Summary France u Conditions for reclassification of a distribution agreement as a franchise agreement u Abrupt termination of established commercial relationships and termination clause u For the ECJ, the abrupt termination of an established business relationship is a contractual matter u The legal French statutory payment deadlines do not apply to international sales subject to the Vienna Convention u Choice of the language of commercial agreements u Entry into force of the reform of contract law France Conditions for reclassification of a distribution agreement as a franchise agreement CA Paris, 4 May 2016, No. 15/10674, SARL Point Smoke / SASU Cigreats This case gave the Court of Appeal of Paris the opportunity to state anew that the commitment to transfer know-how is an indispensable factor in the classification as a franchise agreement. A licensor and a licensee had signed a trademark license agreement containing an exclusive sourcing clause. Due to the licensee’s non-compliance with its exclusive sourcing obligation, the licensor brought legal action against him for terminating the contract due to licensee’s own fault and requesting compensation for harm suffered. The licensee had, for its part, notably invoked the invalidity of the agreement on grounds of non-compliance with the pre-contractual disclosure obligation. In first instance and without even being asked to rule on this point, the French Commercial Court authorized itself to reclassify the agreement as a franchise agreement and pronounced it invalid after having noted the absence of transfer of know-how (even though there had never been any question of transferring know-how in this contractual relationship). The licensor appealed the decision, accusing the Court of having ruled ultra petita (beyond that which is sought) and of having reclassified the agreement without any grounds. The licensee argued that the reclassification as a franchise agreement was justified by the payment of an entry fee, the provision of technical and commercial documentation, the provision of distinctive signs in favour of the distributor, the obligation for the distributor to comply with the agreed upon outfit of the points of sale, and finally by the presence of an intuitu personae clause. The Court of Appeal, in its decision dated 4 May 2016, quite rightly refused the reclassification as a franchise agreement and reversed the decision of first instance, asserting that: u the agreement specified expressly that the supplier was not bound to transmit any particular know-how, and the provision of specific documentation cannot be considered as the transfer of know-how; u The other indicia invoked by the licensee were common to the majority of distribution agreements; and u The licensor had not performed the agreement like a franchisor. The licensor could not be reproached for failure to transfer Germany u Multi-level marketing (MLM) in Germany – Risks in view of fair trading law and criminal law u Commercial Agency Law: Termination Indemnity Claim – Advance Payments United Kingdom u Law Society-led working party endorses e-Signatures in business contracts Europe u A family affair – McDonald’s family trade marks come up trumps 1 Franchise & Distribution Networks Newsletter N°9 - 4th Quarter 2016 know-how, thereby justifying invalidity of the agreement, since such transfer had not at all been promised by the licensor. This decision should be welcome because it highlights that a contractual relationship can only be classified as a franchise agreement if there is a transfer of know-how (in addition to the provision of a brand and permanent assistance from the franchisor). In line with its case law (CA Paris, 31 March 1993, SA CGM de la Côte d’Azur / SA Prisunic), the Court of Appeal of Paris furthermore eliminates this incongruous idea consisting of reclassifying an agreement as a franchise agreement only to subsequently reproach a party for the lack of a qualifying element of the franchise agreement, in this case the transfer of know-how, even though such a transfer had never been agreed on by the parties. The issue of reclassification of distribution agreements as franchise agreements could reach an unprecedented scale in the coming months. Indeed, since the adoption of the El Khomri law (so-called “Labour Law”), on 21 July 2016, franchise networks with more than 300 employees will soon have to implement a dialogue forum with employees of franchisees. Other forms of network distribution (such as dealership, license, and co-operative networks) are not concerned by the law. It is therefore possible that both attempt to circumvent the text by choosing other arrangements than franchising and legal actions for reclassification, may multiply. Abrupt termination of established commercial relationships and termination clause CA Paris, 22 June 2016, No. 14/01512, SAS Vernouillet / FCA France Article L.442-6, I, 5° of the French Commercial Code punishes the act of abruptly terminating an established commercial relationship. Only force majeure or serious misconduct by the business partner are grounds for such a termination without notice and for avoidance of the sanctions. The decision rendered by the Court of Appeal of Paris on 22 June 2016 has just reiterated the importance of listing, in the agreement, the events that the parties consider as being serious enough to justify termination with immediate effect. In this case, car