Franchising in the European Community

Abstract

Franchise agreements have been in evidence for a considerable period of time but it is only lately that they have been brought to the attention of the European Court of Justice in the case of Pronuptia. It would be very interesting to analyze the growth of this commercial phenomenon in Europe however, it is not the purpose of this work. We are concerned with the legal implications of franchising. Its elements and characteristics must be outlined in order to arrive at a proper understanding of how it works. We do not have the usual distribution agreement but something else. A particular set up which helps the promoter of a good or service to make it wel1 known to the consumer in general via the vehicle of a number of independent traders who decide to give up part of their independence in order to be able to demonstrate that the particular good or service is excellent and deserves the patronage of the consumer. There are different types of franchise set ups but here we are interested in the so-called 'Business Format Franchise'. The relationship between franchisor and franchisee brings into being this marketing method and both parties stand to benefit from a well-organized franchise operation. One of the issues which are met with in this type of operation is whether article 85(1) of the EC Treaty is infringed in the sense that a clause in the franchise agreement cannot be in line with this article of the EC Treaty just mentioned. The two organs in Community law which can look very closely at such agreements are the European Commission and the European Court of Justice. The starting point of these two organs is different but they complement each other to a large extent. Both have been instrumental in the framing of Regulation 4087 /88 dealing with the group exemption for franchising agreements. Franchising, like any other distribution agreement or commercial activity, does not escape competition law. Each and every agreement must be seen in the light of the group exemption, whilst prior to its entry into force each franchise agreement could be the subject of scrutiny by the European Commission. A franchise agreement has to follow certain competition rules if it wants to be recognized as being a legal instrument which can withstand the test of a court case. A franchise agreement can be the subject of a negative clearance or be the subject of an exemption under article 85(3) of the EC Treaty. However, it must be pointed out that not all the clauses which are to be found in a franchise agreement run counter to article 85(1 ). On the other hand, the inclusion of certain clauses in a franchise agreement would render the agreement automatically void as stipulated in article 85(2). 2 The European Court of Justice in this area of franchising has at its disposal the American experience. The American courts have developed the so called 'rule of reason' which helps them in evaluating agreements which are submitted for their judgement. The situation in the European Community is different but nevertheless, there is a movement in that direction. This distinction will be looked at further on. Franchising could be considered as opening the way to the development of this concept in the European Community. This is possible on account of the very particular form of set up which a franchising agreement brings about. The Pronuptia judgement can be considered as the spur to the development of the rule of reason in the European Community. In order to have a complete picture of this distribution method, reference will also be made to other forms of distribution agreements and their relative block exemptions. As it has been stated above, franchising agreements benefit today from the group exemption. 4 An analysis of this block exemption will be made. The most important factor in this block exemption is the division of clauses which can be found in a franchise agreement. They can be classified as forming part of the "White" list or forming part of the “Black” list. This distinction is vital to any franchise agreement because the inclusion of a clause in the “Black” list would mean that the agreement in question does not qualify for exemption under the regulation and would run counter to article 85(1) of the EC Treaty. This work would not complete without an in-depth analysis of the Pronuptia judgement. This is the only case which has been dealt with by the European Court of Justice in the context of franchising. Had the defendant in this case not refused to pay the royalties due to Pronuptia, the chances are that we would not have had any court pronouncement on this matter. On the impetus of this judgement the Commission then delivered five decisions which paved the way for the issue of the block exemption. These Decisions were necessary because otherwise the Commission would not have had the necessary experience to issue such regulation.