Business climate and recent developments
What is the extent of franchise business in your jurisdiction, including any particular franchise-heavy sectors and notable recent developments?
The Swiss legal environment is favourable for franchising as it contains fewer restrictions than many other legal systems.
Franchise agreements are common in the services sector, particularly in the retail, food and drink and hotel industries.
Swiss law is a good option to choose for the establishment of international franchise systems. Thanks to the country’s stable environment and its multilingualism, the Swiss market is often used as a test market for international franchises. Even if the franchise concept is not adopted in Switzerland and a franchise agreement does not have a direct link to the Swiss market, foreign parties to international franchise agreements often chose Swiss law to be the neutral applicable law.
Are there any franchising-specific laws in your jurisdiction? What other legal regimes apply?
Switzerland has no specific codified legislation specific to franchising.
Swiss law does not distinguish between:
- master franchise agreements;
- area development agreements; and
- local franchise agreements.
Apart from the general rules on contracts, specific rules on other types of contract are applied to franchise agreements by analogy according to case law. In particular, single rules of labour law (eg, with regard to social security) or sales agent law (eg, with regard to compensation for clientele) may apply by analogy under certain conditions.
Provisions under licence and IP law, company law, data protection law, unfair competition law and anti-trust law are also relevant for franchise agreements. As Switzerland is not a member state of the European Union, in general EU law does not apply.
Is there a legal definition of ‘franchise’?
There is no legal definition of ‘franchise’ in Switzerland. Therefore, it may be difficult to draw a clear distinction in practice between an ordinary distribution agreement and a product franchise agreement where the franchisee sells products or services under a uniform distribution concept.
According to the Swiss Supreme Court, ‘franchising’ is defined as being the distribution of goods and services through independent dealers, but according to a uniformed concept of distribution, the franchisee sells the goods and services in its own name and for its own account. However, the franchisee is obliged to follow the uniformed distribution and marketing concept as provided by the franchisor (see Supreme Court decision 118 II 158).
One important element of franchise agreements is the licence of trademarks, know-how and other IP rights from the franchisor to the franchisee.
Are there any specific regulatory implications for foreign franchisors seeking to expand into your jurisdiction?
For most industries, there are no significant regulatory implications for foreign franchisors. Restrictions may apply with regard to residence and work permits for foreign citizens (particularly for non-EU nationals and individuals from countries which are not part of the European Free Trade Association). Further restrictions may apply for specific industries, none of which are specific to franchising.
Are any regulatory reforms envisaged or underway that affect franchises?
The planned reform of the Swiss Data Protection Act may affect franchises.
Which models and company forms are commonly used for franchises in your jurisdiction? Are there any restrictions or requirements as to which models and forms may be used?
Most franchisors are organised either as a stock corporation (AG) – which is the most popular company form in Switzerland – or as a limited liability company (GmbH).
Are there any national or regional franchising associations? If so, is membership mandatory and what operational codes and guidelines apply?
The Swiss Franchise Association represents the interests of the franchise industry in Switzerland. The association:
- offers workshops for continuing education on franchising;
- provides information about the national and international development of franchising;
- is active in public relations for the interests of the franchise industry; and
- promotes quality through its Code of Ethics, which must be followed by association members.
Membership of the association is open to franchisors and master franchisees but is not mandatory.
Common features and contractual requirements
What are the common elements of franchise agreements in your jurisdiction? Do any requirements or restrictions on contractual provisions apply?
Freedom of contract is an important principle in Swiss contract law. Parties are free to determine the terms of a contract within the limits of law. The only terms that are deemed to be invalid are those:
- which are impossible to implement; or
- which are considered unlawful, immoral or against the public order (Articles 19 and 20 of the Swiss Code of Obligations).
Typical elements in franchise agreements which may be in conflict with Articles 19 and 20 of the Swiss Code of Obligations include:
- the duration of the agreement (which are frequently long); and
- the exclusion of franchisor liability vis-à-vis the franchisee.
As a general rule, the exclusion of such liability is not possible in case of unlawful intent or gross negligence (Article 100 of the Swiss Code of Obligations).
A typical franchise agreement has a static element, which covers the consistent aspects of the franchise and a dynamic element, which includes all aspects that the franchisor may unilaterally adapt during the term of the agreement. The latter includes:
- IT systems; and
- other information sources which describe the franchise concept and the know-how required to put the concept into practice.