dealer had transferred the control of his company without seeking the prior written consent of the licensor, in disregard of its contractual obligations. Faced with this change of control and pursuant to the termination clause in the agreement, the licensor terminated the contract without notice. The automobile distributor then sought liability of its licensor by arguing that it was a case of abrupt termination of an established business relationship. The Court of Appeal of Paris, confirming the decision of first instance, deemed that “the parties expressly agreed that the transfer of the Company’s shares without the prior written agreement of Fiat France constituted an event justifying termination of the agreement ipso jure without notice”, and thereby dismissed the dealer’s demand. By characterizing in contractual terms the faults they consider as serious, the parties can deprive the judge of his power to exercise full discretion on the severity of the fault. The termination clause should therefore be carefully written and is an exercise of anticipation. This exercise is however limited by the notion of abuse of right which may be punished by the provisions of Articles L.442-6, I, 2° of the French Commercial Code and new article 1171 of the French Civil Code, which prohibit, under certain conditions, clauses that create a significant imbalance between the rights and obligations of the parties to the contract. For the ECJ, the abrupt termination of an established business relationship is a contractual matter ECJ, July 14, 2016, case C-196/15, Granarolo For nearly 10 years the case seemed to have been settled: the action for damages grounded on the abrupt termination of established business relationships (article L.442-6, I, 5° of the French Commercial Code) was a tortious action (in other words non-contractual) (Cass. Com., 6 February 2007, n°04- 13178). This legal classification imposed by the Cour de Cassation was vindicated by a desire to standardize the regime applicable to this action, whether the parties had or had not formalized their business relationship by a written contract, and to impose, in any event, compensation for the injured party in relation to the abruptness of the termination. This solution was however relatively counter-intuitive especially for many foreign lawyers who found it difficult to understand how an action based on a breach of contract could be classified as a tort. As we indicated in edition n°4 of our newsletter (3rd Quarter 2015), by virtue of a preliminary question dated 7 April 2015, the Court of Appeal of Paris asked the ECJ about the tortious or contractual nature of this action, in litigation taking place within the European Union (EC Regulation n°44/2001 of the Council of 22 December 2000 known as Brussels I, today replaced by EU regulation No. 1215/2012, Brussels I bis). The legal qualification of the actions is indeed autonomous under this regulation, in other words, independent of the classifications given by national courts. In the case in question, an Italian company had terminated a relationship with its French distributor that had been established for twenty-five years by giving it one month’s notice. This relationship had not been formalized by a framework contract and no exclusivity had been granted. 2 Given that the termination of the business relationship was abrupt, the French distributor brought legal action against the Italian supplier before the French courts, pursuant to article L.442-6, I, 5° of the French Commercial Code. The Italian supplier then challenged the jurisdiction of the French courts on the grounds that the action was of a contractual nature and that solely the Italian courts had jurisdiction. The Court of Appeal of Paris therefore brought the question before the ECJ. Going against the opinion of its Advocate General, the ECJ considered that from the moment that there exists a contractual relationship, even non-written, an action for damages grounded on the abruptness of termination is a contractual matter. In order to determine the existence of a tacit contractual relationship, the ECJ asked the French judge to examine the nature of the relationship through a variety of indicia (length of the relationship, good faith between the parties, regularity of transactions and future development, agreements on prices, correspondence exchanged...). The established business relationship under article L. 442-6, I, 5° of the French Commercial Code clearly falls within this category. This decision is significant because the classification of the action grounded on the abrupt termination of an established business relationship as tortious or contractual has a direct impact: u firstly on the determination of the court having jurisdiction (at least in the absence of a clause conferring jurisdiction or an arbitration clause between the parties). Indeed, if the action is regarded as tortious, the competent court shall be that of the place where the harmful event occurred or may occur (article 7.2 of the Brussels I bis Regulation), whereas if it is considered as contractual, the general rule is that the competent court is that of the place where the obligation which serves as the basis for the application has been or should be executed (article 7.1). It is specified nevertheless that the Regulation provides for two special rules, for deliveries of goods and the provision of services. Distribution relationships (which go beyond purchase-resale relationships) are equated to the provision of services by the ECJ (ECJ, 19 December 2013, Corman-Collins, C-9/12) in such a way that the competent court in the absence of choice by the parties is that of the place where the services are being or have been rendered; u As to determination of the applicable law. In contractual matters the applicable law is the law chosen by the parties in the contract and, failing choice (for example in the event of a non-written agreement), the law of the country in which the distributor (or the franchisee) has his habitual residence (Article 4 (e) and (f) of EC regulation No 593/2008, Rome I) whereas if the action is tortious, the applicable law is the law of the country where the damage occurred, except if it results from the circumstances as a whole that the harmful event is clearly more closely connected with another country (article 4 of EC Regulation No 864/2007, Rome II). It remains to be seen what position will be adopted by the Cour de Cassation after that ruling, for international disputes that do not fall within the scope of application of the Brussels I bis Regulation (i.e. disputes that are not within the European Union). The legal French statutory payment deadlines do not apply to international sales subject to the Vienna Convention CEPC, notice No n°16-12 of 16 June 2016 The Commercial Practices Review Commission (“Commission d’examen des pratiques commerciales” (CEPC)) reached a decision on the application of the legal threshold of payment deadlines provided for by the French Commercial Code (article L.441-6 of the French Commercial Code), in an agreement falling within the scope of the Vienna Convention on the International Sale of Goods of 11 April 1980 (CISG). For the record, the CISG applies to contracts for the international sale of goods when (i) the contracting parties are established in States which have ratified the CISG (i.e. 85 States in the world), or that application of the rules of private international law lead to the application of the law of a contracting State and that (ii) the parties have not ruled out the application of the CISG. Despite the fact that it qualified the provisions of article L.441- 6 I paragraph 9 of the French Commercial code of overriding mandatory rules (Notice No. 16-1 of 16 January 2016), the CEPC indicates in its notice No 16-12 of 16 June 2016, that when the contract falls within the scope of the CISG, it is not subject to the statutory payment deadlines. Accordingly, for the CEPC, in international sales of goods subject to the CISG, the contractual freedom prevails, as long as there is no obvious abuse to the detriment of the creditor which would run counter to good faith and fair use, taking into account the nature of the product. Choice of the language of commercial agreements CEPC, notice No 16-10 of 30 May 2016 In its notice No 16-10, the Commercial Practices Review Commission (“Commission d’examen des pratiques commerciales” (CEPC)) confirmed that two French legal entities governed by private law may, by mutual agreement, draft their contractual documents in the English language, without breaching the Toubon law n° 94-665 of 4 August 1994 relating to the use of the French language. 3 Franchise & Distribution Networks Newsletter N°9 - 4th Quarter 2016 The CEPC stresses however that in the event of a litigation before the French courts, the judges may demand a sworn translation, with no obligation whatsoever to take into account documents written in a foreign language. Entry into force of the reform of contract law Ordinance No 2016-131 of 10 February 2016 Ordinance No 2016-131 of 10 February 2016 for the reform of contract law, the general regime of obligations and proof of obligations entered into force on 1 October 2016. The new provisions apply to agreements signed after its entry into force, as well as to those tacitly or expressly renewed on this date. It is recommended to networks that they review their forms of agreements governed by French law in light of the new provisions. Germany Multi-level marketing (MLM) in Germany – Risks in view of fair trading law and criminal law Whoever intends to set up a multi-level marketing system (“MLM system”) in Germany should pay attention to the relevant legal framework. The German and the European lawmaker have created rules which are intended to apply to illegal pyramid schemes and snowball systems; if an MLM system is not carefully designed and structured, there is a risk that third parties might successfully claim violation of the relevant rules, which may not only lead to damage claims but also to criminal punishment. u According to sec. 3 (3) UWG (German Act Against Unfair Competition) in conjunction with item 14 of the Annex to the UWG, it is an unfair commercial practice to establish, operate and/or promote a sales promotional scheme creating the consumer’s impression that remuneration can be obtained solely or primarily from introducing other participants into the scheme/system (pyramid scheme; snowball system). This provision is intended to reflect the requirements of item 14 of Annex 1 to the Unfair Commercial Practices Directive, i.e. Directive 2005/29/EC (in fact, the provision does not fully reflect these EU law requirements, but we will leave this aside here). u In addition to the abovementioned provision, so-called “progressive customer canvassing” is punishable