Business climate and recent developments
What is the extent of franchise business in your jurisdiction, including any particular franchise-heavy sectors and notable recent developments?
Franchises are common in Italy, especially in the retailing and services sectors. In the past few years, franchising has also become wider spread in the food services, clothing and real estate sectors.
Are there any franchising-specific laws in your jurisdiction? What other legal regimes apply?
Italy adopted its first specific legislation on franchising through Act 129/2004 (the Franchising Act), which entered into force on May 25 2004. Its implementing regulation (Ministerial Decree 204/2005 or the Franchising Regulation) was adopted in 2005. Other relevant applicable laws are:
- Act 287/1990 (rules on protection of competition and the market – the Italian Antitrust Law);
- EU Block Exemption Regulation (330/2010) on vertical restraints; and
- Act 192/1998 (regulation of sub-supply within the production activities) – in particular, Section 9 on the abuse of economic dependence (the Anti-Economic Abuse Law).
Is there a legal definition of ‘franchise’?
‘Franchising’ is defined by the Franchising Act as a particular kind of agreement between two separate entities – one of which is both legally and economically independent from the other – according to which the franchisor, in exchange for payments, grants the franchisee a set of industrial and IP rights that may include trademarks, commercial trade names, displays, utility models, designs, copyrights, know-how, patents and technical and commercial assistance or consulting. With the execution of a franchising agreement, the franchisee becomes part of a network of franchisees operating within a determined territory aimed at promoting specific goods or services. One of the main purposes of franchising is essentially the creation of a collaborative system and effective distribution network.
Are there any specific regulatory implications for foreign franchisors seeking to expand into your jurisdiction?
Foreign business entities and foreign investments are not subject to any particular restriction while expanding their business in Italy. A foreign business entity that engages in active business in Italy may be required either to register as a branch with the Italian register of undertakings or obtain a tax number, which is necessary for every single transaction, or both. Even where they are not required, these measures are nonetheless appropriate for expanding in Italy. Companies carrying out business in sectors that attract a high level of public interest (eg, banking and finance, transportation, energy, or food and drugs) may be subject to further restrictions such as the obtainment of special licences issued by relevant agencies.
Are any regulatory reforms envisaged or underway that affect franchises?
At the time of writing, there were no regulatory reforms envisaged that would affect franchising.
Which models and company forms are commonly used for franchises in your jurisdiction? Are there any restrictions or requirements as to which models and forms may be used?
Like in most jurisdictions, the majority of companies in Italy are set up with limited and unlimited liability. Limited liability is the preferred option for franchise businesses as it protects shareholders from general business risks and allows a better allocation of funds. Franchisors typically choose a company limited by shares (SpA) or a limited liability company (Srl), depending on:
- the proposed business size;
- the relationship among shareholders; and
- the type of investments.
There are no restrictions as to which model and form franchises may use.
Are there any national or regional franchising associations? If so, is membership mandatory and what operational codes and guidelines apply?
The main Italian franchising associations are:
- Assofranchising, whose aim is to represent the general interests of franchising in Italy and other countries;
- Confimprese, an association of free enterprises that specialises in the sale of goods and services through the main distribution channels (ie, franchising and retail); and
- Federazione Italiana Franchising, the only franchising association representing both franchisors and franchisees.
Membership is not mandatory. Furthermore, every association has its own code of ethics.
Common features and contractual requirements
What are the common elements of franchise agreements in your jurisdiction? Do any requirements or restrictions on contractual provisions apply?
Section 3 of the Italian Franchising Act provides that a franchise agreement must be in writing to be valid.
The franchising agreement must expressly contain and indicate the following information:
- the amount of the initial investments and other entry fees to be paid by the franchisee to start the franchise business;
- the terms of calculation and payment of the royalties, as well as the indication, if any, of minimum takings to be reached by the franchisee;
- the rights to territorial exclusivity, if any, granted to other franchisees or related to the sale network and any outlet directly run by the franchisor;
- the particulars of the know-how to be provided by the franchisor to the franchisee;
- the criteria, if any, in place for the acknowledgement of the franchisee’s contribution to the know-how of the franchise;
- the details of the services provided by the franchisor in terms of technical and commercial assistance, outlet set-up and training; and
- the terms for the renewal, termination or assignment of the agreement.
