Franchise & Distribution Networks Newsletter n°14 - 1st Quarter 2018

Franchise & Distribution Networks Newsletter N°14 - 1st Quarter 2018 u The German Franchise Year in Review United Kingdom u Court of Appeal delivers pizza decision Netherlands u Turbo Appeal in franchise dispute in the Netherlands u Intended franchisee responsible for business plan; Franchisor not liable for damages Poland u Franchised business to be highly limited on Sundays in Poland? u Poland: Remedies for early termination of a franchise agreement subject to VAT European Union u Distribution Online: Manufacturers may ban sales via Third Party Online Platforms! u The trouble with break-ups: bad faith between exbusiness partners? u Significant imbalance: Article L.442-6, I, 2° of the French Commercial Code only applies when the parties are "business partners" u Significant imbalance: the liquidated damages clause stipulated in favour of only one party does not constitute a significant imbalance u Abrupt termination of an established business relationship: the Cour de Cassation uses legal precedents of the ECJ for rules on jurisdiction u Commercial agency: conditions for granting and calculation means of damages for termination of commercial agents’ agreements. FRANCE Significant imbalance: Article L.442-6, I, 2° of the French Commercial Code only applies when the parties are “business partners” CA Paris, 27 September 2017, RG no. 16/00671 Article L.442-6, I, 2° of the French Commercial Code prohibits the act of “submitting or attempting to submit a business partner to obligations which create a significant imbalance in the rights and obligations of the parties”. This text applies to any professional with an economic activity (Cass. Com., 25 January 2017, no. 15-13013) but only when the party harmed by the practice is a “business partner” which implies a substantive review of the relationship between the parties. In the case ruled on by the Paris Court of Appeal, a company offered to design websites for its corporate clients by concluding subscription agreements and license agreements for operating the websites. The license agreements entered into were then assigned to a financial leasing company as well as to a bank. As a result of complaints filed by several clients who challenged the business practices of the service provider, the Minister of the Economy brought legal action against these companies on the grounds of Article L.442-6, I, 2° of the French Commercial Code. In their defence, the service provider claimed that this provision was not applicable on the ground that the clients entering into an agreement with a service provider for the design and the rental of their websites could not be classified as a “business partner” in the meaning of Article L.442-6, I, 2°. The Court of Appeal clarified at the outset that since the banking and financial activities offered by the bank were exclusively governed by the Monetary and Financial Code, the provisions of the French Commercial Code on restrictive practices did not apply to it. The Cour de Cassation recently had the same line of reasoning when it refused to apply Article L.442-6, I, 5° of the French Commercial Code (on the abrupt termination of established business relationships) to banks (Cass. Com., 25 October 2017, No 16-16839). With regard to the relationship maintained by the other companies with their clients, the Court of Appeal rejected the classification as “business partner”, deeming the agreements in question to constitute ad hoc operations with limited purpose and duration, without the parties being united by a 1 France Germany Franchise & Distribution Networks Newsletter N°14 - 1st Quarter 2018 common purpose. This solution is in line with previous decisions which had refused the application of Article L.442-6, I, 2° of the French Commercial Code in similar contexts (for example, CA, Aix-enProvence, 10 March 2016, No 15/06564; CA Paris, 6 March 2015, No 13/20879) and embraces the exact opposite position to that adopted - wrongly, in our opinion - by the Commercial Practices Monitoring Commission (CEPC) (CEPC, opinion no. 15-01 of 30 September 2015; CEPC, opinion no. 16-3 of 10 February 2016). Thus for the Court, a business relationship only exists (and consequently Article L.442-6, I, 2° of the French Commercial Code applies) if the relationship entered into is long term and marked by the willingness of the parties to develop stable and established relations to work cooperatively towards a common purpose. (Authors: Grégoire Toulouse, Noémie Vincent) Significant imbalance: the liquidated damages clause stipulated in favour of only one party does not constitute a significant imbalance CA Paris, 13 October 2017, RG no. 15/03694 In this case, two companies had signed agreements for the rental of video surveillance equipment and maintenance services. Following termination of the agreements by the lessee, the lessor sued the former for abusive termination and to recover payment of unpaid rent pursuant to the termination clause provided for in the agreement. In order to oppose the lessor’s claim, the lessee (which could have used the inapplicability of the text on the ground of the absence of a business partnership) alleged notably that the termination clause created a significant imbalance, to its detriment, in the rights and obligations of the parties within the meaning of Article L.442-6, I, 2° of the French Commercial Code. According to the lessee, the significant imbalance of the termination clause derived from the liquidated damages associated to it, which provided for the payment of damages solely to the lessor, in the event the lessee failed to fulfil its contractual obligations. The Paris Court of Appeal rejected the lessee’s argument, considering that the unilateral nature of the penalty clause stipulated within the termination clause was not such as to indicate a significant imbalance in the rights and obligations of the Parties. This line of reasoning is justified since the Court already has the power under applicable law (new Article 1231-5 of the French Civil Code) to increase or reduce the amount of provided for in the liquidated damages clause if such amount is obviously derisory or excessive. (Authors: