Validation by the Constitutional Council of price control by the judge in an agreement between professionals
u Selective distribution Network : the First President of the Paris Court of Appeal suspends the execution of the decision of the Competition Authority in the Stihl case
u Incorrect forecasts : the importance of the notion of “deviation beyond the margin of error inherent to any provisional dataâ€
u Public criticism directed toward a company : defamation and not disparagement
u Update on the latest case law on arbitration clauses and asymmetric juridiction clauses
FRANCE
Validation by the Constitutional Council of price control by the judge in an agreement between professionals Constitutional Council, 30 November 2018, n°2018-749 QPC
One may recall that the Constitutional Council considered in 2011 that the provisions of Article L. 442-6, I, 2° of the Commercial Code, which prohibit and sanction significant imbalance in agreements between professionals by a heavy civil fine, comply with the Constitution (Cons. Council, 13 January 2011, n°2010-85 QPC).
At that time, the Constitutional Council considered that this rule abided with the principle of legality on the ground that “in order to determine the substance of the prohibition of unfair commercial practices in contracts concluded between a supplier and a distributor, the legislator referred to the legal notion of significant imbalance between the rights and obligations of the parties contained in Article L. 132-1 of the Consumer Code (...) and that, with reference to this concept, which content has already been specified by case law, the infringement is defined under conditions allowing the judge to rule without its interpretation being subject to arbitrarinessâ€.
However, Article L. 132-1 (now L. 212-1) of the French Consumer Code, which prohibits unfair terms in agreements entered into between professionals and consumers, provides in particular that: “The assessment of the unfair nature of terms within
the meaning of the first paragraph shall neither concern the definition of the main subject matter of the contract nor the adequacy of the price or remuneration for the good sold or the service offered, provided that the terms are drafted in a clear and comprehensible mannerâ€.
Therefore, the Constitutional Council’s explicit reference to Article L. 132-1 of the Consumer Code suggested that, as for consumer agreements, the price of agreements entered into between professionals could not be subject to any control by the judge.
Yet in 2017 the Court of Cassation adopted a broad interpretation, ruling that “the similarity of the concepts of significant imbalance provided for in Articles L. 132-1, now L. 212-1 of the French Consumer Code and L. 442-6, I, 2° of the French Commercial Code, emphasized by the Constitutional Council in its decision n° 2010-85 QPC of 13 January 2011, does not exclude that there may be differences due to the objectives pursued by the legislature in each of these areas, in particular as regards the category of persons it has intended to protect and the nature of the agreements concerned; thus, the aforementioned article L. 442-6, I, 2° (...) does not exclude, unlike article L. 212-1 of the Consumer Code, that the significant imbalance may result from a mismatch in the price of the good sold†(Court of cassation, Commercial Chamber., 25 January 2017, n°15-23547).
In a dispute with the Minister of the Economy over their pricing practices under single annual agreements, two Carrefour group companies raised a preliminary question,
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France Germany
Franchise & Distribution Networks Newsletter N°18 - 1st Quarter 2019
questioning the Constitutional Council on the constitutionality of Article L. 442-6, I, 2° of the French Commercial Code as interpreted by the Court of Cassation, and arguing that this interpretation was contrary to both the principle of legality of criminal offences and penalties and the freedom to undertake.
The Court of Cassation accepted the transmission of the question to the Constitutional Council on 27 September 2018 (Court of Cassation, 27 September 2018, n° 17-10173).
The Constitutional Council’s decision of 30 November 2018 is as surprising as it is disappointing.
Firstly, the Council rejected the complaint alleging infringement of the principle of legality of criminal offences and penalties by merely referring to the grounds set out in its previous decision of 13 January 2011, which confirmed the predictability of the text by invoking an analogy of interpretation with the aforementioned Article L. 132-1 of the Consumer Code. This motivation by reference, without further explanation, is particularly disappointing since the text of the Consumer Code precisely excludes price control, as already mentioned....
Secondly, without denying the infringement of the freedom to undertake, the Constitutional Council considered that this one is justified, recalling that “it is permissible for the legislature to restrict the freedom to undertake and the freedom to contract, which derive from Article 4 of the 1789 Declaration on Human rights, in accordance with constitutional requirements or justified by the general interest, provided that it does not result in disproportionate infringement as regard the objective pursuedâ€.
Therefore, the Constitutional Council considered once again that this provision complies with the Constitution, without expressing any reservation of interpretation that many had hoped for.
Authors: Hans-Christian Kast and Grégoire Toulouse
Selective distribution network: the First President of the Paris Court of Appeal suspends the execution of the decision of the Competition Authority in the Stihl case Competition Authority, Decision No. 18-D-23 of October 24, 2018 and Decision of the First President, Paris Court of Appeal, 23 January 2019
In the case which gave rise to the decision of the French Competition Authority on 24 October 2018 and the decision of the First President of the Paris Court of Appeal on 23 January 2019, a supplier of agricultural equipment had implemented two types of bans as part of its selective distribution network.
The first was to prohibit distributors from reselling the equipment via third-party platforms.