Are parties to a franchise agreement subject to an implied or explicit duty of good faith?
The franchisor must act in accordance with goodwill, fairness and good faith at all times during the whole process of negotiation with the prospective franchisee. In addition, the prospective franchisee shall receive, without delay, from the franchisor all the information that it shall consider necessary or useful for the purposes of the franchise agreement. Nevertheless, the franchisor can withhold information if it considers that it is reasonable to keep such information confidential or if such information could infringe third parties’ rights.
Similarly, the requirements of goodwill, fairness and good faith apply also to the prospective franchisee while dealing with the franchisor. The prospective franchisee shall provide the franchisor with any information necessary or appropriate for the purposes of the franchise agreement in a timely, correct and comprehensive manner, even if such disclosure is not expressly requested by the franchisor.
The principles of goodwill, fairness and good faith apply to any kind of agreement, and are therefore also essential in the offer and sale of franchises during the pre-contractual, contractual and post-contractual phases pursuant to Sections 1175, 1337, 1358 and 1375 of the Italian Civil Code.
Are franchise agreements subject to any formal or documentary requirements, including registration?
A franchise agreement must be registered at the local office of the Italian Revenue Agency within 20 days of the date of the signature. Any delay in registering the agreement may incur a fine from the financial authority.
What due diligence should both parties undertake before entering into a franchising agreement?
Before entering into a franchising agreement, the franchisor should verify the reliability of the prospective franchisee, especially from a financial standpoint. The prospective franchisee will be requested to pay royalties and other amounts provided by the agreement (eg, entry fee, advertising contribution). The franchisor should therefore evaluate before the relationship starts whether the prospective franchisee will be a reliable subject to work with, and whether it will be able to manage properly its activity in order to avoid damaging the good reputation of the franchisor.
In turn, the prospective franchisee should evaluate the type of business that it will run under the franchising agreement. Furthermore, as the prospective franchisee will assume the risk of a new activity, it would be advisable to verify the solidity of the franchising system and of the trademark. The prospective franchisee should also verify the costs that it will be requested to pay by the franchisor (royalties, entry fee).
Are franchisors subject to pre-contractual disclosure requirements? If so, do any exemptions apply? What remedies are available to franchisees in the event of breach of these requirements?
According to Sections 4 and 6 of the Franchising Act, at least 30 days before the conclusion of the agreement the franchisor is required to disclose to the franchisee a complete set of information, save for the reserved information or information whose disclosure may violate third parties’ rights.
The franchisor must give different information depending on whether it operates within or exclusively outside Italy. A franchisor operating exclusively within the Italian territory, or both in Italy and abroad, must provide the franchisee with a copy of the contract to be signed and with all the information concerning:
- data regarding the franchisor;
- activities and characteristics of the business concept;
- details of the variation, year by year, of the number of franchisees; and
- a description of court or arbitration proceedings related to the franchise system commenced by any franchisee, third party or public authority against the franchisor and terminated in the course of the preceding three years.
A franchisor operating exclusively outside the Italian territory shall disclose to the franchisee further information, such as an index of the franchisees operating within the network and of the stores of the franchisor sorted by country. At the request of the franchisee, the franchisor will also provide the franchisee with a list of at least 20 franchisees operating within the network and their relevant locations. Furthermore, the franchisor shall provide:
- an indication of the annual variation – sorted by country – of the number of franchisees and their relevant location within the preceding three years;
- a concise description of all court proceedings regarding the franchise system concluded with a final judgment within the three years preceding the start of the contract; and
- a concise description of any arbitral proceedings concerning the franchise system concluded with a final award within the three years preceding the start of the contract.
The law does not provide expressly for exemptions concerning the disclosure obligation. However, generally, when a franchisee knows the franchising system because, for example, it already has other franchising shops with the same franchisor concerning the same activity, the parties may agree that the disclosure is not necessary.
Section 8 of the Franchising Act provides that if one party has supplied false information, the other party may ask for the annulment of the agreement under Section 1439 of the Italian Civil Code, and can sue the party for damages, if appropriate. Similarly, the franchisee may seek to obtain the annulment of the agreement if the franchisor breached the disclosure obligation.
Choice of law
May the parties freely choose the governing law of the franchise agreement?