The important elements of a franchise agreement include:
- the subject of the franchise and rights of use;
- the licence of IP rights;
- the territory, exclusivity and limited territorial protection (as admissible under competition law);
- the franchise fee (initial entry fee and ongoing fees);
- the franchisee’s obligations to promote the sale of goods (including instructions for advertisement and marketing);
- the requirements for the purchasing of goods and procurement;
- the services to be provided by the franchisor (eg, know-how transfer, courses and training and counselling);
- the franchisor’s right to give directives;
- confidentiality obligations;
- non-competition obligations (as admissible under competition law);
- the franchisor’s control rights (eg, the right to perform audits);
- reporting and accounting obligations;
- the rules in connection with the transfer of business;
- the contract term and renewal, contract termination rights and the consequences of termination; and
- the choice of law clause and place of jurisdiction or arbitration clause.
Are parties to a franchise agreement subject to an implied or explicit duty of good faith?
As a general rule, each party to a franchise agreement must act in good faith in the exercise of their rights and in the performance of their obligations (Article 2(1) of the Swiss Civil Code).
Are franchise agreements subject to any formal or documentary requirements, including registration?
No. From a legal point of view, franchise agreements can be agreed orally. However, it is standard practice to sign a general written agreement which the franchisor adopts for all franchisees.
As franchise agreements are usually pre-formulated agreements (standard form contracts), the rules on general business conditions apply – this generally works to the disadvantage of the franchisor.
What due diligence should both parties undertake before entering into a franchising agreement?
Larger franchisors often adopt a standardised application process for potential franchisees. During this process, the potential franchisees must submit detailed information about their background, business experience in the relevant industry and financial situation. The application process will also often include personal interviews.
For a potential franchisee, it is more difficult to obtain relevant information about a franchisor. Some information may be publicly available if the franchisor is a listed company. However, the most pertinent information may not be available. The franchisee should try to get as much information about the franchising concept and the market situation as possible from the franchisor and can also ask permission to contact existing franchisees. The franchisor must provide potential franchisees with any relevant information in connection with the franchise agreement
Are franchisors subject to pre-contractual disclosure requirements? If so, do any exemptions apply? What remedies are available to franchisees in the event of breach of these requirements?
According to case law, both parties must disclose any relevant information in connection with the franchise agreement. As a general rule, the scope of a franchisor’s obligation to disclose is more extensive, as generally franchisors are more familiar with the franchise business than potential franchisees. For the potential franchisee, there is usually no alternative than to rely on the franchisor’s obligation to disclose relevant information as the details of the franchise concept and franchisor know-how is generally protected by confidentiality obligations.
The relevant information which must be disclosed by the franchisor includes:
- the rights and obligations under the franchise agreement, but also all relevant facts about the relevant market in which the franchise will be operated;
- the business of the franchisor;
- the franchise concept;
- the experiences of the franchisor with regard to the franchise concept; and
- alternative distribution channels which the franchisor adopts to sell contractual products.
The potential franchisee is also obliged to disclose relevant information (eg, about their financial situation).
The disclosed facts must be accurate and complete. Each party may be entitled to claim damages based on culpa in contrahendo if they can demonstrate that the pre-contractual information of the counterparty was inaccurate or incomplete. If the party would not have entered into the agreement if they had known the correct or full information, they may be entitled to rescind the agreement.
Choice of law
May the parties freely choose the governing law of the franchise agreement?
Yes, according to Article 116 of the Federal Act on Private International Law, the parties to a franchise agreement may freely choose the governing law. The choice of law must be explicit or at least clearly evident from the agreement or the circumstances.
What fees are typically charged under a franchise agreement?
There are no specific laws regarding the nature, amount or payment of a franchise fee. Typically, the franchisee must pay an initial fee for the advanced services of the franchisor (ie, for the planning and development of the system). For the rights and advantages related to the use of the system, the franchisee must usually pay ongoing fees (often a percentage of sales).
Do franchisees have a right of renewal?
A right of renewal exists only if it was agreed to in the franchise agreement.
On what grounds may a franchisor refuse to renew?
An obligation to renew the franchise only exists if it has been agreed in the franchise agreement. The grounds on which the franchisor may refuse to renew must also be provided in the terms of the agreement.