In line with the Coty Germany ruling (C-230/16) issued on 6 December 2017 by the Court of Justice of the European Union (CJEU), which had confirmed the possibility of a ban on the resale of luxury products on third party platforms, the Authority considered that this practice allowed Stihl, which has no contractual link with such platforms, to ensure, in a manner that is both appropriate and proportionate, that its products are sold under conditions aimed at preserving its brand image and guaranteeing consumer safety. Thus, the authority did not pronounce any sanction in this respect.
The second, according to the Competition Authority, was to de facto prevent distributors from selling products on their own websites by requiring “handover†(i.e. hand delivery) by the seller to the buyer.
The supplier argued that this obligation to handover (either by delivery to the distributor’s store or by delivery to the buyer by a representative of the distributor himself) was intended to protect consumers, as the equipment was potentially dangerous.
This argument did not convince the Authority, which noted (i) that the regulations in force did not impose any such obligation, (ii) that Stihl’s competitors did not require their distributors to comply with similar requirements and (iii) that the hand- delivery duty was not monitored with the same intensity when it concerned the players in the DIY retail sector.
In the same way as in the Pierre Fabre ruling of the CJEU on 12 December 2012 (C-439/09), the Authority observed that this obligation amounted to eventually preventing passive resale through the Internet and thus, qualified such duty as a restriction of competition by object, not eligible for exemption under EU Regulation 330/2010 on vertical restraints.
The Authority therefore imposed a fine of €7 million and ordered the supplier to amend its selective distribution contracts in order to allow its distributors to resell the products online without requiring “handover†to buyers, and to inform of the same the distributors within 3 months.
This injunction was actually overruled by the First President of the Paris Court of Appeal.
According to the First President, this injunction to amend contracts would have substantially modified the supplier’s selective distribution system and the nature of the selective distribution within Stihl’s network in France, which counts 1,200 distributors, and would have generated substantial costs, which could hardly be recovered or compensated if the decision of the Competition Authority were to be reversed.
Also, the First President noted that the decision of the Competition Authority was likely to lead to Stihl’s liability being sought by its end customers, and to damage its reputation because of the lower quality of the service provided.
Consequently, on 23 January 2019, the First President ordered a stay of the execution of the decision of the Competition
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Authority, pending the decision on the merits of the Paris Court of Appeal.
Authors : Morgane Gloaguen and Grégoire Toulouse
Incorrect forecasts: the importance of the notion of “deviation beyond the margin of error inherent to any provisional data†Paris Court of Appeal, 24 October 2018, n° 16/10932
In this case, a franchisee had sought the liability of its franchisor (and not the annulment of the franchise agreement) on the ground of deceit due to the provision of an erroneous forecast and an incomplete disclosure document.
After recalling the position of the Court of Cassation according to which there is no obligation on franchisors to communicate provisional profit and loss accounts to its franchisees, but that if they do so, they must provide sincere and verifiable information (Court of Cassation, Commercial Chamber, 31 January 2012, No. 11-10834), the Paris Court of Appeal noted the significant difference between the forecasts transmitted by the franchisor and the actual figures of the franchisee, which exceeded “the margin of error inherent in any data of a provisional nature†since it reached more than 78% in the first year (although the calculation made by the Court appears questionable) and an average difference of 49% for years 3 to 5.
In such a context, where the gap between what was predicted by the franchisor and what actually happened is very large (over 40%), courts tend to be severe with franchisors.
However, the franchisor can usefully defend itself by demonstrating (i) that the forecasts were realistic, taking into account the results of other points of sale (Court of Cassation, Commercial Chamber, 5 December 2000, n°98-16524) or (ii) that the franchisee actually knew what to expect, for example because he was an experienced businessman (Court of Cassation, Commercial Chamber, 5 January 2016, n° 14- 15705) or (iii) by demonstrating that the observed difference resulted from misconduct or management mistakes on the part of the franchisee (Paris Court of Appeal, 4 December 2013, n°13/08506).
In this case, however, the franchisor did not convince the Court of Appeal, which emphasized that :
u The franchisor “does not even attempt to demonstrate the plausibility of the forecast figures†and “does not explain why 41% of the points of sale have closedâ€;
u “The franchisee’s proven experience in the sector does not exempt the franchisor from providing him sincere information.†It should be noted on this point that in this case, the Court certainly doubted the sincerity of the information provided by the franchisor because the latter had not even tried to prove that the forecasts were plausible and had, moreover, provided only a very incomplete precontractual
information document that did not allow the franchisee to notice the excessive optimism of the profit and loss forecast.
u “Finally, if the franchisee is required to inquire about the state of the network, it cannot be accused of failing to study the turnover of the franchisees, if it was provided with the provisional figures.†In other words, if forecast figures are provided by the franchisor before the contract is concluded, the franchisee is in principle entitled to rely on these forecasts.
The franchisor was therefore sanctioned for deceit.
