Karsten Metzlaff Karl Rauser March 23 2004 Franchiser's Obligation to Pass on Kickbacks Noerr PartGmbB | Franchising - Germany Karsten Metzlaff, Karl Rauser Franchising Background Facts Decision Comment Background Franchisors which do not supply their franchisees with goods themselves, but which oblige franchisees to obtain goods from system suppliers, often receive purchase benefits from the suppliers in the form of price discounts (eg, refunds, bulk discounts and differential discounts), depending on the volume of goods purchased by the franchisees. Such kickback payments are prohibited in the United States. In recent years discussion has arisen as to whether, and if so to what extent, franchisors are obliged to pass on such purchase benefits to franchisees in Germany.Initial clarification of the question is to be found in the Sixt judgment handed down by the German Federal Court of Justice on February 3 1999. In that decision the court held that there is no general principle in German law requiring the franchisor to pass on to the franchisee all benefits arising from the fact that supplies are obtained from sources developed by the franchisor. It is considered to be a question of the franchise agreement concluded by the parties, and the interpretation thereof, as to whether the franchisee has a claim to the passing on of purchase benefits on the basis of the agreement. Consequently, the matter depends solely on the details of the individual franchise agreement.However, a large number of franchise agreements contain general and often poorly worded clauses according to which the franchisor "must support the franchisee in negotiations with suppliers" or must pass on to the franchisee the "benefits of the system". In its Apollo-Optik decisions of 2003 the German Federal Court of Justice addressed the wording of such clauses.FactsThe case concerned a franchise system which operated a chain of opticians in Germany, with about 150 of its own stores and 90 stores run by franchisees. In dispute was a clause contained in a standard form franchise agreement, which was worded as follows: "6.3 Apollo shall take care of the partner as regards business development and business operations in compliance with the system, and shall pass on to the partner benefits, ideas and improvements in order to achieve the best possible business success." The question was whether the franchisor was obliged to pass on all purchase benefits in the form of price discounts. The franchisor had negotiated with suppliers discounts on supplies to franchisees. However, the negotiated discounts were not passed on to the franchisees in full; instead, the franchisor had arranged for the suppliers to pay it differential discounts, consisting of the difference between the discount rate negotiated for its own retail stores (a maximum of 52% of the list prices) and the lower discount rates which suppliers granted to the franchisees (a maximum of 38% of the list prices).DecisionThe interpretation of the clause adopted by the Federal Court of Justice was that the franchisor was obliged to pass on all purchase benefits it had negotiated for franchisee purchases in framework agreements with suppliers. It based this conclusion on the interpretation of the relevant contractual clause. The court proceeded on the basis of the wording of the clause as it would be understood by honest parties entering into a franchise agreement. Since the franchisor had undisputedly negotiated a scale of discounts without this being expressly mentioned in the agreement, the Federal Court of Justice considered it obvious that such advantageous opportunities to obtain supplies were to be regarded as "benefits ... in order to achieve the best possible business success".The Federal Court of Justice further held that even if the clause was to be considered ambiguous, this interpretation would nonetheless arise from the application of the rule on ambiguities. According to this rule, where a clause in a standard form contract is ambiguous, the interpretation which is most beneficial to the franchisee will apply.Therefore, the outcome on the basis of the chosen wording of the contract was that the franchisor was obliged to pass on to its franchisees, in full, all discounts it had negotiated with the suppliers for purchases made by its franchisees. Further, the franchisor had incurred liability for damages by causing the suppliers to indicate in the scale of discounts a lower discount for franchisees than in fact had been agreed, and by causing the suppliers to pay it a differential discount.CommentNumerous franchise agreements will contain similar, poorly worded clauses which, on the basis of the rule on ambiguities, could lead to claims accruing to franchisees. The claims of the Apollo franchisees could have been avoided by selecting a different wording for the clause. In future, a franchisor will have to refrain from including any clause in a franchise agreement whose wording could force it to make payments which it did not intend to make in that form. For further information on this topic please contact Karsten Metzlaff or Karl Rauser at Nörr Stiefenhofer Lutz by telephone (+49 30 20 94 20 00) or by fax (+49 30 20 94 20 94) or by email ([email protected] or [email protected]).