The parties can freely choose the governing law of the franchising agreement. Where the parties do not indicate the governing law, the law of the country where the franchisee has its habitual residence usually applies. It is however advisable to specify the governing law in the franchising agreement so as to avoid any risk of contestation if disputes arise.
What fees are typically charged under a franchise agreement?
According to Section 3 of the Franchising Act, the franchising agreement must also expressly indicate:
- the sums related to the initial investments and other entry fees payable by the franchisee in order to start the franchise business; and
- the terms of calculation and payment of the royalties.
The entry fee corresponds to the sums related to the initial investments and other fees payable by the franchisee in order to start the franchise business. Royalties are either a percentage required by the franchisor from the franchisee and related to the business turnover of the franchisee, or a fixed rate payable in installments at regular intervals.
Do franchisees have a right of renewal?
Although there is no legal obligation for the franchisor to renew the franchise agreement, it is nevertheless mandatory under Section 3.4(g) of the Franchising Act to include renewal conditions in the agreement. It is therefore necessary to specify clearly such conditions in the contract.
On what grounds may a franchisor refuse to renew?
Provided that the renewal conditions are set forth in the agreement, franchisors generally refuse to renew because of the poor experience they have had with the franchisee. This may be because the franchisee breached the provisions of the agreement, or failed fulfil its obligations to pay the royalties or other amount due. Another reason may be that the franchisee did not meet the franchisor’s expectations.
How are renewals of franchise agreements usually effected? Do any formal or substantive requirements apply?
The parties are free to determine the renewal conditions. If the parties decide to renew the agreement, they are free to change some conditions provided in the franchising agreement. For example, the franchisor can increase the amount of the royalty, or change the targets to reach.
On what grounds may a franchisor terminate a franchise agreement? Are any remedies available to franchisees in this regard?
A franchisor may terminate a franchising agreement in case of default or non-performance by the franchisee of its contractual obligations. If the breach is considered serious, termination is usually granted to the franchisor. A ‘serious breach’ could be a default in payment of the fees or royalties, the violation of any exclusivity rights on the product or the non-compliance with the franchisor’s standards. Since these breaches can be subject to interpretation, the agreement should list clearly the situations in which the franchisor can terminate the franchise relationship. The franchisee should in turn be fully aware of its obligations under the franchising agreement, so as to avoid the risk of termination. However, where the franchisee deems that the franchisor terminated the agreement unlawfully, it can challenge the termination before a court, preferably after first trying to find a settlement with the franchisor.
Ongoing franchisor/franchisee relationship
What mechanisms (formal and informal) are commonly used by franchisors to ensure franchisee compliance with the operational terms and standards of the agreement?
Generally, the franchisor provides the franchisee with operative manuals and detailed instructions so that the franchisee has all the tools at hand to comply with the franchising system.
In order to ensure franchisee compliance with the operational terms and standards of the agreement during the relationship, the franchisor may include in the franchising agreement a specific provision according to which it will have the right to carry out some inspections at the franchisee’s premises in order to ascertain the compliance with the operational terms and standards of the agreement.
Amendment of operational terms
Can the franchisor unilaterally change operational terms and standards during the course of the agreement?
Generally, the franchisor cannot unilaterally change operational terms and standards during the course of the agreement, especially if the changes are material and likely to alter the object of the contractual relationship between the parties. That said, many franchising agreements include clauses providing the right for the franchisor to change unilaterally, for example, the products to be put for sale by the franchisee. But these types of clause do not allow the franchisor to make changes without limits, because the nature of the agreement and the original obligations agreed by the parties must be respected.
Do any specific laws affect the ongoing franchisor/franchisee relationship after they enter into the franchise agreement?
The Franchising Law is the main statute applicable in Italy. However, during the contractual relationship, both the franchisor and the franchisee must also comply and respect the general principles of goodwill, good faith and fairness.
Do any ongoing disclosure requirements apply during the course of the agreement?
The disclosure obligations of the franchisor are particularly stringent during the pre-contractual phase, as provided by Section 6 of the Franchise Act. The general rule of Section 1375 of the Italian Civil Code, however, foresees that both contracting parties have to act in good faith during the performance of the agreement. This general duty of good faith includes the disclosure to the other party of any information or document that may be relevant for the franchising agreement and for the franchising activity in general. More specifically, the relevant case law has stated that the ‘good-faith duty’ to be applied to the franchising agreements can be defined as the duty to maintain a close and fair collaboration between the franchisor and the franchisee throughout the whole performance of the franchise contract.