Moreover, since the franchisor did not demonstrate any error or mismanagement by the franchisee, the Court took into account all the losses suffered by the franchisee (and not just part of them) as a basis for calculating the damage, and then applied a coefficient to it, the Court noting logically and classically that “the compensation for a loss of opportunity must be measured taking into account the lost opportunity and cannot be equal to the benefit that the opportunity would have provided had it been realized.â€
Authors : Fanny Levy and Grégoire Toulouse
Public criticism directed toward a company: defamation and not disparagement Court of Cassation, Commercial Chamber, 26 September 2018, n° 17-15502
This ruling of 26 September 2018 was an opportunity for the Court of Cassation to recall its now established case-law which makes a clear distinction between public criticism targeting individuals or legal entities (for example, the competitor) from those criticizing products or services marketed by these persons (Court of Cassation, Plenary Assembly, 12 July 2000, n° 98-10160; Court of Cassation, Civil Chamber. 1e, 29 October 2014, n° 13-15850; Court of Cassation, Civil chamber., 1st, 7 March 2018, n° 17-12027).
In the first case, the criticism is assessed under the terms of the 1881 Act on Freedom of the press, which provides for a special regime. In the second case, critical statements are sanctioned, when they are disparaging, on the ground of article 1240 of the Civil Code (former article 1382), in other words, according to the common law of civil liability in tort.
In the present case, a company was subject of a claim for breach of trust by the manager of a company it had a commercial relationship with. The claimant subsequently published an article in the newspaper La Dépêche du Midi entitled “Accusation of connection scams†in which he explained the action subject of his complaint. The company in question then sued him for damages based on article 1382 (now 1240) of the Civil Code, arguing that his words constituted disparagement towards a competitor.
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Franchise & Distribution Networks Newsletter N°18 - 1st Quarter 2019
The Paris Court of Appeal, supported by the Court of Cassation, rejected the claim after noting that the disputed charges, which were directed solely towards the company as a legal entity and not towards its products or services, were harming the honour of the company and that this infringement amounted to defamation, the compensation for which could only be pursued on the basis of the 1881 Act on Freedom of the press.
Thus, only disparagement of products or services can be assessed on the ground of article 1240 of the Civil Code, since products and services are not protected by the 1881 Act. Public criticism targeting the persons themselves (individuals or legal entities) must be assessed on the ground of the 1881 Act sanctioning defamation.
The distinction is not merely theoretical: it has a significant practical impact. Consequently, claims have to be brought before specific courts (the Tribunal de Grande instance having exclusive jurisdiction in defamation matters) and above all, while actions for compensation for damage under Article 1240 of the Civil Code are time-barred after five years, the limitation period for actions brought on the basis of defamation is only of three months (Article 65 of the 1881 Act), which requires a company victim of defamation to act very quickly after the publication of defamatory statements.
Authors: Myriam Berger and Grégoire Toulouse
Update on the latest case law on arbitration clauses and asymmetric jurisdiction clauses Paris Court of Appeal, 11 September 2018, RG n° 16/19913 and Court of Cassation. 1st Civil Chamber, 3 October 2018, n° 17-21309
Two interesting Court decisions have recently been rendered, the first concerning the question of the validity of arbitration clauses in international franchise agreements and the second on the validity of asymmetric jurisdiction clauses (which give to only one of the parties the option to bring proceedings in courts other than the one designated by the jurisdiction clause).
In the first case, which gave rise to the ruling of the Paris Court of Appeal of 11 September 2018, a franchisor had brought a claim against a franchisee before an arbitrator in New York who found the franchisor liable to sanction. The franchisee had refused to participate in the arbitration proceedings and was opposed to the exequatur of the decision in France.
The first reason given by the franchisee to challenge the exequatur was that the agreement, as a whole, created a significant imbalance to the advantage of the franchisor within the meaning of Article L. 442-6, I, 2° of the French Commercial Code and that, consequently, the arbitration clause was null and void.
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In line with precedents of the Court of Cassation, the decision of the Paris Court of Appeal recalled the fundamental principle of the autonomy of arbitration clauses. Thus, even if the contract was null and void as contrary to French public policy based on Article L. 442-6, I, 2° of the French Commercial Code, this would not affect the validity of the arbitration clause.
The franchisee also argued that the high cost of arbitration had deprived it of its right of access to justice. This claim was also rebutted because the franchisee had not provided evidence of its allegations and the franchisor demonstrated precisely the opposite.
The question is: Would the solution have been different if the franchisee had provided evidence according to which its impecuniosity had deprived it of the right of access to the judge? An a contrario analysis of the decision would suggest a positive answer. However, according to precedents of the Court of Cassation, the impecuniosity of a party does not make the arbitration clause manifestly inapplicable (Court of Cassation, Civil Chamber, 1st, 13 July 2016, No. 15-19389).
In the second case, which gave rise to the ruling of the Court of Cassation of 3 October 2018, a real estate company sued a bank in compensation for failure to comply with its duty to provide advice. As the legal action had been brought before the French courts, the bank had challenged the right of the designated judge to rule on the case because of the jurisdiction clause stipulated in the agreement. This clause provided for the jurisdiction of the Luxembourg judge but granted exclusively the bank “the possibility of derogating from this allocation of jurisdiction if it considers it appropriateâ€.