Grégoire Toulouse, Noémie Vincent) Abrupt termination of an established business relationship: the Cour de Cassation uses legal precedents of the ECJ for rules on jurisdiction Cass. Com., 20 September 2017, No.16 14812 The Cour de cassation was once again asked to settle the question of the nature (contractual or tortious) of the claim for abrupt termination of a an established business relationship on the basis of Article L.442, 6, I, 5° of the French Commercial Code in order to determine which court has jurisdiction to hear the dispute in a European context. The proceedings were brought before the French courts by a French distributor, which had suffered an abrupt termination by its Belgian supplier. Despite a longstanding relationship (7 years), the parties had not entered in any framework agreement. According to the case-law traditionally adopted up to now, French courts should have considered that they had jurisdiction. Indeed, this action was regarded as a tortious action and the court of the place where the harmful event occurred (which refers to both the place where the event giving rise to the damage occurred and to the place of realization of the latter) would thus have had jurisdiction. But this is not the solution that the Cour de cassation adopted here: approving the decision of the Paris Court of Appeal, the Cour de cassation decided that Belgian courts should have jurisdiction. To justify its decision, the Cour de Cassation referred to Article 7, paragraph 2 of (EU) Regulation no. 1215/2012 on jurisdiction and recognition and enforcement of judgments in civil and commercial matters, as interpreted by the European Court of Justice (ECJ) in the Granarolo case (case C 196/15 of 14 July 2016). Quoting from this decision, the Cour de cassation mentioned that “a claim for damages founded on the abrupt termination of an established business relationship is not a matter of tort or delict or quasi-delict within the meaning of this regulation, if there existed between the parties a tacit contractual relationship based on a body of consistent evidence among which are likely to feature, in particular, the existence of a long term business relationship, good faith between the parties, regularity of transactions and their evolution in time both in quantity and quality, possible agreements on prices charged and/or on discounts granted as well as correspondence exchanged.” 2 Noting that the relationship had existed for several years, the Paris Court of Appeal qualified it as being “a tacit contractual relationship” and was justified in upholding that the claim for damages was of a contractual nature. Since the goods were delivered to Belgium pursuant to the general conditions of sale of the Belgian supplier, it was thus the Belgian Court which had jurisdiction in accordance with Article 7, point 1 of Regulation supra, and not French courts. For the record, in the Granarolo decision, the ECJ had stated, in paragraph 22, that “in order to determine the nature of the civil liability action brought before it, the national court must ascertain at the outset whether the action, irrespective of how it is classified in national law, is contractual in nature.” It is thus a matter of autonomous concepts in European Union law and it is not certain at this stage whether the Cour de cassation will extend this solution to domestic disputes and to international disputes opposing French parties to parties established outside the EU (and therefore not subject to the Regulation). Although it would theoretically be possible to consider that an action for damages on the ground of the abrupt termination of an established business relationship can be of a contractual nature in EU disputes while being considered as a tortious action in domestic disputes and in disputes between French and non French citizens domiciled outside the European Union, this is certainly not desirable. For the sake of consistency and legal certainty, the Cour de cassation will hopefully soon harmonize the classification of the action for damages based on Article L.442-6, I, 5° of the French Commercial Code. (Authors: Grégoire Toulouse, Elise Créquer - Taylor Wessing France) Commercial agency: conditions for granting and calculation means of damages for termination of commercial agents’ agreements. CA Paris, 6 July 2017, RG n° 16/22264 The commercial agent is entitled to damages to compensate the damage suffered in the event of termination of its contractual relationship with the principal (Article L.134-12 of the French Commercial Code). These protective provisions, which derive from Directive 86/653/EEC, are mandatory (Article L.134-16 of the French Commercial Code). Therefore, the parties cannot derogate from this by contract. It is only in the event of serious misconduct by the agent, termination of the contract upon the initiative of the agent (except if the termination occurs pursuant to circumstances attributable to the principal) or assignment of the agreement by the agent to a third party, that compensation is not due by the principal (Article L.134-13 of the French Commercial Code). The amount of the damages is generally set by the Courts at the equivalent of two years of the total gross remuneration of the agent, calculated on the basis of commissions and other fringe benefits earned during the last two or three years of the agreement and is designed to compensate the commercial agent’s loss of income. By virtue of a decision dated 6 July 2017, the Paris Court of Appeal underlined the terms and conditions for the granting and calculation of these damages. In the case at hand, the Court deemed that the agent initiated the termination of the agreement by an email sent to the principal. However, the Court granted damages to the agent for contract termination, considering that both parties had failed to comply with their respective contractual obligations (the principal had breached his obligation to pay the commissions to the agent while the agent had violated his non-compete obligation). Given the circumstances of the case, the Court therefore fixed the amount of the damages at only four months of commissions. This decision shows that even though it is customary practice to automatically