances in all adhesion contracts, without referring to the concept of “Business Partner”.
Arbitration Clause: confirmation of the restrictive interpretation of the obvious non-applicability of the clause
Cass. Civ. 1st, 24 February 2016, No 14-26964, Subway International BV
This case once again clarifies the definition of applicability of article 1448 of the French Code of Civil Procedure whereby it is the responsibility of the arbitrator designated in the arbitration clause to rule on his own jurisdiction.
This principle of “jurisdiction to decide on jurisdiction” (compétence-compétence) is subject to an exception, i.e. when the clause is obviously void or unenforceable and the case has not yet been referred to the arbitral tribunal. Only in that case has the state judge jurisdiction to assess the scope of the arbitration agreement.
French case law which favors arbitration, interprets this exception very restrictively.
In the case at hand, Subway International had signed an engagement letter with a law firm in France, containing an arbitration clause conferring jurisdiction to the American Arbitration Association.
After Subway International withdrew its files from the law firm, the latter sued it for unfair and abrupt termination of contractual relations before the Chair of the Paris Bar and then before the Court of Appeal of Paris.
The law firm argued notably that the arbitration clause was only directed at disputes that occurred in the context of performance of the agreement and was thus evidently inapplicable to a liability action grounded on the unfair and abrupt termination of the agreement.
The Court of Appeal rejected the claim, deeming that when an interpretation of the arbitration clause or a search for the common intention of the parties is required, its inapplicability cannot be considered as obvious.
The Cour de cassation approved this decision, in line with its case-law whereby a clause which is only directed at the performance of the agreement is not obviously inapplicable to the dispute relating to its termination (Cass. Civ. 1st, 27 February 2013, No. 12-16328).
Therefore, there has to be a serious doubt as to the common intention of the parties for the judge to consider that the clause is clearly inapplicable to the dispute. Such is the case for example when agreement of the parties on the very principle of arbitration has not been demonstrated (Cass. Civ. 1st, 6 November 2013, n° 11-18709: The arbitration clause was inserted in the terms and conditions of the service provider who was unable to prove that they had been brought to the knowledge of the customer).
Selective distribution: judicial liquidation of an authorized distributor and resale of products outside the network
Cass. Com., 16 February 2016, n° 14-13017, Chanel
Following the judicial liquidation of an authorized reseller of the Chanel network, a corporation had acquired the product stock of the brand by judicial auction before selling them via discount outlets.
Chanel held the purchaser liable for having breached a prohibition to resell outside of the network, pursuant to article L.442-6, I, 6° of the French Commercial Code.
As reminder, the implementation of this text assumes that a non-authorized distributor acquires, directly or indirectly, products from an authorized distributor, notwithstanding a prohibition clause for their resale outside the network.
Suppliers and their networks benefit from legal protection unless it is demonstrated that the network is anti-competitive (for example if the selective distribution contract contains clauses prohibited by EU Regulation No 330/2010) or that it is not completely closed (i.e. if all distributors are not bound by a clause prohibiting resale outside the network).
In the case at hand, the question was raised as to whether, as a result of the judicial liquidation of the authorized distributor, the clauses prohibiting resale outside the network stipulated in the selective distribution agreement remained enforceable against third parties and the liquidator.
The Cour de cassation confirmed this, deeming that the judicial liquidation of the authorized distributor did not render ineffective the selective distribution agreement, the provisions of which remain fully enforceable against both the liquidator and third parties.
The Cour de cassation then noticed that the liquidator had expressly indicated, in the legal publicity for the auction, that the purchaser had to seek the agreement of Chanel before reselling the products. The purchaser could therefore not seriously claim that he was unaware of the need to seek Chanel’s agreement before any resale.
Chanel finally reproached this company for having used its products as appeal products to sell other products of low quality which Chanel defined as unfair and parasitic competition.
Not surprisingly, the Cour de cassation also upheld this argument.
Publication by the French General Directorate for Competition Policy, Consumer Affairs and Fraud Control (DGCCRF) of the annual report of judicial decisions for 2015 with regard to restrictive business practices
Each year, the office in charge of restrictive business practices, issues a report summarizing the civil and criminal court cases in which the Minister of the Economy has been a party.
u On 23 decisions rendered in the presence of the Minister of the Economy, 19 originated from an action by the latter and the Minister intervened in 4;
u The activity was very focused on the issues of significant imbalance (representing 10 decisions out of the 23 rendered in civil law matters);
u The amount of the civil fines imposed by the courts was Euros 2,580,000 (nearly 4 times more than in 2014 but less than in 2013);
u The amount of the refunds of undue payments ordered by Courts reached a record high of Euros 78 Million.
