Background
Arguments
Regional Court of Berlin Decision
Outlook
In the past, the franchise world believed in territorial protection. Franchisors did not force franchisees to compete with other franchisees, or with the franchisor itself, for the same customer base in their market and trading area. Territorial protection was regarded as a tool to facilitate the franchisee's economic success. It was ensured by express exclusivity stipulated in the franchise agreement. Nowadays, however, franchisors are often under pressure to show growth. They enter the market through kiosks, tandem units, dual branding, product placement in supermarkets and the like. Further, they no longer hesitate to establish new stores next to those of existing franchisees. Franchisees thus find themselves facing reduced margins and greater competition; they suspect that the franchisor is seeking to take advantage of consumer awareness which the franchisees themselves have created.
This has caused lawyers to invoke the franchisor's duty to protect its franchisees against competition. This duty must be fulfilled where the parties explicitly agreed on territorial protection in the franchise agreement. Where there is no such contractual obligation, however, the question arises whether each franchise agreement contains such an implied duty.
Some lawyers have argued that the franchisor's duty to protect the franchisee against competition from both the franchisor itself and from other franchisees follows from the nature of the franchise agreement. Under a franchise agreement, the franchisor must communicate know-how and provide commercial or technical assistance. It is also obliged to provide sufficient market potential to utilize the franchise know-how. This obligation encompasses the franchisor's implied duty to protect the franchisee against competition from the franchisor or other franchisees.
This view is supported by an application by analogy of the law governing the relationship between commercial landlord and tenant. Under this law the landlord is prohibited from renting business floor space in the same building to the tenant's competitors, so that the tenant can fully exploit the rented area. Many argue that this principle must also be valid for the franchisee, in order to allow him a proper exploitation of the transferred know-how.
Regional Court of Berlin Decision
The Regional Court of Berlin did not share this view in a judgment it issued in 1999. It rejected a general implied duty of the franchisor to protect its franchisee against competition from the franchisor itself or from other franchisees. The court argued that even if the duty to protect a commercial tenant against competition from other tenants is an accepted duty of the landlord, this duty only aims to protect the tenant against competition from other tenants located in the same building, in an adjoining property or at most in the immediate neighbourhood. Thus, even if one accepts that the franchisor has such an implied duty, this duty would be limited to a similar range. In the case at hand the competing franchisee's premises were not located in the same building or in the immediate neighbourhood.
It has been argued that each franchise agreement encompasses the duty of the franchisor to protect its franchisees against competition from other franchisees. However, it is questionable whether this view can be supported by the principles of German civil law. The Regional Court of Berlin was not prepared to adopt this view in its 1999 judgment. It also follows from the judgment that the franchisor's duty of loyalty does not amount to a general and implied duty to protect its franchisees against competition from each other. An infringement of the duty of loyalty could only result in a franchisee's claim for damages if the franchisor puts his economic existence at risk by allowing several other franchisees to be active in the same territory. However, whether the franchisor's duty of loyalty prohibits the admission of any other franchisees in the territory must be decided in each individual case.
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]).