award damages equivalent to two years of commissions, French Courts retain discretionary authority in this area, the objective being to compensate the whole damage and nothing but the damage suffered by the agent. (Authors: Grégoire Toulouse, Mathias Kuhn - Taylor Wessing France) GERMANY The German Franchise Year in Review So that’s it for 2017! The year is over, and it is time for a short review of new developments and court decisions which are relevant for franchising in Germany. Pitfalls in General Terms and Conditions For the purpose of uniformity of their franchise system and equal treatment of the franchisees, franchisors typically use uniform franchise contracts. Thus, German law on general terms and conditions is likely to apply. In the past year, some interesting decisions were made on this subject. For instance, the German Federal Supreme Court (BGH) decided that a clause for the automatic renewal of an advertising contract was invalid due to a lack of transparency. In the case at hand, it was unclear at which point in time the agreement became effective, so that it was also unclear when exactly the agreement had to be terminated (in order to avoid automatic renewal); the relevant notice period depended on 3 Franchise & Distribution Networks Newsletter N°14 - 1st Quarter 2018 the effective date of the agreement. Thus, the clause was held to be invalid and unenforceable. The rationale behind this decision is applicable also to franchise agreements, and it is therefore necessary to ensure that provisions on the term and termination of the franchise agreement are clear and transparent. In another judgment, the BGH confirmed its position with respect to contractual penalty clauses in general terms and conditions. In a nutshell, contractual penalty clauses which generally treat unequal cases equally (i.e., by stipulating a standard penalty amount which is disproportionate to, e.g., slightest breaches of contract) are invalid and unenforceable. It is therefore an option to provide in the franchise agreement that the franchisor shall determine the penalty amount at its reasonable discretion under consideration of the specific circumstances of the case. Competition Law With respect to competition law, 2017 brought a number of interesting cases and developments. For instance, the “Asics” decision of the Higher Regional Court Duesseldorf of 5 April 2017 should be noted, according to which a general ban to use price comparison tools in selective distribution systems was considered to be not in line with competition law. As far as franchise systems qualify as selective distribution systems this is highly relevant. Furthermore, in its “Coty” decision of 6 December 2017 the European Court of Justice confirmed the right of the manufacturer to prohibit sales of “luxury goods” via third-party platforms under certain circumstances. This should apply as well in franchise systems, at least if they are structured as selective distribution systems. However, the definition of “luxury goods“ remains quite open, in particular against the background of former case law and practice of the competition authorities, and a total ban of internet distribution would likely still be problematic; in the “Coty” case the European Court of Justice expressly notes that the relevant provision does not completely ban the internet distribution. Furthermore, the final report of the EU Commission’s sector inquiry, dated 10 May 2017, regarding e-commerce is worth mentioning. Therein, the EU Commission deals e.g. with bans of search engines, geo-blocking and best-price clauses. Also, the German Federal Cartel Office has published “Information regarding the ban on price fixing in the area of stationary food retailing” in July 2017. It concerns e.g. agreements on fixed and minimum prices, recommended retail prices and margin guarantees, which should be of particular relevance for franchise systems operating in this industry. 4 Data Protection Everybody is talking about the EU General Data Protection Regulation. It applies inter alia to distribution systems in general and especially to franchise systems. It is already foreseeable that the data protection regulation will lead to an increased sensibility for data protection issues. The data protection regulation will not be directly applicable before 25 May 2018. However, as it includes inter alia more comprehensive sanctioning options than before, a stronger position of the data protection officer and e.g. also advanced information obligations, it is necessary to deal with its consequences at an early stage. Pre-contractual Disclosure Obligations While pre-contractual disclosure is of great importance for franchise agreements, it appears that the most recent decision originates from the Higher Regional Court Dresden from the year 2016 (18 June 2016). The Dresden court decided that the franchisor violated its pre-contractual obligation to provide information by not informing the franchisee on which data the revenue forecast it was given was based on, or rather that the revenue forecast only had the character of a rough estimate. In the light of recent case law, especially with regard to the above mentioned decision, franchisors should inform potential franchisees about the profitability of the franchise system (especially with regard to the planned location but also to the system itself) and assure that this has taken place on the basis of reliable figures. If only an estimate can be provided, this should be pointed out clearly. Termination Indemnity Claims So far, the German Federal Court of Justice has not decided whether and, if so, under which preconditions franchisees could be entitled to termination indemnity claims. According to a decision of the German Federal Court of Justice in 2015, a mere factual continuity of the customer base in the form of an “essentially anonymous bulk business” (in the case at hand: of a bakery) is not sufficient for justifying an indemnity claim (if any). The court held that in any event, such claim could only exist at all if the franchisee were contractually obliged to transmit customer data to the franchisor upon termination or during the term of the agreement. The same view was taken by the