How are renewals of franchise agreements usually effected? Do any formal or substantive requirements apply?
Unless otherwise agreed in the franchise agreement, the renewal of a franchise agreement is subject to the parties’ mutual agreement.
On what grounds may a franchisor terminate a franchise agreement? Are any remedies available to franchisees in this regard?
The parties may agree on a limited or unlimited term for the franchise agreement. With regard to ordinary termination, the parties are free to agree on the termination regime and to choose the termination period and a set termination date.
An extraordinary termination of the agreement is possible at any time and with immediate effect for so-called ‘valid reasons’. Valid reasons for an extraordinary termination exist when the continuation of the contract until the next proper termination date is unacceptable to the other party. The burden of proof that such valid reasons exist lies on the party which terminates the agreement.
It is crucial to carefully agree on the appropriate obligations after termination. Often, obligations after termination are not given sufficient attention, despite the fact that at this stage the relationship between the parties can become strained and amicable solutions are often not possible.
Ongoing franchisor/franchisee relationship
What mechanisms (formal and informal) are commonly used by franchisors to ensure franchisee compliance with the operational terms and standards of the agreement?
Inspection rights and audits allow the franchisor to ensure that the franchisee is complying with the terms of the agreement and with the applicable law.
In case of non-compliance, the franchise agreement typically allows the franchisor to take appropriate actions. In case of the breach of fundamental obligations, the franchisee may be liable for contractual penalties and the franchisor may be entitled to terminate the agreement.
Amendment of operational terms
Can the franchisor unilaterally change operational terms and standards during the course of the agreement?
A typical franchise agreement includes a static element, which covers the consistent aspects of the franchise and also an important dynamic element, which covers all aspects and standards which the franchisor may unilaterally adapt during the term of the agreement. This includes:
- IT systems and other information sources which describe the franchise concept; and
- know-how which is required to put the concept into practice.
The dynamic element allows the franchisor to refine its franchise concept and to adapt it to changing market conditions and developments.
Typically, the franchise agreement defines which elements of the agreement may be unilaterally adapted by the franchisor and the rules which must be followed for such unilateral adaptations.
If the agreement does not list which elements of the agreement can be adapted, an implicit right for the franchisor to make unilateral adaptations exists. However, the exact scope of such an implicit right can be controversial, it is therefore advisable that the scope and rules surrounding adaptations are clearly outlined in the franchise agreement. Any adaptations must not unreasonably affect the franchisee. In case of a dispute, a judge would be entitled to assess whether the franchisor’s adaptations were inequitable.
Do any specific laws affect the ongoing franchisor/franchisee relationship after they enter into the franchise agreement?
There are no franchise-specific laws in Switzerland which affect the ongoing franchisor/franchisee relationship.
However, the ongoing relationship may be relevant for the legal question of which rules of law apply to the individual franchise agreement by analogy. In particular, single rules of labour law (eg, with regard to social security) or sales agent law (eg, with regard to the compensation for clientele) may apply by analogy under certain conditions. In order to decide on this legal question, the judge will not only take into account the wording of the franchise agreement, but also how the parties put the agreement into practice. This may be even more important than the wording of the agreement, particularly for franchise agreements that were agreed many years ago. Based on the ongoing franchise relationship, the judge will assess whether the franchisor grants significant autonomy to the franchisee.
Do any ongoing disclosure requirements apply during the course of the agreement?
Based on the principle of good faith performance (Article 2(1) of the Swiss Civil Code), parties may be obliged to inform their counterparty about substantial changes which may adversely affect the franchise.
Transfer and sale
Transfer and sale
What rules and procedures apply to the transfer and sale of a franchise business?
The parties are free to determine the conditions and the procedure applicable to the transfer of business in a franchise agreement. They may define the conditions under which the franchisor will continue the franchise with the acquirer. They may also agree on right of first refusal in favour of the franchisor in case of the sale of the franchise business.
What competition laws apply to franchises, with particular regard to:
(a) Non-competes and other restrictive covenants?
The general rule for vertical agreements says that a non-compete obligation during the term of the agreement should be limited to a maximum of five years. A longer duration may be admissible but should be assessed according to each individual case.