The Court of Appeal had upheld the bank’s jurisdictional objection and dismissed the claim of the plaintiff company.
However, by a decision of 3 October 2018, the Court of Cassation overturned the appeal decision and considered that the clause conferring jurisdiction was null and void and therefore unenforceable.
For the Court of Cassation, a clause which does not contain any reference to a rule of jurisdiction in force in a Member State or any objective element sufficiently precise to identify the court which could be seized does not satisfy the requirement of foreseeability of the Brussel I Regulation EC 44/2001 of 22 December 2000 (the rule being the same under EU Regulation Brussels I Bis of 12 December 2012 now in force). Consequently, such a clause is null and void.
This decision confirms the strict approach of the First Civil Division of the Court of Cassation on the validity of asymmetric jurisdiction clauses. Validity of such clauses is in principle not contested provided that the clause still enables the parties to easily identify the courts that may be seized to hear the dispute (iCourt of Cassation, Civil Chamber. 1st, 26 September 2012, n° 11-26022; Court of Cassation, Civil
Chamber, 1st, 7 October 2015, n° 14-16898). It should be noted, however, that the Commercial Chamber of the Court of Cassation took the exact opposite stance in 2017 (Court of Cassation, Commercial Chamber, 11 May 2017, No. 15- 18758) so that a mixed chamber, or a preliminary question to the Court of Justice of the European Union, would now be welcome in order to settle the debate once and for all.
Authors: Morgane Gloaguen and Grégoire Toulouse
GERMANY
German Packaging Act 2019: Producers / distributors must not sell without registration! On 1 January 2019, the new German Packaging Act entered into force, obliging many producers and distributors – including online retailers – to register and participate in a disposal and recycling system, even if based abroad.
Most important: Without appropriate registration, producers, distributors and importers must not offer the packaging – nor therefore the products contained therein – for sale – in Germany, including via e-commerce. Risk: Authorities may impose fines up to EUR 200.000,00. Furthermore, competitors and consumer associations can claim from producers and retailers to cease and desist from any sales and authorities may confiscate the proceeds for reasons of unfair competition.
The German Packaging Act introduces several changes compared to the existing German Packaging Regulation. Among them, there is the obligation to register on the online database of the newly established foundation called “Zentrale Stelle†in order to be entitled to introduce new packaging items on the market. Packaging items that require registration and licensing under the new law are sales packaging (“Verkaufsverpackungenâ€) and secondary packaging or outer packaging (“Umverpackungenâ€) under two conditions: They
�1. are filled with products, and
2. typically end up, after being used, as waste at (i) a private final consumer or (ii) equivalent places of waste generation (“gleichgestellte Anfallstellenâ€) – such as
g restaurants, hotels, canteens, administrations, hospitals, educational, charitable or military institutions, service stations etc. – all irrespective of the quantities of waste generated there.
g smaller craft and agricultural businesses – if the packaging waste produced is collected in separate waste containers for paper, cardboard and board, as well as plastic, metallic and composite packaging not exceeding 1,100 litres each and subject to disposal at a conventional household rate (instead of a business-like rate).
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These obligations generally apply to online resellers as well.
Practical advice:
1. Producers and all other economic operators who market packaged products in Germany have to comply with the new law – even if based abroad if they sell into Germany. The term “producer†is very broad and includes importers and distributors putting the packaging into circulation for the first time.
2. Producers and retailers must not place packaging on the market if it is not registered or not properly registered though being subject to registration. Non-compliance may result in severe consequences, including fines, damage claims and confiscation of profits.
3. There is no transition period. Registration, if a new obligation not previously provided for under the GPR, must take place by 01.01.2019 at the latest. Producers, importers and retailers as all other economic operators concerned can easily register online: https://lucid. verpackungsregister.org/
Author: Dr. Benedikt Rohrßen
Franchisors: How to make price campaigns comply with competition law According to the famous franchising case “Pronuptiaâ€, franchisors may impose restraints on franchisees without unlawfully restricting competition – provided that such restraints are necessary for the franchise system (decision of 28 January 1986, No. 161/84). This applies, e.g., for restricting the transfer of the franchise-related know-how or obligations not to sell competing products or services.
As regards pricing, the general prohibition according to Art. 101 TFEU applies: franchisors – as other suppliers –, must not “directly or indirectly fix purchase or selling prices or other trading conditionsâ€.
Any agreement contrary to this prohibition is void – as just reconfirmed by the Munich Regional Court in its decision of 26 October 2018 (Case No.37-O 10335/15) regarding price campaigns for the “Burger of the Weekâ€. In that case, the franchisor ran a restaurant chain. The franchisees had to pay advertising charges, which the franchisor used, also for financing price campaigns in which the franchisor offered certain menus at very cheap prices – however without making it sufficiently clear – according to the court – that these prices were not binding the franchisees and would only apply in the participating restaurants.
