Topics covered in this month's newsletter:
- The place of franchising in the new regulation
- Restrictions on online sales
- Online platforms
- Parity obligations
- Dual pricing
- Dual Distribution
- Restrictions on active sales
- Agency agreements
- The situation in the United Kingdom after Brexit
On 9 July 2021, following a comprehensive consultation process, the European Commission published the long-awaited drafts of the revised Vertical Block Exemption Regulation (“Draft VBER”) and the accompanying Guidelines on Vertical Restraints (“Draft Guidelines”).
The current 10-year-old legal framework (EU Regulation 330/2010 of 20 April 2010 on the application of Article 101(3) of the Treaty on the Functioning of the European Union (“TFEU”) to categories of vertical agreements and concerted practices) has been criticized for being outdated and poorly adapted to the growth of online sales and the emergence of new market players, such as online platforms. The Commission decided in 2018 that it was time for a change. A lengthy review process and many consultations followed, with the goal of setting up a better assessment system for vertical agreements and to implement corresponding changes in view of the challenges of the fast-growing digital economy.
It is noteworthy that the Draft VBER and Draft Guidelines may still be changed. The public consultation lasted until 17 September 2021. Subsequently, the revised VBER and guidelines will be adopted before the end of May, next year.
This edition of our European Franchise & Distribution Newsletter is dedicated to the major topics of the ongoing revision process and the last contribution is dedicated to the reform that is also underway in the United Kingdom.
The place of franchising in the new regulation
Since the adoption of Regulation (EC) No 2790/99 of 22 December 1999 on vertical restraints, franchising is no longer subject to specific treatment, as was once the case with Regulation (EEC) No 4087/88 of 30 November 1988.
In 2010, the EU Commission adopted the same stance with Regulation (EU) No 330/2010.
With the Draft VBER, the European Commission seems to be willing to remain on the same line.
Franchising is recognised in the Draft Guidelines (point 150) as an agreement presenting specificities that justify a special treatment, in accordance with the Pronuptia ruling of the Court of Justice of the European Union: Franchising (with the exception of industrial franchise agreements) presents some specific characteristics, such as the use of a uniform business name, the application of uniform business methods (including the licensing of IPRs) and the payment of royalties in return for the benefits granted. In view of these specificities, provisions that are strictly necessary for the functioning of such distribution systems can be considered as falling outside Article 101(1). This concerns, for instance, restrictions that prevent the know-how and assistance provided by the franchisor from benefiting his competitors and a non-compete obligation with regard to the goods or services purchased by the franchisee that is necessary to maintain the common identity and reputation of the franchise network. In the latter case, the duration of the non-compete obligation is irrelevant as long as it does not exceed the duration of the franchise agreement itself.
The Commission therefore concedes that franchise agreements may include an exclusive supply and non-competition obligation for the entire term of the agreement (and not just five years for other distribution agreements). It also admits the possibility of more control by the franchisor over the operation of the franchisees, in order to ensure the common identity and reputation of the franchise network.
However, the other obligations contained in franchise agreements continue to be dealt with under the same rules as those applicable to exclusive or selective distribution agreements, which is hardly satisfying. Indeed, franchising cannot be considered as a mere distribution agreement because the transfer of know-how from the franchisor to the franchisees is consubstantial to all franchise agreements.
In practical terms, the approach of the European Commission raises critical issues.
For instance, in the Draft VBER, as in the current VBER, post-contractual non-competition clauses are only valid if they are limited (i) to the goods and services which were the subject of the contract, (ii) to the premises or land from which the buyer operated, (iii) to one year after the end of the contract, and (iv) if they are indispensable for the protection of know-how (Article 5(3) of the Draft Regulation).
Admittedly, franchise agreements are better placed than the other distribution agreements to meet these four conditions precisely because they include a transfer of know-how.
But is it really consistent to impose that the clause be limited to "the premises" or "the land" from which the franchisee operated its business, especially if the aim is to protect the know-how? The answer is obviously negative, particularly in the case of service franchises in which the location of the premises is sometimes totally irrelevant. The Commission should recognize the validity of non-competition clauses that cover at least the catchment area or the exclusive territory in which the franchisee operated its business prior to termination or expiration of the franchise agreement.
Similarly, it is regrettable that the Commission did not consider changing its position on the issue of the resale price maintenance. Indeed, it would not be illogical for the franchisor to be entitled to freely fix the prices applicable in the franchise network, for the obvious purpose of homogeneity.
Finally, the application of the new rules on dual distribution in Article 2(4) of the Draft VBER (see article below dedicated to this subject) to franchise agreements is of serious concern for franchisors. Indeed, dual distribution is inherent to the operation of franchise networks. Franchisors almost always sell their products or services directly to customers, in their pilot units, and at the same time, act as suppliers of their franchisees. Preventing franchisors from exchanging information on prices, commercial strategy or customers with their franchisees when their market share exceeds 10% (as proposed by the European Commission in the Draft VBER), would have a strong negative impact on the operation of franchise networks.
Let’s hope that the European Commission will eventually complete its Draft VBER and Draft Guidelines to at least confirm that:
- the exchange of information between the franchisor and its franchisees will still benefit from the block exemption, even if the franchisor’s market share is beyond 10%
- post-contractual non-competition clauses contained in franchise agreement may cover the entire territory in which the franchisee previously operated, and not simply the premises or land from which the franchisee operated.