Franchise lawi Legislation
The Italian Franchise Act is over 10 years old, having been approved by Parliament on 6 May 20047 after a gestation of more than seven years (the first bill having been proposed in 1997).
Italian law recognises a number of types of contract (which find their specific definition and regulation within the Civil Code or within ad hoc acts), though it also allows for parties regulating their respective relationships outside those recognised contracts (e.g., a trademark or patent licence is not a recognised contract in our jurisdiction; nevertheless such contracts are fully effective and enforceable on condition that they include those basic elements required under general Italian contractual law).
With the entry into force of the Franchise Act, the franchising contract has finally been recognised by Italian law,8 being defined (under Article 1) as:
the contract that, irrespective of the relevant naming, is executed between two juridical parties, legally and economically independent, with which a party grants to the other party, against a consideration, the right to dispose of a number of industrial and intellectual property rights related to trademarks, trade names, signs, utility models, design, copyright, know-how, patents, technical and commercial assistance and advice, including the franchisee in a system constituted by a plurality of franchisees distributed on the territory, to commercialise certain goods and services.
From a very first reading it can therefore be inferred that the franchising contract is distinguished by the following two main elements:
- the franchisor grants to the franchisee the right to use certain intellectual property (IP) rights and undertakes to provide to the latter certain services for the exploitation of the activity; and
- the franchisee pays a consideration in relation to the grant of IP rights and for the provision of the services mentioned.
From a subjective standpoint the legislature, on the one hand, has expressly not excluded that an individual may be a party to a franchising agreement; however, the mention of the commercial purpose of the activity would lead to the assertion that the parties must in any case be entrepreneurs; and, on the other hand, has required that franchisor and franchisee are 'juridically and economically independent', thus entailing that the parties to the contract should not belong to the same corporate group or be parties to a joint venture in which control is reserved for the franchisor.
Finally, a number of debates have arisen over the provision according to which the franchisee should be included 'in a system constituted by a plurality of franchisees distributed on the territory', and also in relation to the rule set out under Article 3, Paragraph 1, which states that 'for the purposes of the establishment of a franchising network, the franchisor shall have tested its commercial formula on the market'. While these questions certainly deserve a much deeper analysis, it is anticipated that the main issue will continue to be the applicability of the Franchise Act to the 'pilot contracts', through which the franchisee starts experiencing its commercial formula.ii Pre-contractual disclosure
The legislature's requirements in the Franchise Act (which consists of nine articles) focus, in substantial part, on pre-contractual obligations.
In particular, Section 6 of the Franchise Act sets out generic information obligations upon the franchisor, stating that the latter should be timely in providing any data and information that it believes necessary or useful for the franchisee for the execution of the contract (to the extent that the data and information are not confidential or the relevant disclosure would not entail the violation of third parties' rights).
Section 4 provides a list of specific information to be provided to the franchisee at least 30 days before the date of the execution of the franchising agreement. Namely, as well as the full copy of the agreement to be executed, enclosures providing the following information are to be delivered to the franchisee:
- main data relating to the franchisor (including the corporate name, corporate capital and – if the franchisee so requires – a copy of the balance sheet for the past three years);
- an indication of the trademarks used within the franchising system (mentioning the data relating to the filing or registration of the licence granted to the franchisor by a third party or the documents attesting to the use of the trademark);
- a short description of the elements that feature the activity constituting the subject matter of the franchising;
- a list of the franchisees belonging to the network and of the direct points of sale of the franchisor;
- an indication of the variation, year by year, of the number of franchisees (including the relevant locations in the past three years or, if the shorter period, from the starting of the activity); and
- a short description of the possible judicial or arbitration cases started against the franchisor and concluded within the past three years in relation to the franchising system.
Although providing a detailed disclosure obligation for the franchisor, the legislature has omitted to state the sanction to be applied in the event that the franchisor fails to disclose any of the mandatory information. Indeed, Section 8 of the Franchise Act allows a party to claim the annulment of the contract only in cases of 'false information' having been disclosed, thus limiting the range of situations in which this sanction may be applied.