under sec. 16 (2) UWG. Potential sanctions are imprisonment of up to two years and fines. In a nutshell, this provision also requires that benefits/compensation can only or primarily be obtained by introducing other participants into the scheme/system. u Carefully structured MLM systems, however, do neither fall under sec. 3 (3) UWG in conjunction with item 14 of the UWG Annex nor under sec. 16 (2) UWG, because in such systems benefits/compensation is not primarily granted for introducing other participants into the system, but for sales of the relevant products. u In order to ensure that an MLM system does not fall under these rules, the complete remuneration system concerned should be carefully reviewed and structured. For instance, any minimum purchase requirements, bonuses and rebates need to be examined. If the system offers no attractive remuneration for sales of products but appears to concentrate on remuneration components for introducing third parties into the system, there is a clear risk that it falls under the abovementioned rules. u On the contrary, the following aspects indicate that the respective system does not fall thereunder: g no entrance fee and no purchase of a certain (minimum) quantity is required for joining the scheme; g the purchase of a minimum quantity does not require any major expenditures that would need to be amortised by soliciting further participants; g the system provides for the option of returning the purchased products within a specific time period in the case of dissatisfaction; g the system is designed such that the incentive for obtaining bonuses in connection with the canvassing of third parties is reasonably proportional to the incentive for achieving profits through the margin between the purchase price and the sales price; g if minimum purchase quantities apply, they apply for participants on all levels of the system, not only for those on lower levels; and g interested parties are provided with an income overview giving a realistic impression of the earning potential. The overall rough rule of thumb is that remuneration must be rather granted for the acquisition of sales than for the acquisition of participants. Any proactively designed MLM system in Germany should take this into account in order to comply with applicable laws. Commercial Agency Law Termination Indemnity Claim – Advance Payments Pursuant to Sec. 89b HGB (German Commercial Code, Handelsgesetzbuch), a commercial agent shall be entitled to an indemnity after termination of the contractual relationship, if and to the extent the agent has brought the principal new customers or has significantly increased the volume of business with existing customers, the principal continues to derive substantial benefits from the business with such customers after termination of the relationship, and the payment of the indemnity is equitable, giving due consideration to all relevant circumstances. 4 While this indemnity claim does not come into existence prior to termination of the agency agreement and cannot be calculated prior thereto, it does happen that the parties make arrangements regarding advance payment on the indemnity under Sec. 89b HGB. In such cases it is agreed that the commercial agent shall receive a monthly prepayment which shall eventually be offset against the indemnity claim (when the latter will have been calculated). From the principal’s view this has, in particular, the positive effect of not having to pay the entire indemnity amount in one fell swoop upon termination of the contractual relationship, but of having paid most of the sum due when the contract term ends. Such an advance payment and offsetting arrangement is not automatically invalid and unenforceable, even though the indemnity claim does not even exist when the advance payment is made. However, it is effective only if certain strict requirements are met. Above all, according to existing case-law, any such payment must be clearly identified as an advance payment on the indemnity claim so that it can be unambiguously distinguished from the commercial agent’s commission. And, in simple terms, the principal must prove that no higher commission would have been agreed without such advance payment/offsetting arrangement. If he cannot prove this, the arrangement is invalid. Such case-law has been recently confirmed by the Federal Court of Justice (BGH) (judgment of 14 July 2016 – VII ZR 297/15). If a principal is unable to present such evidence, “double punishment” is imminent: on the one hand, the agent (possibly) receives higher remuneration (commission) during the contract term because the advance payment is deemed to be part of the commission, and on the other hand an undiminished indemnity claim exists upon termination of the commercial agency relationship. But even worse: As the agent’s remuneration will be deemed higher than the actual commission due to the combination of commission and advance payment, the indemnity claim will then likely be higher as well, as it is based on the commission paid to the agent, which is deemed to include the advance payment as well. To avoid these risks, it is for instance an option in practice to negotiate and contractually agree on the definitive commission as a first step, and, only as a second step, to negotiate and contractually agree on the prepayment and offsetting against the indemnity claim. It is conceivable, for example, to let a certain