Transfer and sale
Transfer and sale
What rules and procedures apply to the transfer and sale of a franchise business?
The possibility of transferring and selling a franchise business must be expressly permitted in the agreement according to Section 3.4(g) of the Franchising Act. Therefore, the parties may set out restrictions on such transfer and sale in the franchising agreement.
What competition laws apply to franchises, with particular regard to:
(a) Non-competes and other restrictive covenants?
In line with Section 5(a) of the EU Block Exemption Regulation (330/2010), it is forbidden to include in the agreement any direct or indirect non-compete obligation with indefinite duration or exceeding five years. According to Section 1 of the regulation, a ‘non-compete obligation’ is defined as:
- any direct or indirect obligation that prohibits the buyer from manufacturing, purchasing, selling or reselling goods or services that compete with the contract goods or services; or
- any direct or indirect obligation on the buyer to purchase from the supplier or from other undertakings designated by the supplier more than 80 % of the buyer’s total purchases of the contract goods or services and their substitutes on the relevant marked, calculated on the basis of the value or, if such is standard industry practice, of the volume of its purchases in the preceding calendar year.
(b) Exclusive geographical areas?
The Italian Franchising Act does not forbid the franchisor to develop its activities within the same territory of other franchisees (exclusive territorial agreements). Such ban can be nevertheless stipulated contractually.
The doctrine has confirmed in this respect that, in the absence of such contractual obligations, it is not possible to consider as implicitly applicable the exclusive agreement in favour of the agent established under Section 1743 of the Italian Civil Code, which states that the principal cannot engage more agents within the same territory and for the same branch of activity at the same time.
Case law has followed this principle, and has determined that exclusivity is not a natural element of a franchising agreement, but has to result from a specific contractual agreement. Thus, the pre-contractual disclosure obligation of the franchisor applies, and the franchisor should also inform the franchisee of any forthcoming expansion of the franchising within the same territory.
(c) Price fixing and mandatory product purchases?
The EU Block Exemption Regulation and the Italian Antitrust Law consider market partitioning by territory or by custom as a hard-core restriction that may be consequently subject to sanctions. However, a few exceptions to this prohibition may be included in a franchise agreement in favour of the franchisee.
Both the EU Block Exemption Regulation and the Italian Antitrust Law consider resale price maintenance (RPM) illegal. Section 4.1(a) of the regulation nevertheless includes an exception for fixing a maximum price level, or recommending a certain price for products or services, provided that “they do not amount to a fixed or a minimum sale price as a result of pressure from, or incentives offered by, any of the parties”.
At the time of the release of the new version of the Block Exemption Regulation, the EU Commission issued additional policy guidelines on vertical restraints on May 19 2010, and introduced new interpretations on RPM. As a general rule, Sections 223 and 224 of the guidelines expressly confirm that RPM has to be treated as a hard-core restriction. Section 225 gives, however, the possibility to the companies to use RPM in particular circumstances, insofar as its use generates an increase in the efficiency levels, and a positive effect on the market and on the consumer. In any case, such positive effect must be able to set off and overcome any possible negative effect usually created by vertical agreements.
(d) Online trading?
A specific clause set contractually by the franchisor that prohibits a franchisee from developing its franchising business by means of online trading is null and void for contravening the EU antitrust rules and in particular the Block Exemption Regulation in the field of vertical agreements.
However, the regulation permits agreements between the franchisor and the franchisee that limit online sales. Such contractual limitations of the use of the Internet can be compatible with the regulation only in case of online sales carried out in territories, or addressed to a specific group of clients, that are exclusively granted to other franchisees – such limitation ensures the protection of fair competition between the undertakings that operate in the market.
How can franchisors protect their intellectual property (eg, trademarks and copyright)?
Franchisors can protect their trademarks in Italy by means of registration at the Italian Trademarks and Patents Office – based in Rome – or, in case of European or international trademarks, by registering the trademarks respectively at the Office for Harmonisation in the Internal Market in Alicante or at the World International Property Organisation in Geneva.