Practical advice
1. The decision gives clear guidance for franchisors’ advertising campaigns and is consistent with the pre- existing decisions concerning other franchise systems.
2. To ensure compliance with antitrust law, franchisors should make it clear where the price campaign applies (e.g. “Participating Restaurants Onlyâ€) – and ensure that price recommendations are only recommendations, hence do not result into fixed prices or minimum prices because of any pressure exerted or incentives offered.
Author: Dr. Benedikt Rohrßen
UNITED KINGDOM
There is more to life than Brexit While Brexit is undoubtedly going to dominate 2019, it will certainly not derail the EU’s legislative agenda although it may slow things down in the UK. We are also expecting some significant court decisions this year.
1. Data privacy
u UK
The UK government recently published the draft Data Protection, Privacy and Electronic Communications (Amendment etc.) (EU Exit) Regulations 2016. These are intended to come into effect on exit day but will not apply in full if there is a transition period. The Regulations consolidate the EU GDPR and the UK DPA18 to create the UK GDPR and provide for uninterrupted data flows from the UK to EEA countries and Gibraltar.
Over the course of 2018, the ICO is expected to publish various codes of practice including:
g Direct marketing code
g Data sharing code
g Age appropriate design code
g Data protection and journalism code
g Code of practice on the use of personal data in political campaigns.
We also expect ICO guidance including on :
g Deletion
g Exemptions to data subject rights
g Data protection by design
The Morrisons case around vicarious liability for data breaches heads to the Supreme Court this year and the ICO has issued criminal proceedings against SCL Elections Ltd (trading as Cambridge Analytica). Both decisions will be of interest.
u EU
We continue to expect the ePrivacy Regulation which will update rules on cookies and direct marketing. It does, however, seem unlikely that this will be finalised before the EU Parliamentary elections in May. As explained in our article on
Franchise & Distribution Networks Newsletter N°18 - 1st Quarter 2019
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the Global Data Hub, the draft has been considerably watered down and it may well be that the most significant impact in this area has already been felt with the change to GDPR consent which took effect on 25 May 2018.
The EU will continue to progress the Cybersecurity Act which is intended to create an EU-wide cybersecurity certification framework. Informal agreement was reached at trilogue stage and we expect the Regulation to be finalised in the early part of this year.
The Regulation on a framework for the free flow of non- personal data in the EU which prohibits unjustified data localisation requirements, was passed in November 2018 and will apply from 28 May 2019.
The EDPB is likely to issue an Adequacy Decision in respect of Japan and further guidance on issues including international transfers and clinical trials. Draft guidance published at the end of 2018 on the role of the representative, certification and contracts will be finalised.
Data transfers to the US will be under the spotlight again this year. The Irish Supreme Court has given Facebook leave to appeal on a CJEU reference relating to SCCs as a data export mechanism to from the EEA to the USA. If the appeal is denied, then we are likely to see a decision from the CJEU on the issue. The Commission has also said that the US must appoint a permanent Ombudsperson to oversee the Privacy Shield by 28 February 2019 although it is not entirely clear what will happen if the appointment is not made by then.
2. Consumer Protection
u UK
Consumer Green Paper
The UK government published a Consumer Green Paper in April 2018, identifying issues it hopes to look at in 2019. These include :
g Addressing the loyalty penalty (the fact that you effectively lose out by not switching).
g Using data portability to assist consumer switching.
g Understanding how personalised pricing is used and whether it can harm consumers.
g Promoting confidence in C2C trading.
g Improving businesses’ terms and conditions.
g Minimising the use of unfair terms.
g Improving uptake of ADR.
g Introducing fines for breaches of consumer law – the government intends to introduce legislation to give civil courts the power to impose financial penalties. Fines will be capped at 10% of an organisation’s worldwide turnover.
The government consultation on the Green Paper closed in July 2018 but a response has not yet been published.
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CMA sector focus
The CMA will focus on the following markets in 2019 :
g Hotel booking sites
g Funerals market
g Loyalty penalties
g Personalised pricing
Office of Product Safety and Standards
The OPSS was established in early 2018, issuing its first strategy in August 2018 together with the new Product Recall Code. The Strategy suggested the OPSS would produce its first full strategic assessment of the product safety landscape by the end of March.
u EU
New deal for consumers package
The EC announced a new deal for consumers package in April 2018, intended to strengthen consumer protection enforcement. Two draft Directives were proposed. Progress has been limited to date but we may see more this year :
g Directive on better enforcement and modernisation of EU consumer protection rules (the Omnibus Directive) – intended to amend the Unfair Contract Terms Directive, the Unfair Commercial Practices Directive, the Consumer Rights Directive and the Price Indication Directive. The draft covers penalties for infringement, transparency requirements for online marketplaces, protection for consumers of free digital services and dual quality of products. The draft is awaiting an EP Parliamentary decision.
g Directive on representative actions for consumers – will repeal and replace the Consumer Injunctions Directive. The draft will be voted on by the European Parliament in its plenary session.