Higher Regional Court Hamm. So far, there has been no decision of the German Federal Court of Justice in which such obligation of a franchisee existed. We will keep you updated. (Author: Dr. Heiko Franke) UNITED KINGDOM Court of Appeal delivers pizza decision Caspian Pizza Ltd and Others v Shah and Another [2017] EWCA Civ 1874 (23 Nov 2017) Background In 1991, the claimants started a pizza business in Birmingham, England trading under the name “Caspian Pizza”. The business expanded into a chain of restaurants all using the same name in the Birmingham area. In 2002, the defendants opened a pizza restaurant in Worcester, England (approximately 30 miles from Birmingham) using the Caspian name and later opening further restaurants in and around Worcester. In 2008, the claimants entered into an oral franchise agreement with its Worcester rival. This oral agreement permitted the defendants to operate the Worcester restaurant under the “Caspian Pizza” name. Any goodwill generated by the use of the mark would vest in or be assigned to the claimants and monthly royalty payments would be made for the use of the name. However, in 2013 the original Birmingham business claimed that the defendants had refused to enter into a written franchise agreement in order to regularise the position under the oral agreement and failed to pay the royalties due by them. The Claim The claimants therefore filed a claim in the IP Enterprise Court, contending that once the oral franchise agreement had ended, the defendant’s use of the claimants’ two registered trade marks constituted trade mark infringement. One was a word mark for the CASPIAN name, registered in 2005. The other was a device mark featuring the name CASPIAN PIZZA alongside a cartoon image of a pizza-making chef, registered in 2010. The defendants counterclaimed that the marks were invalid under section 5(4)(a) of the Trade Marks Act 1994 (“TMA”), by virtue of the earlier right used at the Worcester business. Section 5(4)(a) TMA states that “A trade mark shall not be registered if, or to the extent that, its use in the United Kingdom is liable to be prevented - (a) by virtue of any rule of law (in particular, the law of passing off) protecting an unregistered trade mark or other sign used in the course of trade”. Judge Hacon found that the CASPIAN word mark was invalid because at the date of registration in 2005, the defendants had established enough localised goodwill in the name “Caspian” for the purposes of section 5(4)(a) TMA. Localised goodwill was held to be enough to invalidate a national trade mark as no geographical restriction had been put on the mark during the application stage. However, Judge Hacon held that the device mark (CASPIAN PIZZA) was valid as the defendants 5 had not used a similar logo and therefore had no earlier right on which they could rely. The claimants appealed the decision of invalidity in respect of the word mark and the defendants cross-appealed the judge’s refusal to declare the device mark invalid. Court of Appeal The claimants argued that the level of goodwill required to make a claim for invalidity under section 5(4)(a) must be construed as being goodwill either throughout, or in a significant part, of the UK. However, the Court of Appeal rejected this argument and held that earlier use of the mark does not have to have been throughout the UK or even in a geographical area which overlaps with the place where the applicant for registration carries on its business. The Court of Appeal further held that Judge Hacon was wrong to separate the word and device marks when considering the question of earlier rights. This is because the primary element of the device mark was the word “Caspian”. It therefore found both marks to be invalid, dismissing the appeal and allowing the cross appeal. Practical Conclusions Whilst there are no specific formal requirements to create an enforceable franchise agreement in England and Wales, other than ensuring that the basic elements of a contract exist, this case highlights the importance of having a written franchise agreement in place. Had the franchise agreement between the Birmingham business and the Worcester business been in writing, the terms of the deal would have been documented and maintained. This would have included any constraints the Worcester business was under regarding its use of the “Caspian Pizza” name, clarity of the Birmingham businesses’ rights/ownership in respect of the marks and specifically how long the term of the franchise agreement was for. Furthermore, this case demonstrates the need for businesses to register their intellectual property rights as soon as possible. The claimants started using the “Caspian Pizza” name in 1991 but did not register the word mark until 2005. As this was after the defendants had already acquired goodwill in their use of the mark for the purposes of section 5(4)(a) TMA, the claimants were unable to protect themselves from a declaration of invalidity. (Author: Lauren Clarke – Taylor Wessing UK) THE NETHERLANDS Turbo Appeal in franchise dispute in the Netherlands On 17 November 2017, the District Court of Noord-Holland (Haarlem) rendered a decision in preliminary relief proceedings regarding the use of a trade mark by its owner (and franchisor). After only 5 days the Court of Appeal of Amsterdam reversed this decision with an appeal decision in a so-called ‘Turbo appeal’. The parties in this case were the Association of Etos Franchisees (hereinafter: the “Association”) on the one hand and ETOS B.V. (hereinafter: “ETOS”), ALBERT HEIJN B.V. (hereinafter: “AH”) and AHOLD NEDERLAND B.V. (hereinafter: “AHOLD”) on the other hand. ETOS and AH are both part of the koninklijke Ahold Delaize N.V., an international food retail group, with multiple formats such as supermarkets, convenience stores, hypermarkets, online grocery, online nonfood, drugstores, wine and liquor stores. ETOS is a drugstore with around 550 stores in the Netherlands of which 250 stores operate under franchise. ETOS is the proprietor of several trade mark registrations and a broad range of “own trade mark” products that are sold in ETOS stores, including the franchise stores. In January 2017, ETOS presented their intention to sell its