As each year, the report is the opportunity to summarize useful case law.
On a criminal level, almost all of the sanctions focused on non- compliance with invoicing rules (giving rise to 158 notifications, 93 transactions for a total amount of nearly Euros 1 Million, and 44 criminal court decisions pronouncing a total of Euros 240,000 of fines).
In addition, the report highlights that 2015 was the first year of implementation of the provisions of the Hamon law of 17 March 2014, which considerably strengthened the powers granted to DGCCRF to enforce the law and apply administrative sanctions.
The DGCCRF, in this context, controlled 2,572 companies (including 82 companies of significant size and 197 companies of intermediate size).
876 companies were in breach of their legal obligations (i.e. 37% of the companies concerned) giving rise to 494 warnings,
148 injunctions, 14 criminal reports and 242 administrative reports.
In addition, the DGCCRF imposed administrative fines (as authorized by the law since 2014) of a total of nearly Euros 7 Million (the individual amount rarely exceeding Euros 100,000).
For more information, the DGCCRF’ report can be consulted online on: http://www.economie.gouv.fr/cepc/etudes- jurisprudence?language=fr.
Franchise & Distribution Networks Newsletter
N°8 - 3rd Quarter 2016
Compensation claim, concept of “new customers” – ECJ, C-315/14 – Relevant for franchise systems in Germany?
Whether or not franchisees have a termination indemnity claim against the franchisor on the basis of an analogous application of Sec. 89b HGB (German Commercial Code) upon termination/expiry of the franchise agreement has not yet been decided by the German Federal Court of Justice (Bundesgerichtshof, BGH).
However, with a view to the potential analogous application of Sec. 89b HGB, franchisors should be aware of new ECJ case- law regarding the concept of “new customers”, Art. 17(2) of Directive 86/653/EEC (reflected in Sec. 89b HGB).
According to the ECJ decision, even those customers may be regarded as “new customers” who already had business relations with the principal in relation to other goods, provided the sale of the products assigned to the commercial agent requires the establishment of specific business relations (in particular, as a result of negotiating efforts and sales strategy).
At first glance, if Sec. 89b HGB were applicable to franchise systems, this could also apply with respect to customers of such franchise system, who initially have bought certain products from a franchisee and later buy products belonging to a different/broader product range of the franchise system (in particular, because the franchise product range has been expanded).
However, in a franchise system there typically is one major brand under which products are sold, and a franchisor might successfully argue that such brand had not been changed, irrespective of changes in the product range.
If Sec. 89b HGB were applicable, this aspect could indeed lead to a court assessment different from the assessment in commercial agency cases (however depending on the circumstances). Franchisors should make courts aware of this aspect (furthermore, the requirement of “specific business relations” leaves room for interpretation and arguments), as this might result in a lower termination indemnity claim (if any) of a franchisee.
The termination indemnity claim in Franchise relationships
In our European Newsletter No 4/2015, we had informed you of a judgment from the German Federal Court of Justice (Bundesgerichtshof, “BGH”) with franchise relevance. According to said judgment, a mere factual continuity of the customer base in the form of an “essentially anonymous bulk business” does not fulfil the requirement for termination indemnity claims (if any) that the franchisee must be contractually obliged to transmit customer data to the franchisor upon termination or during the term of the agreement.
The Higher Regional Court Hamm (Oberlandesgericht Hamm, “OLG Hamm”) shares the view of the German Federal Court of Justice (BGH) in a recent judgment (18 U 35/13). According to the OLG Hamm judgment, an analogous application of sec. 89b of the German Commercial Code (HGB), which regulates termination indemnity claims of commercial agents, is not possible if there is no contractual obligation to transmit customer data to the franchisor but only a mere factual continuity of the customer base (in the case at hand: petrol station business, consisting of washing station and shop business).
In addition, the OLG Hamm confirms the relevance of the second requirement for termination indemnity claims (besides the contractual obligation to transmit customer data). According thereto, any indemnity claims of franchisees could only exist if the franchisee is integrated into the distribution system of the franchisor as if it were a commercial agent; the OLG Hamm holds that this requirement were also not fulfilled in the case at hand.