time period pass between executing the commercial agency agreement (including the agent’s remuneration) and agreeing on the prepayment/offsetting arrangement. United Kingdom Law Society-led working party endorses e-Signatures in business contracts What’s the issue? The EC adopted the Regulation on electronic identification and trust services for electronic transactions in the internal market (eIDAS) in 2014. It has been implemented inwto UK law by the Electronic Identification and Trust Services for Electronic Transactions Regulations 2016 (SI 2016/696), which came into force on 22 July 2016. The regulations repeal the E-Signature Regulations 2002. The ICO is appointed as the UK’s supervisory body for the purposes of the Regulations and will be required to oversee trust service providers’ compliance and impose sanctions including fines of £1000 for non-compliance. Under eIDAS, there is an element of discretion given to Member States both in terms of when and whether to join mutual recognition schemes but also to make any decisions about particular requirements for certain transactions (for example, transfers of land). While the recognition of the validity of e-Signatures is not new, they have been used with caution in the UK and lawyers have been historically wary of using them in certain situations, for example, deeds, due to the evidentiary requirements around witnessing signatures. What’s the development? The introduction of eIDAS has prompted a working party led by the Law Society of England and Wales, to provide guidance on e-Signatures. It has published a non-binding note (the note) based on a full legal opinion by Mark Hapgood QC, setting out good practice for the use of electronic signatures in business contracts under UK law. The note sets out principles for determining whether different types of contracts can be or have been validly signed electronically as well as the evidential weight of electronic signatures, conflict of law issues and other considerations. What does this mean for you? The Law Society takes a robust approach to the use of e-Signatures. Its view is that, provided they are used in accordance with any relevant statutory requirements, they can be validly used not only in simple business to business contracts, but also to satisfy statutory requirements for documents to be signed in writing or under hand, for deeds and for company documents. Evidentiary consideration of their validity and practical considerations (such as capacity of the signatory) should be addressed in the same way as ‘wet ink’ signatures. Where, however, a cross-border contract is being entered into, advice should be sought on applicable law and potential conflict of laws. 5 With this endorsement, we are likely to see more organisations use electronic signatures in legal documents which will often be facilitated by dedicated providers, although it is fair to say that many are waiting for the practice to spread and/or for legal precedent to be established in the more controversial situations. The relevant legislative framework consists of: u The Electronic Identification and Signature Regulation 2014 (eIDAS); and u The Electronic Communications Act 2000 (ECA). Common law principles also apply. The note does not consider particular types of electronic signatures but includes within its scope: u a person typing their name into a contract or email which contains the terms of the contract; u a person electronically pasting an image of their signature into the contract in the appropriate place; u a person accessing a contract through a web-based e-signature platform and clicking to have their name typed or in handwriting font, inserted in the appropriate place; and u a person using a finger or stylus on a touchscreen to write their name electronically in the appropriate place. The note concludes that there is nothing to prevent simple contracts being signed in electronic form. Documents subject to a statutory requirement to be in writing and/or signed and/or under hand can be signed electronically. The note takes the view that: u a requirement to be in writing includes electronic form due to the wide definition of “writing” in the Interpretation Act 1978; u the test for determining whether or not something is a signature is: “whether the mark which appears in a document was inserted with the intention of giving authenticity to it” and this covers electronic signatures; u a document is understood to have been executed under hand if it is executed other than by deed. Most lawyers have taken the view that deeds should not be executed electronically due to potential evidentiary issues. The note suggests that deeds can be validly made electronically. The writing requirement is satisfied for the same reasons as above. The requirement for a company subject to the Companies Act 2006, that the deed be executed and delivered as a deed can be met as follows: u execution can be achieved by two directors or a director and secretary adding their signatures either in counterpart or sequentially to the same version (electronic or hard copy) of the deed; u delivery can be achieved through electronic signing but the parties will have to ensure the signing arrangements adequately address when delivery takes place, particularly if the parties propose that their lawyers hold their signed documents to the order of the relevant party prior to the deed coming into effect. For an individual