Post-contractual non-compete obligations may be agreed only in extraordinary cases provided all of the following conditions are met:
- the obligations are limited to the sale of products or specific services competing with the contractual products or services;
- the obligations are limited to the premises where the franchise business was operated; and
- the obligations must not last for longer than one year after termination.
Further, any post-contractual non-compete obligations must be used only to protect the know-how which the franchisor has disclosed to the franchisee.
(b) Exclusive geographical areas?
Absolute territorial protection is unlawful; passive sales of extra-territorial resellers into the geographical area which has been exclusively allocated to the franchisee must not be prohibited.
(c) Price fixing and mandatory product purchases?
Resale price maintenance is unlawful. However, the franchisor may impose a maximum resale price on the franchisee, provided that such a price does not have the same effect as a fixed price. Maximum resale prices are common in franchise agreements.
Mandatory product purchases may be admissible if these are required to ensure the uniformity of the franchise concept. However, they should be carefully assessed on an individual basis, in particular if they could potentially impede the import of parallel products into Switzerland.
(d) Online trading?
A general prohibition of online sales by the franchisee is not admissible. However, the franchisor can define quality standards for online sales if they are equivalent to the quality standards for offline sales. In addition, the franchisor may prohibit purely online sales, meaning that the franchisor may require physical sales in a brick and mortar store to occur in addition to online sales.
For franchise agreements, the general rules for vertical agreements are particularly relevant. If one of parties has a dominant position in the relevant market, the specific rules regarding the abuse of a dominant position must also be observed.
How can franchisors protect their intellectual property (eg, trademarks and copyright)?
Trademarks and patents are protected provided they are registered in the public registry or in accordance with international treaties. The registrant benefits of legal exclusivity.
Copyrights do not require registration. A work qualifies for copyright protection if it meets the legal requirements for copyright protection.
Must IP licences be registered?
Registration is not mandatory. Trademark and patent licences may be registered. They then become binding on any rights to the trademark subsequently acquired (Article 18 (2) of the Trademark Protection Act and Article 34(3) of the Patents Act).
How can franchisors protect their know-how and trade secrets?
There is no general definition of ‘know-how’ in Swiss law. The Swiss Competition Commission defines ‘know-how’ as a package of practical information, resulting from experience and testing, which is secret (not generally known or easily accessible), substantial (significant and useful for the production of the contract products), and identified (described in a sufficiently comprehensive manner) (Article 7 of the Communication on Vertical Agreements).
The owner of know-how does not benefit of legal exclusivity. However, to the extent that know-how is considered a business secret, the owner is protected against disclosure, espionage or the use of knowledge illegally acquired, according to the rules of the Unfair Competition Code and the Criminal Code.
Confidentiality clauses – often combined with contractual penalties in case of breach – are a common element of franchise agreements in order to protect franchisor know-how.
What are the consequences of a franchisee’s breach of the franchisor’s IP, know-how or trade secret rights and what remedies are available to the franchisor in this regard?
If a confidentiality clause is (allegedly) violated by a party, the non-breaching party may claim enforcement of the clause before the competent court and the arbitral tribunal, respectively. Injunctions and preliminary injunctions are both possible before or during main court proceedings. Often, parties agree on a contractual penalty for breaching confidentiality.
Laws and considerations
What real estate laws and considerations should franchisors bear in mind where:
(a) The franchisor owns the premises on which the franchisee operates?
In this case, the franchise agreement will include provisions which relate to the lease of these premises from the franchisor to the franchisee. According to the prevailing opinion in Switzerland and from case law, the (semi-)mandatory provisions on the leasing of commercial premises (enacted by the legislator in order to protect the lessee’s interests) should not apply to the franchise agreement by analogy, provided the elements of lease are only an ancillary component of the agreement of minor importance. In the context of a franchise agreement, this should generally be the case.
(b) The franchisor sub-leases the premises to the franchisee?
If the lease agreement between the franchisor and the landlord does not allow the franchisor to sub-lease the premises without presuppositions, the franchisor is only entitled to sub-lease the premises to the franchisee with the landlord’s consent. However, the landlord may refuse consent only if:
- the franchisor refuses to inform them of the terms of the sub-lease;
- the terms and conditions of the sub-lease are unfair in comparison with those of the principal lease; or
- the sub-letting gives rise to major disadvantages for the landlord.