private label products in the supermarkets of AH. The Association demanded ETOS not to proceed with this for various reasons including that because of the nature of the franchise the private label products are (exclusively) part of the ETOS franchise formula. Secondly the Association had partly initiated and financed the creation and promotion of these products. In addition this is one of the reasons for the shopping public to visit the ETOS stores. On 14 July 2017 ETOS confirmed that ETOS and AH had decided not to sell the private label products in the AH stores. This decision was made to avoid a public discussion between the parties, which could cause damage to the ETOS brand in general. As a result, the Health and Beauty products of AH would be sold under another trade mark. In the week of 6 November 2017 AH however started to sell “CARE” products in its Healty & Beauty line. The content and the packaging of these products were identical to the private label products that are sold in the ETOS stores. The only significant difference is the trade mark. In preliminary injunction proceedings the Association demanded that the sale of the “CARE” products in the AH cease with immediate effect because of the agreement made in July. The presiding judge considered that it is not only important to check the meaning of the words in the agreement but also Franchise & Distribution Networks Newsletter N°14 - 1st Quarter 2018 6 what the parties could both reasonably have attributed to this agreement in the given circumstances and what they could reasonably expect from each other in this respect. Taking this into consideration, the presiding judge came to the conclusion that the email of 14 July 2017 in which ETOS confirmed that the private label products would not be sold in the AH stores, could not be interpreted as a notification that the products, which were already produced, would be sold under another trade mark, but in the same packaging. The presiding judge ruled that it is not reasonable to expect that the Association had taken this consequence into consideration on the basis of this agreement. In addition, the judge considered that this would not make sense in the light of the fact that the shopping public visits the ETOS stores because of these specific products. Only five days later, the Court of Appeal of Amsterdam reversed the judgment at first instance. The Court of Appeal ruled that the parties only agreed that no private label products (Etos branded) were to be sold in AH stores but that they did not agree anything on the sale of private label products in AH stores using another brand like CARE. The conclusion of the Court of Appeal is that AH does not violate the agreement with the Association by selling the products under the CAREtrademark in its AH stores for a limited period of time. However, the Court of Appeal mentioned that if there were other circumstances, the above conclusion could be different. This would include if ETOS does not comply with the general obligation to protect the franchise formula. This could be the case if the franchisor is willingly profiting from the reputation of a certain brand that was built by the franchisees by launching products under that name in competing stores. In this case, such circumstances were however not established by the Court of Appeal. One of the lessons learned from this decision is that when contracting in the Netherlands it is important to consider that the purely textual meaning of the words in the agreement is not (always) definite. In the end it is decisive what the parties could both reasonably have attributed to an agreement in the given circumstances and what they could reasonably expect from each other in this respect. Last but not least, this case is a good example of the possibilities of a turbo appeal in the Netherlands. In case the decision in preliminary injunction proceedings is not favourable, the possibility to appeal is open. In really urgent cases however, it is possible to start a turbo appeal and to have a decision of the Court of Appeal in a strict time period even as short as five days. (Author: Annemijn Schipper – Taylor Wessing Netherlands) 7 Intended franchisee responsible for business plan; Franchisor not liable for damages Decision of the District Court of Gelderland, 15 November 2017 (ECLI:NL:RBGEL:2017:6745) Dutch case law demonstrates a certain reluctance to accept a duty of care of the franchisor towards a franchisee. The franchisee is an entrepreneur, who is responsible for its own activities. This assumption is especially manifest in case law about forecasts. The Dutch Supreme Court ruled that a franchisor, who engages a third party to research expected turnovers and profits, might rely on the correctness of the outcome thereof. However, if the franchisor provides information to the franchisee, knowing that it contains serious errors, he has to make the franchisee aware of these errors. In its decision of 15 November 2017, the District Court also ruled on franchisee’s own responsibilities. In this case, a franchisor and intended franchisee negotiated a preparatory agreement, in which they expressed their intentions to conclude franchise agreements and agreed that research into forecasts should be carried out. The research is carried out by a third party. On the basis thereof, franchisee drafted a business plan and operation budget. According to franchisee, the preparatory agreement implied that the franchisor was obliged to provide correct forecasts. As the forecasts provided were incorrect, franchisee claims franchisor committed a breach of contract and claims damages. The District Court does not accept this argument and rules that the preparatory agreement did not have the intention to pass the responsibility for the research to the franchisor. As far as can be deduced from the text of the preparatory agreement, parties did not agree that franchisor would guarantee certain sales results and / or the soundness of the forecasts issued by third parties. Franchisee had the desire to open stores as franchisee, so it was also up to franchisee to bear the associated entrepreneurial risk. In the preparatory agreements, parties therefore agreed that franchisee would