executing a deed or for a company executing it using one director and a witness, the evidentiary burden of showing that an electronic document signature has been witnessed has always been thought to be hard to satisfy. The note suggests that there is no significant difference between witnessing wet ink and electronic signatures. The witness must observe the signing. For this reason, it suggests that a witness be physically present to observe the signature rather than viewing it through a live televisual feed. The note also has no issue with signing company documents electronically provided all requirements of the Companies Act 2006 are followed. In terms of evidential weight of electronic signatures, it is suggested that the courts would apply the same principles to assessing any challenge to the validity of an electronic signature as they would to a wet ink one. Similarly, rules on originals and counterparts should not be any different for electronic signatures. Where the contract is cross-border or not governed by English law, it is recommended that advice be sought on conflict of laws or on the applicable law. Other considerations to be taken into account are largely practical ones such as considering the intention, authority and capacity of the signatory, any relevant filing requirements, security etc. Europe A family affair – McDonald’s family trade marks come up trumps The General Court has upheld an EUIPO Board of Appeal decision which declared invalid the mark MACCOFFEE on the grounds that it took unfair advantage of McDonald’s earlier rights. This is a helpful decision for owners of “family” trade marks, i.e. those which share a prefix, suffix, word, syllable or other feature. It seems likely that, following this case, the concept of a family of trade marks will be more widely used in trade mark proceedings. Franchise & Distribution Networks Newsletter N°9 - 4th Quarter 2016 6 Europe > Middle East > Asia taylorwessing.com The Court decided that the Board of Appeal was justified in saying that there had been a link between the “Mc” marks and the MACCOFFEE mark – the public could mentally establish a link between the trade marks and could transfer the image of the McDonald’s trade marks to the goods covered by the contested mark. It further held that the MACCOFFEE mark did take unfair advantage of the repute of the McDonald’s trade marks and that it was therefore invalid. Case T-518/13 Background In 2010, Future Enterprises Pte Ltd registered the word mark MACCOFFEE as an EUTM for various foodstuffs and beverages in Classes 29, 30 and 32. McDonald’s brought an application for a declaration of invalidity on grounds of Article 8(5) based on various earlier trade marks for McDONALD’S, McFISH, McTOAST, McMUFFIN, McRIB, McFLURRY, CHICKEN McNUGGETS, McCHICKEN, EGG McMUFFIN, McFEAST, BIG MAC, and PITAMAC. The Board of Appeal held that the relevant public could mentally establish a link between the conflicting marks, and a large part of that public would associate the contested trade mark with the “Mc” family of trade marks. It was highly probable that MACCOFFEE took unfair advantage of the reputation of the McDONALD’S trade mark and the use was without due cause. Decision While the General Court held that there was no visual similarity between the marks, they held that the marks were phonetically and conceptually similar because of the prefix “Mc” and “MAC” – both elements are traditionally pronounced in the same way and would be perceived as a surname of Gaelic origin. The marks therefore had a certain degree of overall similarity. The Court held that foodstuffs covered by the registered mark were similar to fast-food restaurant services provided by McDonald’s, because of the close links between them. Such goods could be found in fast-food restaurants, were either consumed on the spot or provided on a take-away basis. The consumer would establish a link between the mark affixed to the packaging and the commercial origin of those goods. The General Court also considered whether the Board of Appeal had been right to say that the relevant public will establish a link between the marks at issue, and whether the existence of a family of trade marks containing the element “Mc” was a relevant factor when assessing if the relevant public would establish that link. The General Court held that this was a relevant factor, and said that McDonald’s evidence showed that the prefix “Mc”, combined with the name of a menu item or foodstuff, had acquired its own distinctive character in relation to fast-food restaurant services and goods within the EU. It was therefore capable of characterising the existence of a family of marks. On the reputation of the McDONALD’S mark, the General Court held that the Board of Appeal had been right to conclude that the considerable reputation of the McDONALD’S trade mark extended to the characteristic elements of the “Mc” family of trade marks, without having to determine whether each of the marks constituting that family was a mark with a reputation. 7 uHeiko Franke Düsseldorf T: +49(0)211 8387-0 email@example.com Contacts uGrégoire Toulouse Paris T: +33 (0)1 72 74 03 33 firstname.lastname@example.org Contributors to the Newsletter: France: Grégoire Toulouse, Fanny Levy, Marie Jarrety. Germany: Heiko Franke. UK: France Delord, Charles Llyod, Roland Mallinson, Mark Owen, Jason Rawkins, Niri Shanmuganathan, Christopher Benson, Timothy Pinto.