(c) The franchisee leases the premises from a third-party landlord?
Most franchise concepts contain standards which the premises must meet. The franchisor should assess whether the leased premises comply with these standards. The franchise agreement should include a warranty signed by the franchisee, which states that they comply with their obligations towards the landlord and that the terms of the lease agreement allow that they can operate the franchise concept in the leased premises.
(d) The franchisee owns the premises?
Many franchise concepts contain standards which the premises must meet. The franchisor should assess whether the leased premises comply with these standards. The franchise agreement should include a warranty signed by the franchisee, which states that they can operate the franchise concept in the leased premises.
Can franchisees or their employees be regarded as employees of the franchisor for liability purposes? If so, how can franchisors mitigate this risk?
Labour law and sales agent law are not directly applicable to franchise agreements. However, single rules may apply by analogy to protect franchisees; particularly in a subordination franchise agreement where the franchisee lacks autonomy for its business decisions (similar to an employee). The more the franchisee lacks autonomy, the more potential there is for labour law to be applicable by analogy.
This risk can be mitigated by avoiding imposing restrictions and requirements on franchisees which would ordinarily be imposed on employees. It is also important to clearly state in the agreement that the franchisee will remain a legally independent entrepreneur, with sufficient freedom to make its own business decisions. However, a judge may come to a different conclusion after having assessed the full agreement and the way that it was implemented.
The application of labour law rules to franchise agreements may have extensive consequences for the franchisor. For example, the franchisor may become responsible for the franchisee’s social security contributions.
Tax and currency controls
What tax regimes apply to the franchisor/franchisee relationship?
Important applicable taxes include:
- corporate income tax;
- withholding taxes (for foreign investors); and
- value-added tax (VAT).
Payments made under franchise agreements are subject to corporate income tax.
Tax burdens vary from canton to canton (with the exception of VAT). However, in general Switzerland has a favourable tax regime for franchise undertakings.
Do any currency controls apply with respect to foreign franchisors?
No currency controls apply with respect to foreign franchisors.
What issues are typically the subject of disputes arising in the franchisor/franchisee relationship?
The obligation of franchisees to promote the sale of goods often leads to disputes. This is mostly due to disagreements as to what measures the franchisee is obliged to take to promote sales and to develop and enhance the franchise system. Other common issues which can lead to disputes include:
- (alleged) violation of non-compete or exclusivity obligations;
- late payments by the franchisee; and
- price increases by the franchisor.
During the term of the agreement and as long as both parties want to continue their contractual relationship, disputes are generally settled amicably. However, in the context of the termination of franchise agreements, disputes often arise and regularly lead to litigation or arbitration. Typical issues at this stage include franchisee claims for compensation for clientele and, less frequently, compensation for investment costs.
Which venues are empowered to hear franchising disputes in your jurisdiction? What considerations should be borne in mind when choosing a venue?
Franchising disputes can be brought before any court which has territorial jurisdiction.
Some cantons (Aargau, Berne, St Gall and Zurich) have established special courts for commercial matters, with judges who have special knowledge with respect to commercial matters, including intellectual property. These commercial courts are generally a good choice for franchising disputes, particularly those in a complex international context. However, they do not purely specialise in franchising, but generally in commercial matters.
Alternative dispute resolution
Is alternative dispute resolution (ADR) commonly used for franchising disputes in your jurisdiction? What considerations should be borne in mind when opting for ADR?
ADR is not commonly used in Switzerland. This also applies in relation to franchise disputes.
Foreign judgments and awards
What regulations and procedures apply to the recognition of foreign judgments and arbitral awards where international franchising networks are concerned?
Switzerland is a party to the Lugano Convention, a parallel convention to the Brussels I Regulation. The Lugano Convention applies in civil and commercial matters, which includes judgments in the context of franchise agreements. Pursuant to the convention, judgments rendered in a member state of the European Union or in another convention contracting state can be recognised and enforced in Switzerland. The rules and conditions for the recognition of judgments generally correspond to the rules of the Brussels I Regulation. If the Lugano Convention or any other international treaty does not apply, foreign judgments are recognised according to the provisions of the Federal Act on Private International Law.
With regard to foreign arbitral awards, recognition and enforcement in Switzerland is governed by the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention), even if the arbitral tribunal had its seat in a non-member state of the New York Convention.