draft a business plan and operating budget and that it would arrange the funding of the stores. The District Court concludes that franchisee had its own responsibility with regard to the forecasts and the conclusions to be drawn therefrom. (Author: Vera Jurgens – Taylor Wessing Netherlands) POLAND Franchised business to be highly limited on Sundays in Poland? The Polish Parliament adopted the law on the limitation of retail businesses on Sundays and some other days. According to the bill, the principle of prohibiting the opening of such and other forms of commerce is to be introduced incrementally until 2020. In 2018 and 2019 some Sundays will not be covered by the ban. The law is still to be signed by the President before coming into force in March this year. Some types of commercial activity will remain beyond the reach of the ban, e.g. petrol stations, e-commerce shops, bakeries, and restaurants, although the last exception was already added at later phase of legislative process. After the lower chamber (Sejm) passed the law in November 2017, the higher chamber (Senat) proposed several amendments, and the Sejm accepted them in January. What was at stake was, among others, the scope of franchised businesses which will be embraced by the far-reaching limitations. The Senat voted in favour of a clause which would allow a natural person to open a self-owned business on Sundays not only on condition that the person runs it ‘in person’, but also only if ‘on their own behalf and for their own benefit’. Luckily for hospitality sector in Poland, by virtue of another amendment proposed by the Senate, a business could open if gastronomy were the prevailing activity of the location. Finally, these Senat’s amendments have been accepted by the Sejm. Yet, one should conclude that the bill, if it becomes law, should be closely examined against constitutional guarantee of nondiscrimination and the principle of free economic activity. (Author: Marcin Przybysz – Taylor Wessing Poland) Poland: Remedies for early termination of a franchise agreement subject to VAT It seems that the tax administration and administrative courts in Poland may have established a stable position on the matter, which concerns the situation in which a franchisee terminates the contract before the expiry of a guaranteed period, and pays an agreed penalty to the franchisor equivalent to the total franchising fee for the remaining period until the end of the guaranteed period of the franchise agreement. According to a recent judgment, the payment is taxed with VAT. The court ruled on a complaint submitted by a franchisor. The party had requested an individual tax interpretation from state administration where the contract at stake envisaged that the parties are bound by the franchise for a guaranteed period. If the franchisee wishes to free themselves early on, they were under an obligation to pay a sum calculated as described above. The franchisor argued that the payment constitutes a penalty, and as such is exempted from VAT according to Polish tax law. The remedy must be considered in the context of disclosure of know-how to the franchisee. However, both the tax administration and the administrative 8 court found that effectively, by token of an agreement between the parties, the franchisor is paid in exchange for their consent to an early termination of the contract. Hence, the consent is deemed to be a service directly related to a financial transfer. Whereas early termination of a contract as such does not lead to damage to the franchisor’s business, and there is no penalty as such. The court relied in particular on the judgment of the EU Court of 15 December 1993 in the case Lubbock Fine & Co. v Commissioners of Customs and Excise (C-63/92). The Court deemed that the term “letting of immovable property” used in EU tax law covers the case where a tenant surrenders his lease and returns the immovable property to his immediate landlord. Last but not least, the Regional Administrative Court in Rzeszów raised that its interpretation applies notwithstanding whether the original franchise contract envisages options for early termination, or whether this is agreed upon by the parties at a later stage. This last aspect may in practice require more attention and a nuanced approach. This is because the parties may in such subsequent agreement reserve different rights in reaction to non-execution of a contract that they eventually agree to terminate. Only when these different reservations are viewed in total, it may be possible to assess whether in fact a party pays a penalty, or remunerates the other party. The judgment in the case I SA/Rz 566/17 was issued on 12 October, and is currently subject to revision by the Supreme Administrative Court. (Authors: Jacek Kowalewski – Taylor Wessing Poland) EUROPEAN UNION Distribution Online: Manufacturers may ban sales via Third Party Online Platforms! Long expected by manufacturers of brand-name products, brick-and-mortar-distributors, internet retailers and online platform providers as Amazon, eBay or Zalando, the Court of Justice of the European Union (CJEU) decided on 6 December 2017 – its “Saint Nicholas’ decision” – that manufacturers may lawfully ban sales via third party platforms. According to the CJEU, such platform ban was not necessarily an unlawful restriction of competition under article 101 Treaty on the Functioning of the European Union (“TFEU”).Instead, the court confirmed that selective distribution systems for luxury goods, which shall primarily preserve the goods’ luxury image may comply with European antitrust law. More specifically, the court decided that platforms bans are lawful, namely that EU law allows restricting online sales in “a contractual clause, such as that at issue in the present case, which prohibits authorised distributors of a selective distribution network of luxury goods designed, primarily, to preserve the luxury image of those goods from using, in a discernible manner, third-party platforms for internet sales of the goods in question, provided that the following conditions are met: (i) that clause has the objective of preserving the luxury image of the goods in question; (ii) it is laid down uniformly and not