Facts

A franchisee filed a claim against its franchisor challenging alleged acts of unfair competition by the latter. In particular, the franchisee alleged that the franchise agreement imposed a sale price for products (comfits and ancillary products) and did not allow it to carry out sales campaigns or promotional activities. Further, the franchisor sold the same products on the wholesale market at lower prices, even lower than those paid by the franchisees to the franchisor. As a result, the franchisee argued that the franchisor had breached the exclusivity provision set out in the franchise agreement and was guilty of unfair competition.

The franchisee filed for an injunction asking the court to prohibit the sale by the franchisor of the products that were the subject of the franchise agreement on the wholesale market in a certain territory.

The franchisor filed its defence before the court stating that the exclusivity obligation under the franchise agreement had not been violated since it prohibited the franchisor only from opening new stores or executing new franchise agreements in the exclusive territory and did not prohibit the sale of products on the wholesale or other markets.

Decision

The court accepted the franchisee's request in full and prohibited the franchisor from selling the products to wholesalers in the territory at issue for the duration of the franchise agreement.

The court deemed that the contractual provision made no explicit reference to any (exclusive) right of the franchisor to sell on the wholesale market.

According to Article 3(4)(c) of the Franchising Law (129/2004), a franchise agreement must expressly indicate "the scope of possible exclusive territorial rights granted either vis-à-vis other franchisees of the network, or vis-à-vis sales channels and outlets run directly by the franchisor". This right should have been specified in order to fulfil the franchisor's disclosure obligations under:

  • Article 6 of the Franchising Law, which requires the parties to behave towards each other with loyalty, honesty and good faith and to provide each other with information that the other would consider necessary or useful with a view to concluding the contract; and
  • Article 1337 of the Civil Code, under which parties will conduct themselves in good faith when negotiating a contract.

In this context, the court deemed that the exclusivity provision must be understood in accordance with the principle of good faith and together with the other contractual provisions. As stated by the Supreme Court, good faith constitutes a "joint obligation", which requires that each party act to safeguard the interests of the other.

Pursuant to the above principle, the franchisor's argument was rejected, as it would have created an imbalance between the rights of the franchisor and the franchisee.

Comment

In accordance with the above decision, as well as the general principle stated by Article 3 of the Franchising Law, the exclusivity provisions in a franchise agreement must detail the scope and limits for the franchisee and the franchisor. In particular, the right of the franchisor to sell exclusively in different markets or at points of sale managed directly by the latter should be clearly and expressly stated in the franchise agreement.

Notwithstanding the contractual wording, the franchisor is required to act fairly and in good faith and must avoid causing potential damage to its franchisees, taking into account the initial investments, costs and royalties required to enter into a franchise agreement.

For further information on this topic please contact Marco De Leo or Beatrice Masi at Rinaldi e Associati by telephone (+39 02 7600 8860) or email (mdeleo@rinaldilawf.com or bmasi@rinaldilawf.com). The Rinaldi e Associati website can be accessed at www.rinaldilawf.com.

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