Digital Single Market consumer protection proposals
There are two draft Directives going through the legislative process at the moment. Again, progress has been slow, but it is being made.
g Digital Content Directive – the EU is proposing maximum harmonisation measures to ensure consumer rules and protections apply equally to digital content and goods and that these rules are harmonised as far as possible.
g Supply of goods Directive – maximum harmonisation of measures to the sale of goods.
The major outstanding issues have been :
g The treatment of ‘smart goods’ (goods with embedded digital content) and whether they should be treated as goods as a whole or whether the digital element should be treated separately as digital content; and
g The reluctance of Member States to harmonise limitation periods and change the period before the burden of proof is reversed.
The latest versions suggest that smart goods should be treated simply as goods, and that Member States will have discretion to vary minimum consumer protections, for example, by giving consumers a short term right to reject, as the UK does under the Consumer Rights Act. They may also have discretion to require that defects be notified to the trader within two months of discovery in order to attract remedies.
Online platforms
As part of the Digital Single Market project, the EC has proposed a Regulation on promoting fairness and transparency for business users of online intermediation services. This will introduce new rules governing relations with certain platforms which deal with consumers, and the businesses that use them. Platforms in scope are likely to include search engines, e-commerce marketplaces, social media and price comparison tools. The draft Regulation will address sudden unexplained changes in terms and conditions, account suspensions, delisting of products and ranking issues as well as redress mechanisms. The latest draft also suggests that most favoured nation clauses which prevent business users offering better terms elsewhere will be banned.
The draft Regulation was approved by the lead European Parliament Committee in December and is due to be voted on by the European Parliament in plenary session.
Product liability
The EC concluded that the current Product Liability Directive is broadly fit for purpose but it is launching an expert group to explore the effect of economic and technological developments. The group will assess whether the overall liability regime is adequate to facilitate the uptake of new technologies, and whether the Directive needs to be updated or amended in light of developments in the EU and case law. The Commission intends to publish guidance on the Directive in mid-2019 and a report on whether or not the Directive needs to change.
3. Commercial and tech
u UK
Brexit is definitely slowing down the flow of new legislation which is unconnected to Brexit in the UK although a raft of SIs has been prepared to ensure the legal framework functions (as far as possible) in the event of a no deal.
We do know that the Digital Services tax will apply from 1 April 2019. The tax of 2% will be applied to revenue over £25m derived from certain services linked to UK users provided by online marketplaces, social media platforms and search engines with global revenue of over £500m. Loss-making
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businesses will not have to pay the tax and those with low profit margins will pay a reduced rate. There is very little detail available at the moment as to how that will be determined. Revenues caught will include advertising revenues generated by social media platforms or search engines, and commission charged by online marketplaces (not revenue from online sales). The DST will not apply to financial or payment services, the provision of online content, sales of software or hardware, nor to television or broadcasting services. The government will be publishing more detail about how the tax will work following its consultation.
Other issues likely to feature this year include Modern Slavery and supply chains, online disinformation, clarity on the use of electronic signatures for deeds, and a possible ban on ‘ipso facto’ termination clause – clauses that allow one party to terminate a contract due to the insolvency or financial condition of another party.
The employment status of gig economy workers was the subject of a number of high-profile cases in 2018 and the Supreme Court will be looking at this when it hears Uber’s appeal against the Court of Appeal decision that a group of its drivers should have been treated as workers in 2016.
u EU
Online disinformation is an increasing focus across the world and the EU is not alone in starting to take this issue seriously. To date, the EU has stopped short of legislating in this area (outside a package of measures designed to prevent interference in EP elections, and to prevent dissemination of terrorist content) but is waiting to see what effect the industry voluntary code of practice has before deciding whether further steps are needed.
NETHERLANDS
New Draft Bill franchise published
As previously announced in newsletter no. 16 the draft franchise law that was supposed to provide a statutory basis for the Dutch Franchise Code – a self-regulation prepared by the industry – has been withdrawn on 23 May 2018. However, a new draft bill (the “billâ€) was published on 12 December 2018. The bill is a new initiative, but with the same objective as the previous draft franchise law; protection of the franchisee. This article aims to describe the most important aspects of the bill mainly from the perspective of the franchisor.
First of all, the bill introduces the principle of ‘good franchisor’ and ‘good franchisee’. This means that the franchisor and franchisee must be reasonable and prudent towards each other. The principle applies both in the pre-contractual and contractual phase.
Secondly, the franchisor is required to inform the franchisee in a timely and specific manner about a list of subjects. The bill also contains a general obligation for both parties to inform each other in a timely manner of everything that could reasonably matter to the other party. The aforementioned disclosure obligations apply both in the pre-contractual and contractual phase.
Also, the franchisor must give the franchisee a period of four (4) weeks between the time of receipt of all relevant information and the intended time of conclusion of the franchise agreement. This ‘cooling off period’ aims to protect the franchisee from agreeing to a franchise agreement of which he cannot properly oversee the content, obligations and risks arising therefrom. During the cooling off period it is forbidden for the franchisor to change the draft franchise agreement, unless the adjustments are in favor of the franchisee.