applied in a discriminatory fashion; and (iii) it is proportionate in the light of the objective pursued.” (cf. the CJEU’s press release No. 132/2017 and the judgment’s full text here). This is the intermediary result of the Coty case – while it is now up to the Higher Regional Court of Frankfurt to apply these requirements to decide the Coty case. Simply put, the question in that case is whether owners of luxury brands may generally or at least partially ban the resale via internet on third-party platforms. For details on the Coty case’s history, please see our previous Franchise & Distribution Networks Newsletter No. 13 with the article “Online Distribution: Platform bans in selective distribution? The Coty case continues”). Practical Conclusions: 1. This “Saint Nicholas’ Decision” of 6 December 2017 is highly important for all manufacturers of brand-name products, brick-and-mortar-distributors, internet retailers and online platform providers – because it clarifies that luxury manufacturers of brand-name products may ban sales via third party platforms (Amazon, eBay, Zalando and Co.) to ensure the same level of quality of distribution throughout all distribution channels, offline and online. 2. The Coty case is extremely relevant to distribution in Europe because more than 70% of the world’s luxury items are sold here, many of them online now. For further implications on existing and future distribution networks and the respective agreements, stay tuned! 3. As a glimpse back: the district court of Amsterdam already on 4 October 2017 decided that Nike’s ban on its selective distributors not to use online platforms as Amazon was a lawful distribution criterion to safeguard Nike’s luxury brand image (case of Nike European Operations Netherlands B.V. vs. the Italy-based retailer Action Sport Soc. Coop, A.R.L., ref. no. C/13/615474 / HA ZA 16-959). 4. Irrespective of the luxury character of goods, many manufacturers of brand-name products may refer use the court’s arguments to also provide for platform bans within their distribution or franchise networks – because the CJEU’s concept of „luxury goods“ appears rather broad, encompassing goods whose “quality (… )is not just the result of their material characteristics, but also of the allure and prestigious image which bestow on them an aura of luxury, that that aura is essential in that it enables Franchise & Distribution Networks Newsletter N°14 - 1st Quarter 2018 The trouble with break-ups: bad faith between ex-business partners? Case Ref: Case T-687/16 In a recent decision of the General Court between two former business partners, the “bad faith” absolute ground for invalidity was put to the test – that is, the provision that an EU trade mark shall be declared invalid where the applicant is deemed to have been acting in “bad faith” when he filed the application. However, the concept of “bad faith” is not defined or described in legislation, making this a difficult ground for invalidity to establish. It is hardly surprising then that the Court made a ruling of “no bad faith”. On 25 April 2011, the intervener Joaquín Nadal Esteban (“Esteban”) lodged an application for registration of an EU trade mark with the EUIPO in respect of classes 35 and 39, as shown above left (the “Contested Mark”): On 26 August 2011, Koton Mağazacilik Tekstil Sanayi ve Ticaret AŞ (“Koton”) filed a notice of opposition to the mark applied for in respect of all the services. The opposition was based on the following earlier rights, although, importantly, these earlier marks covered dissimilar goods / services to those covered by the Contested Mark: u the earlier Maltese figurative marks registered under numbers 46666 and 46667, above right top). u international registration No 777048, designating Benelux, Bulgaria, the Czech Republic, Denmark, Germany, Estonia, Greece, Ireland, Spain, France, Italy, Cyprus, Latvia, Lithuania, Hungary, Austria, Poland, Portugal, Romania, Slovenia, Slovakia, Finland, Sweden and the United Kingdom, of the earlier figurative mark above right bottom. On 31 October 2013, the Opposition Division found that there was a likelihood of confusion between the marks at issue in so far as they designated services in Class 35. The following year, the Fourth Board of Appeal of EUIPO dismissed the appeal and upheld the Opposition Division’s decision and on 5 November 2014, the Contested Mark was registered for services in Class 39 comprising “transport; packaging and storage of goods; travel arrangement”. On 5 December 2014, Koton filed an application for a declaration that the Contested Mark was invalid on the ground of “bad faith” which was rejected by the Cancellation Division. It found that, in the absence in particular of any indication as to the Esteban’s dishonest intention, Koton had failed to prove that Esteban had acted in bad faith when filing the trade mark application. On 4 September 2015, Koton filed a notice of appeal with EUIPO against the decision of the Cancellation Division but on 14 June 2016 the Second Board of Appeal of EUIPO dismissed the appeal (the “Contested Decision”). consumers to distinguish them from similar goods and, therefore, that an impairment to that aura of luxury is likely to affect the actual quality of those goods” (CJEU, C-230/15, para. 25). These characteristics may well fit to many brand-name products, at least those of higher categories. 5. All manufacturers or distribution network heads may try to set up platform bans – because the CJEU further declared in this judgment that a “prohibition such as that at issue in the main proceedings does not amount to a restriction of the customers of distributors, within the meaning of Article 4(b) of Regulation No 330/2010, or a restriction of authorised distributors’ passive sales to end users, within the meaning of Article 4(c) of that regulation”. Hence, as long as there are no reasons to see this different outside of luxury distribution and outside of selective distribution systems, it is quite likely that any manufacturer may set up platform bans as long as this does not end up in banning the distributor’s internet sales completely and as long as the parties concerned have max. 30% market shares under the VBER. 6. The general ban to use price comparison tools as stipulated by the sporting goods manufacturer Asics in its “Distribution System 1.0“ shall be anti-competitive – according to the Bundeskartellamt, as confirmed by the Higher Regional Court of Düsseldorf on 5 April 2017. The last word is, however, still far from being said – see our last newsletters. It will be interesting to see how the Coty case’s outcome will influence how to see such bans on price comparison tools. 