We consider, therefore, the general principles that apply in matters of pre-contractual liability; in brief, these entail that:
- the franchisor may be required to compensate the possible damage suffered by the potential franchisee through withdrawal from the negotiations as a result of conduct by the former contrary to the bona fide principle; and
- should the contract be executed despite conduct by the franchisor contrary to the bona fide principle, the possibility should be explored that the franchisee's will to execute the agreement may be affected by that conduct, allowing the possibility of claiming the annulment of the contract and compensation for the damage suffered (or even solely this latter, should the franchisee decide to maintain the contract in place).
Notwithstanding that the franchisee is plainly seen as the weak party of the agreement, the legislature actually intended there to be two-way disclosure obligations, stating that the franchisee (in addition to a general bona fide obligation) should in its turn, in a timely manner, provide the franchisor with exact and complete information and data that may be necessary or opportune to the franchisor in view of the execution of the contract (though not specifically required by the franchisor).
The wording used by the legislature in relation to the franchisee's obligations does not exactly mirror that used with reference to the franchisor, and is actually more favourable to the latter. This slip can be explained by recalling that the franchise contract is characterised by the intuitus personae and, thus, certain information (which could hardly be known or obtained by the franchisor otherwise) should be spontaneously disclosed by the franchisee.9iii Registration
Franchisees should observe all corporate and administrative regulation regarding registration (e.g., registration with the Chamber of Commerce) and collection of the required licences, and which may depend on the subject matter of the franchise.iv Mandatory clauses
Under Section 3 of the Italian Franchise Act the legislature sought to provide a sort of checklist of the elements that must and may be included within the agreement.
The following are mandatory elements of the agreement, lack of which renders the whole contract null and void:
- an indication of the investment required by the franchisee prior to the start of the activity;
- the modalities of calculating and paying royalties; in this respect according to a view in Italian legal literature, royalties may be omitted in a franchise contract under certain circumstances in specific cases;
- the specification of the know-how to be provided;
- the features of the services to be provided by the franchisor (i.e., technical and commercial assistance, dressing and design of the point of sale); and
- the terms and conditions for the renewal and termination of the agreement.
As mentioned, Section 3 also indicates those elements (i.e., possible entry fees, possible minimum takings, possible exclusivity related to a certain territory, possible provisions on the assignment of the contract and possible modalities for recognising the know-how provided by the franchisor) that, while not mandatory, may be included in the agreement. The inclusion of such a list has been questioned, given that the failure to include any of these elements within the agreement entails no specific consequence in terms of the nullity of the agreement.
By the same rule (implicitly), the term of the contract may be either open-ended or provide a specific duration. In the latter case, the term of the agreement should allow the franchisee to amortise the investment and, in any case, should be no less than three years. In accordance with the aforementioned principle, legal literature unanimously asserts that in the case of open-ended contracts no withdrawal should be allowed before the expiration of a three-year term from the date on which the contract becomes effective, and that no right of withdrawal should be admitted in a contract of a specific term before the expiration of the three-year term.v Guarantees and protection
Although the Italian Franchise Act requires that the parties to a franchise agreement are autonomous and independent of one another, facts show how franchising networks produce close integration between franchisor and franchisees due, inter alia, to the use of the same trademarks and of the same layout of the points of sale, such that third parties (including, but not limited to, consumers) may consider franchisees' outlets as mere branches of the same company.
Case law has been required following such an event to evaluate whether a third party – having contracted with a franchisee while believing they had contracted merely with a branch of the franchisor – could start an action against the franchisor and, if so, whether the franchisor could require indemnification from the franchisee.
According to the 'appearance principle', the guiltless trust of the third party who, on the basis of the seeming facts, believed they had contracted with a branch of the franchisor's business should be protected.
However, these appearances may be determined by the conduct of either the franchisor or the franchisee. Thus, the jurisprudence – moving from one orientation to another – has tried to fix the main principles according to which the franchisor might be directly liable towards the third party for the conduct of the franchisee; briefly (as the matter warrants much deeper examination), the Court of Appeal of Naples, on 3 March 2005 stated that the franchisor has an obligation to control the conduct of the franchisee and the way in which the franchise activity is performed.10 Lack of such control would thus entail an extra-contractual liability of the franchisor towards the third party in respect of the conduct of the franchisee.11