The regulation of the trademarks is governed by the Industrial Property Code (IPC), which was enacted in Italy by the Legislative Decree 30/2005.
When duly registered, a trademark provides the owner with exclusivity rights for 10 years from the date of the filing of the registration request. From that moment, the owner of the registered trademark has the right to its exclusive use (and thus prohibit its use by third parties).
Must IP licences be registered?
Pursuant to Section 138 of the IPC, agreements that transfer, whether for reward or free, in whole or in part, industrial property rights must be publicly disclosed by means of registration of such agreement at the Italian Patents and Trademarks Office.
As regards trademarks that are the object of a licensing contract, the owner of the trademark keeps its property, but permits its use by other undertakings in return for a payment of royalties. Usually, such trademarks licensing agreements are granted as part of a bigger agreement, such as a franchise.
How can franchisors protect their know-how and trade secrets?
Sections 98 and 99 of the IPC expressly recognise the protection of know-how and trade secrets. To be eligible for protection, know-how needs to be secret, carry economic value through its secrecy and be kept by the owner in a proper manner to maintain its secrecy. Consequently, owners of know-how and trade secrets have a legal recourse against parties that communicate such secrets to third parties or obtain them in an illegal or inappropriate manner, usually under unfair competition rules.
What are the consequences of a franchisee’s breach of the franchisor’s IP, know-how or trade secret rights and what remedies are available to the franchisor in this regard?
Any breach of the franchisor’s intellectual property, know-how or trade secrets will be subject to the general rules on contracts, which may lead to the compensation for the damages suffered by the franchisor and the termination of the contract for failure, by the franchisee, to fulfil its obligations.
Laws and considerations
What real estate laws and considerations should franchisors bear in mind where:
(a) The franchisor owns the premises on which the franchisee operates?
If the franchisor owns the premises on which the franchisee shall operate, the parties may enter into a lease agreement. Lease agreements are governed by the Italian Civil Code together with other specific laws. In particular, Law 392/78 governs business leases for commercial use and provides specific rules regarding, for example, the minimum duration of the agreement of six years, its renewal and refusal for renewing, any rent review and increase, or the different rights of the lessee.
(b) The franchisor sub-leases the premises to the franchisee?
Law 392/78 lays down in Section 36 the possibility of the franchisor (ie, the lessee of a lease agreement) to sub-lease the premises to the franchisee. Under that provision, the consent of the landlord will be a prerequisite to sub-leasing premises when the sub-lease is not accompanied by a transfer or lease of the franchisor’s company.
(c) The franchisee leases the premises from a third-party landlord?
Since the franchisee is a company that carries out an actual business activity, a lease agreement with a third-party landlord shall always be stipulated by the franchisee that is going to develop the franchising business. Law 392/78 is therefore also applicable in cases where the franchisee leases the premises from a third-party landlord.
However, the franchisor may require that the franchisee uses a specific strategic location within the premises in order for it to be more visible by potential clients, and a specific decoration and furnishing that respect the look and feel of the franchisor’s trademark.
(d) The franchisee owns the premises?
Real estate ownership is mainly regulated by the Italian Civil Code. Administrative town planning issues are governed by specific legislation.
Where the franchisee owns the premises, it is recommended to incorporate a specific clause in the franchising agreement that foresees the use of such premises, and the specific settings and decoration that the franchisee shall use in order to respect the franchisor’s know-how and intellectual property.
Can franchisees or their employees be regarded as employees of the franchisor for liability purposes? If so, how can franchisors mitigate this risk?
Under a typical franchise structure, the franchisee is an independent entity or individual undertaking and bears consequently its own entrepreneurial risks. Therefore, even if the franchisor applies its own standards to the franchisee and its employees, and provided that there is no direct control, advice or subordination by the franchisor on the franchisee’s employees, the franchisor will not be considered to be the employer of either the franchisee or the franchisee’s employees.
In conclusion, there should be no risk of liability of the franchisor as long as the relationship that affects the employees of the franchisee is, and remains, an internal relationship between the franchisor and the franchisee in line with the franchise agreement. In order to reduce such liability risk, though, the franchisor should avoid, as much as possible, having any direct contact and giving any instructions directly to the employees.
Tax and currency controls
What tax regimes apply to the franchisor/franchisee relationship?