7. For further trends in distribution online, see the EU Commission’s Final report on the E-commerce Sector Inquiry and details in the Staff Working Document, „Final report on the E-commerce Sector Inquiry“. 8. For details on distribution networks and distribution online, please see my articles: u „Vertriebsvorgaben im E-Commerce 2018: Praxisüberblick und Folgen des „Coty“-Urteils des EuGH“, in: GRUR-Prax 2018, 39-41; u “Internetvertrieb in der EU 2018 ff. – OnlineVertriebsvorgaben von Asics über BMW bis Coty”, in: Zeitschrift für Vertriebsrecht 2017, 274-281; and u „Plattformverbote im Selektivvertrieb – der EuGHVorlagebeschluss des OLG Frankfurt vom 19.4.2016“, in: Zeitschrift für Vertriebsrecht 2016, p. 278–283. (Author: Dr. Benedikt Rohrßen) 9 10 Arguments raised by Koton On appeal to the General Court Koton raised a number of pleas in support of its appeal, including that the Board of Appeal was wrong to find that the marks at issue are protected only for dissimilar goods and services. Koton argued that the Board of Appeal should have taken into account all the marks referred to in the application for a declaration of invalidity, including Koton’s earlier Turkish, Ukrainian and Moroccan figurative marks, which allegedly cover the services of the Contested Mark. In Koton’s submission, “bad faith” depends on whether or not the applicant for the EU trade mark has violated his duty of fairness in relation to the legitimate interests and expectations of the applicant, with whom he had business relations. In the applicant’s submission, the presence of the figurative element ‘“KOTON” in the contested mark cannot be accepted as a mere coincidence, and therefore reflects a dishonest intention on the part of its former business partner. To that end, Koton relied on three additional factors aimed at establishing Esteban’s dishonest intention and therefore his bad faith when filing his trade mark application, namely: u the fact that he was aware that Koton used an identical or similar mark covering identical or similar goods and services; u the fact that Esteban intended to prevent Koton from using the earlier mark KOTON in Spain by filing an opposition with the Spanish Patent and Trade Mark Office against the international registration No 1171878 regarding that mark, and u the fact that the ‘“KOTON” element had been created and used for the first time by Koton and that Esteban could not have used that element if he had not been aware of the earlier mark KOTON. The Decision of the General Court The Contested Decision was correct and upheld because there was no bad faith. The General Court dismissed the appeal and agreed with the Board of Appeal of the EUIPO, finding that: u even if it were established that the contested signs display an undeniable degree of similarity and that Esteban had knowledge of Koton’s earlier marks (especially since there was a business relationship between the parties), Esteban had clearly not displayed bad faith when filing the application for registration of the contested mark with respect to marks which cover dissimilar goods and services. u This is because, under the Bad Faith case-law, bad faith within the meaning of Article 52(1)(b) of Regulation No 207/2009 must be assessed, among other things, in light of the likelihood of confusion between a sign used by a third party and the sign for which registration is sought, which presupposes identity or similarity not only between the signs, but also between the goods or services in question. The Board of Appeal applied the case-law, according to which bad faith presupposes that a third party is using an identical or similar sign for an identical or similar product or service capable of being confused with the sign for which registration is sought, which was not the case for these parties. Therefore, the Board of Appeal’s application of the law was correct, the decision should be upheld, and the action dismissed. (Author: Nina Goodyear - Taylor Wessing UK) Franchise & Distribution Networks Newsletter N°14 - 1st Quarter 2018 Europe > Middle East > Asia taylorwessing.com 11 uDr. Heiko Franke Düsseldorf, Germany T: +49 (0)211 8387-0 h.franke@taylorwessing.com Contacts uGrégoire Toulouse Paris, France T: +33 (0)1 72 74 03 33 g.toulouse@taylorwessing.com Contributors to the Newsletter: France: Grégoire Toulouse, Mathias Kuhn, Noémie Vincent, Elise Créquer. Germany: Dr. Heiko Franke Netherlands: Annemijn Schipper, Vera Jurgens UK: Lauren Clarke, Poland: Marcin Przybysz, Jacek Kowalewski EU: Nina Goodyear, Dr. Benedikt Rohrßen uDr. Benedikt Rohrßen Munich, Germany T: +49 (0)892 1038-0 b.rohrssen@taylorwessing.com TWF_00034_0118 © Taylor Wessing 2018 This publication is intended for general public guidance and to highlight issues. It is not intended to apply to specific circumstances or to constitute legal advice. Taylor Wessing’s international offices offer clients integrated international solutions. Though our offices are established as distinct legal entities and registered as separate law practices, we are able to help our clients succeed by providing clear and precise solutions with high-level legal and commercial insights. For further information about our offices and the regulatory regimes that apply to them, please refer to taylorwessing.com/regulatory.html and rhtlawtaylorwessing.com. uMartin Prohaska-Marchried Vienna, Austria T: +43 1 71 65 50 m.prohaska@taylorwessing.com uJan Lazur Bratislava, Solvakia T: +421 (2) 52 63 28 04 j.lazur@taylorwessing.com uMark Owen London, United Kingdom T: +44 (0)20 7300 4884 m.owen@taylorwessing.com uHugo Nieuwenhuizen Eindhoven, Netherlands T: +31 (0) 88 02 43 159 h.nieuwenhuizen@taylorwessing.com uPrzemysław Walasek Warszawa, Poland T: +48 (0) 22 584 97 40 p.walasek@taylorwessing.com