The bill contains regulation on the content of the franchise agreement, including – but not limited to – a provision that states the manner in which the value of the goodwill in the company of the franchisee is determined. In practice, the franchise agreement often includes a clause where the franchisee is obligated to sell his business to the franchisor under certain conditions, sometimes without compensation for accrued goodwill. To protect the franchisee, the bill stipulates that provision must be made for compensation of accrued goodwill.
Besides, the bill introduces a non-competition clause with a scope limited to one year after the end of the franchise agreement. The geographic area is limited to the area within the franchisee was allowed to operate a business under the licensed franchise concept.
Furthermore, the bill requires prior consent of the franchisee for actions by the franchisor that have a significant effect on the franchisees. The bill mentions two different ways in which the franchisees can give their prior consent. Primarily, the consent of franchisee representation by a two-third majority binds all the franchisees that are part of the same franchise formula. Second and in case there is no representative body that can agree on behalf of all the franchisees, the franchisor needs the consent of the individual franchisees.
Franchisors need to be aware that, due to the aforementioned aspects, the bill will negatively impact their position. Supposedly, in justification of the objective of the bill, namely protection of the franchisee.
The bill was published on 12 December 2018 for the purpose of consultation. Time will tell how the new franchise legislation will be phrased and whether it will be received with more enthusiasm than the previous draft franchise law.
Authors: Vera Jurgens and Tim Mimpen
Franchise & Distribution Networks Newsletter N°18 - 1st Quarter 2019
1. Initiation: an action is initiated by submitting a claim or application. All acts of process must be carried out by a member of the Dutch bar. However, visiting lawyers who are member of the Bar in an EU Member State, may work in conjunction with a member of the Dutch bar. Other visiting lawyers may be allowed to speak at hearings ;
2. Assignment: the case is assigned to three judges and a senior law clerk ;
3. Defense: the defendant submits its defense ;
4. Motions and Evidence: active case management pertaining to issues such as procedural defenses, document review, witness or expert testimony are addressed in consultations with the parties, before or after the defense, as appropriate ;
5. Further written submissions: to be submitted as appropriate;
6. Hearing: the NCC will interview parties and allow them to argue the case. The NCC can offer parties to discuss an amicable settlement and the further course of action;
7. Judgment: this may be a final judgment on the claims or an interim judgment, which will be followed by evidence or further written submissions and possibly a hearing and final judgment.
The applicable substantive law will be determined on grounds of regular rules of international private law.
Costs
The court fees for the NCC are EUR 15,000 and for the NCCA EUR 20,000. Parties requesting for interim or protective measures will be charged EUR 7,500 (NCC) or EUR 10,000 (NCCA).
Parties may enter into agreements with respect to the costs. If no agreement is made, the unsuccessful party, as the party found against, will be ordered to pay the legal costs, consisting of the court fees and attorney’s fee ranging from EUR 1.000 to EUR 12.000 per act of process. When neither party succeeds entirely, each will have to pay its own costs.
Author: Vera Jurgens
POLAND
Problems of the Polish sales network - Żabka The franchise agreement in Poland is an unnamed contract (it is not regulated by the Civil Code). However, on the basis of court decisions and business practice, the features of this contract can be distinguished.
Therefore, for the purposes of this article, it can be assumed that a franchise agreement is a system of sales of goods or services involving the transfer of know-how from a franchisor
The Netherlands Commercial Court (of Appeal) Introduction
On 1 January 1, 2019, the international trade chamber of the District Court of Amsterdam (Netherlands Commercial Court, or “NCCâ€) and of the Amsterdam Court of Appeal (Netherlands Commercial Court of Appeal, or “NCCAâ€) were established. The establishment of the NCC(A) enables parties to litigate in English language in international disputes.
Background
Differences between national rules governing legal proceedings negatively affect the operation of the internal market. Within the European Union several legislative initiatives aim to ensure the proper functioning of legal systems (e.g. Regulation 1215/2012 on jurisdiction and recognition and enforcement of judgments in civil and commercial matters). It is the opinion of the Dutch legislator, that the obligation to litigate in Dutch, negatively impacts access to justice. Whereas, the English language is commonly used in international trade, the obligation to litigate in Dutch has cost-increasing effects. By enabling parties to litigate in English, procedures before a Dutch court can be better aligned with the commercial practice used by the parties involved.
Competence
An action may be initiated before the NCC when the following (cumulative) conditions are met :
1. The action is a civil or commercial matter, meaning that the dispute is related to civil law in a broad sense, including contractual disputes, claims in tort, property disputes, intellectual property, technology, construction or corporate matters ;
2. The matter concerns an international dispute, not necessarily limited to disputes involving one or more parties having their domicile in a foreign jurisdiction, but also disputes with cross-border interests ;
3. The parties to the proceedings have chosen the Amsterdam District Court as competent court or the Amsterdam District Court has jurisdiction on other grounds ;
4. The parties to the proceedings have expressly agreed in writing that the proceedings will be heard before the NCC in English. Parties cannot agree on the competence of the NCC by implicitly agreeing to general terms and conditions that include a choice of forum clause.