However, it is important to note that it has not yet been decided by the BGH whether franchisees in general can have a termination indemnity claim against the franchisor on the basis of an analogous application of sec. 89b HGB. We will keep you updated.
Brexit: Implications on your European Trade Mark, Copyright and Design rights
The results announced of the UK’s referendum on leaving the EU will have an impact on our clients’ European trade mark, copyright and design protection but not yet. It is not yet known what impact it will have and when. The key message for now is that nothing has changed just because of this vote and there is no immediate need to do anything.
Points to note for now are:
u The UK remains a member of the EU for now and all EU Trade Mark and EU Registered Design rights are presently unaffected by the vote, both within the UK and the other 27 Member States of the EU. National IP rights will not be affected in any event.
u Negotiations for the UK’s exit from the EU have not started and may not do so for some time. Once they start, they are expected to last at least two years. This means any changes to the scope of protection and remedies arising from these harmonised EU rights are unlikely to happen for at least two years.
u We anticipate that there will, in time, be an option to split out your EU trade mark and design rights so that you would have new equivalent rights in the UK but benefiting from
the same priority date. That should leave the EU rights separate and still covering the rest of the EU. This may require action but we will have, and we will give, ample warning to our clients about this.
u After Brexit, thanks to having appropriately European qualified staff, the Taylor Wessing UK team will continue to be able to file, prosecute and renew EU trade marks and designs and to handle any oppositions and cancellation actions at EUIPO and CJEU. Thanks also to our strong IP teams across Europe, we were recognised as European Trademark Firm of the Year 2016 by Managing Intellectual Property magazine. As a result, we are well placed to continue to advise our clients on their national, pan-EU and international portfolio, enforcement and advisory work from any of our European offices, whether from the UK, Germany, France, the Netherlands, Austria, Slovakia, Poland, Czech Republic or Hungary.
u We are ready to advise clients on an individual basis about the implications for their portfolio, enforcement and licensing strategies, including:
- whether, at the appropriate time, any new precautionary national or EU filings may be needed and when;
- how a Brexit may affect the remedies available from and granted by UK and European courts where EU rights are infringed;
- what drafting changes may be needed to current and future licences, co-existence agreements and other contracts;
- whether and the extent to which this will change the ability to prevent goods being parallel imported into the UK or the rest of Europe;
- the future of trade mark use obligations and how use in just the UK or just the rest of the EU other than the UK will affect the validity of EU Trade Marks.
u As with the other IPRs discussed above, so with copyright there will be no sudden change to the position in respect of UK copyrights. Copyright is still dealt with as a national right in each EU Member State and so the current UK copyright regime will stay the same for at least the next 2 years, and possibly for much longer.
u Uncertainty may arise (though not yet) over the impact on areas of copyright which have been harmonised across the EU. The future impact on UK copyright law will depend on the terms of the UK’s departure. A model where the
Europe > Middle East > Asia
UK retains or wishes to retain access to the EU’s single market may well require the UK to continue to adopt EU copyright legislation either as a matter of law or as a matter of pragmatism to facilitate doing business in the EU. We will be analysing these effects as they emerge.
u In addition, the impact of current EU moves to reform copyright may now not be felt in the UK, or at least not in the same way as had the UK remained. As part of its Digital Single Market initiative, the EU is undertaking its most significant copyright reform since the dawn of the digital era. Areas of possible reform include around geo- blocking, cross-border content licensing, platform liability and copyright exceptions.
u Grégoire Toulouse
T: +33 (0)1 72 74 03 33
u Heiko Franke
T: +49(0)211 8387-0
u Mark Owen
T: +44 (0)20 7300 4884
Contributors to the Newsletter:
France: Grégoire Toulouse, Fanny Levy, Noémie Vincent. Germany: Heiko Franke.
UK: France Delord, Charles Llyod, Roland Mallinson, Mark Owen, Jason Rawkins, Niri Shanmuganathan, Christopher Benson, Timothy Pinto.
© Taylor Wessing 2016
This publication is intended for general public guidance and to highlight issues. It is not intended to apply to specific circumstances or to constitute legal advice. Taylor Wessing’s international offices offer clients integrated international solutions. Though our offices are established as distinct legal entities and registered as separate law practices, we are able to help our clients succeed by providing clear and precise solutions with high-level legal and commercial insights. For further information about our offices and the regulatory regimes that apply to them, please refer to taylorwessing.com/regulatory.html and rhtlawtaylorwessing.com.