The following Italian taxes are applicable to franchise business entities:
- corporate income tax, at a flat rate of 24%;
- regional tax on business activities, which is a local tax applied on the value of the production generated in each taxable period by persons carrying out business activities in a specific Italian region. The standard tax rate is set at a minimum of 3.9%. Regions may increase or reduce the standard tax rate by up to 0.92%;
- value added tax (VAT), usually charged on any supply or service deemed to be made or rendered within the Italian territory. The ordinary VAT rate is set at 22%; and
- withholding taxes on royalties, at a rate of 30% according to Section 25(4) of Presidential Decree 600/73 (unless a specific treaty against double taxation with Italy providing a lower withholding rate applies, as, for example, the Model Treaty of the Organisation for Economic Cooperation and Development, which is the one generally adopted).
Do any currency controls apply with respect to foreign franchisors?
No currency controls or restrictions apply in case of payments carried out by national (local) franchisees of royalties or of other payments to non-resident franchisors in their domestic currency. There may nevertheless be some specific restrictions imposed by certain anti-money laundering requirements.
Normally, payments can be carried out only through an authorised bank or financial intermediary, by means of bank wires and cheques, among other things. Cash of more than a certain amount can be carried out of the country only if notice is given to the competent authority (the Bank of Italy or the Financial Information Unit) and if the relevant documents are obtained.
What issues are typically the subject of disputes arising in the franchisor/franchisee relationship?
Frequent subjects of dispute arising in the franchisor/franchisee relationship include the request of payment of the amounts due by the franchisee (eg, royalties, advertising contribution), the breach of the non-compete clause and the unilateral change of the contractual conditions by the franchisor.
Which venues are empowered to hear franchising disputes in your jurisdiction? What considerations should be borne in mind when choosing a venue?
The Italian court system is split according to the relevant case matter. There are thus ordinary, administrative and tax courts. Usually, a typical franchise agreement falls under the ordinary jurisdiction, which comprises three levels: the Court of First Instance, the Court of Appeal and the Supreme Court.
It takes up to two or three years to obtain a first-instance judgment in ordinary proceedings.
Alternative dispute resolution
Is alternative dispute resolution (ADR) commonly used for franchising disputes in your jurisdiction? What considerations should be borne in mind when opting for ADR?
Mediation, negotiation and arbitration are all commonly used in Italy.
Mediation is governed by Legislative Decree 28/2010, which has been the object of several amendments and reforms in the past few years and is likely to be reformed further. Mediation can be voluntary or mandatory in some specific cases provided by law and in particular if the case concerns, among others, the following matters: lease, rent, insurance or bank agreements, or family agreements. In such cases, mediation is a mandatory procedural precondition to a party starting ordinary proceedings before a court.
Negotiation is governed by Legislative Decree 132/2014. Negotiation can be voluntary or mandatory, the latter occurring when a party intends to start ordinary proceedings before a court. Negotiation is mandatory if one party seeks the payment of amounts up to €50,000 (provided that mediation is not mandatory in that particular case).
The arbitration rules are set forth in the Italian Code of Civil Procedure. The code provides that parties may choose between a ‘ritual’ arbitration:
- under the said rules;
- in line with the rules of a chamber of commerce – the rules of the Chamber of Commerce of Milan are usually the ones opted for; or
- under any other relevant domestic or international organisation, such as the International Chamber of Commerce, Rome branch.
The parties must indicate in the franchising agreement that in case of disputes, they will ask an arbitration court to decide.
Foreign judgments and awards
What regulations and procedures apply to the recognition of foreign judgments and arbitral awards where international franchising networks are concerned?
The recognition in Italy of the judgments issued by courts of EU member states and concerning civil and commercial matters are governed by Regulations 44/2011 and 1215/2012, according to which foreign judgments are automatically recognised in Italy as long as they are not in breach of the public order or conflicting with another decision between the same parties. With respect to judgments issued by courts from outside the European Union, Law 21/1995 applies. Such decisions are automatically recognised, as long as they are final. In such case, the decision must be recognised according to a specific procedure before the Appeal Court.
With respect to foreign arbitral awards, the party seeking to obtain the recognition must file a petition before the president of the Appeal Court. The court may deny recognition in specific cases, such as the incapacity of the parties or, for example, if the decision is not binding in the state where it was issued.