Proceedings
The proceedings will be governed by Dutch procedural law. The Dutch judicial system is very efficient. Supposedly, Dutch courts are the 5th fastest in the European Union with an average of 130 days from a notice to appear to a final judgment. In brief, proceedings at the NCC will operate as follows:
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to a franchisee, in which the franchisor entitles an individual franchisee to use for direct or indirect financial benefits:
1. name of the franchisor
2. its trademark or service mark
3. methods of doing business
4. technical knowledge, systems of conduct, other intellectual or industrial property rights, as well as to use the commercial and technical assistance of the franchisor.
As the franchise market in Poland matures, the number of companies launched based on licenses of well-known brands is growing. In 2015, there were 2,568 license points, in 2016 - 2,943, and last year brought another record - an increase of 4,356. The total number of licensed facilities reached 75,865, the most in history. In this respect, 2017 was particularly successful for Żabka, which increased its network by over 1.1 thousand, points of sale (according to the franchise report from 2018, which is available on the franchising.pl website).
However, in recent times, Żabka has no reason to rest on its laurels. At the Poznań-Stare Miasto District Court in Poznań, the first and perhaps ground-breaking case is underway in which the franchisee (franchisee’s agent) signed a blank promissory note. The charge concerned filling in the bill of exchange despite the non-existence of the obligation. The objection of the invalidity of the promissory note was also raised.
A blank promissory note could only be completed by the franchisor if there were cash claims in connection with material damage related to the running of the commercial outlet. The franchisee denied that such receivables arose. The franchisee indicated that he regularly (on a daily basis) repaid the amounts due in the amount as indicated by the Żabka company itself. He repeatedly asked the franchiser for an explanation of what the claimed receivables resulted from. In response, he received a list of documents and the balance calculated on his basis, indicating that the liabilities were not covered for the amount indicated in the lawsuit. According to the franchisee, it raises doubts (some invoices should not be included in the final settlement).
More importantly he also pointed out that the promissory note obligation was invalid. The franchisee argued that in his view the parties did not conclude a cooperation agreement, but a contract of employment. According to Polish law, the employer cannot secure his claims with a promissory note (this was confirmed by the Supreme Court in its judgment of 19 March 1998, file reference number I PKN 560/97).
The franchisee pointed out that Żabka’s managers are theoretically entrepreneurs, but the contracts with Żabka were constructed in such a way that they do not even have the minimum freedom to conduct their business activities. The franchisee could recruit other employees to operate the store,
but in practice he also had to provide work, among others due to the scope of obligations arising from the contract (as well as network guidelines) and the amount of income that can be achieved (from operating the store).The franchisee has no influence on the store’s offer, he can be supervised at any time, and in the case of negative verification, he receives a lower remuneration. These circumstances indicate the relationship of subordination that is a feature of the employment contract.
According to the Polish Labour Code and the Supreme Court’s jurisprudence, the performance of activities in person, in a continuous manner as well as in a subordinate manner and payable, indicates the existence of a contract of employment (regardless of the provisions of the contract concluded between the parties of the franchise agreement).
On the other hand, the Franchisor indicated that, according to the legal opinions, franchisees are self-employed entrepreneurs. This is supported by, among others, the fact that they register their activities themselves, obtain appropriate forms of authorization and permits, recruit employees and settle public and legal obligations. As with all entrepreneurs, they make different business decisions every day, which determine the financial results of their business. The fact that, similar to many other entrepreneurs, they work together under one recognizable brand, a result of which they can increase their competitiveness towards large retail chains, it does not affect their independent entrepreneur status in any way.
These types of cases show how the relationship of dependence in business is modified. Some of them contain elements of subordination characteristic for the sphere of employment. In this context, the franchise agreement should be included in the Polish Civil Code. Lack of legal regulation does not keep up with the changing market conditions and transfers business relationships to the courtroom.
The verdict in the present case (if court will agree with arguments of franchisee) may expose Żabka to huge costs associated with the recognition of store managers as employees and change the current perception of franchise agreements in Poland.
Author: Krzysztof Borżoł
Franchise & Distribution Networks Newsletter N°18 - 1st Quarter 2019
Contacts
uGrégoire Toulouse Paris, France T: +33 (0)1 72 74 03 33 [email protected]
Contributors to the Newsletter: France: Grégoire Toulouse, Myriam Berger, Fanny Levy,, Noémie Vincent,Hans-Christian Kost Germany: Dr. Benedikt Rohrßen UK: Mark Owen Netherlands: Vera Jurgens, Tim Mimpenr
uDr. Benedikt Rohrßen Munich, Germany T: +49 (0)892 1038-0 [email protected]
uMark Owen London, United Kingdom T: +44 (0)20 7300 4884 [email protected]
uVera Jurgens Eindhoven, Netherlands T: +31 (0) 88 02 43 159 [email protected]
uEwelina Stobiecka Warszawa, Poland T: +48 (0) 22 584 97 40 [email protected]
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© Taylor Wessing 2019 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.
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