Competition and franchise: a difficult combination
The agreements between a franchisor and a franchisee are recorded in a franchise agreement. Some of these agreement are often on the intersection of competition law. In a recent legal action, franchisees invoked the fact that the franchise agreement is contrary to competition law, after their franchisor demanded compliance with the franchise agreement. Contract lawyer Martijn Kessler explains which aspects all franchisors should aware of.
The purchase obligation: franchise and competition under Dutch law
Free competition is essential for the Dutch economy. The right competition stimulates the economy and ensures a competitive and fair market. Franchisors such as the HEMA and Albert Heijn give franchisees the opportunity to operate their franchise concept. Of course the franchisor wants his franchisees to comply with (for example) certain quality and hygiene requirements. The franchisor often overcomes this by imposing a detailed purchase obligation on the franchisee. In this way the franchisor knows that the products in the stores comply with certain quality standards.
Purchase obligation: unlawful competition in The Netherlands?
This was also the case in this matter before the court in preliminary relief proceedings in Rotterdam. The franchisees of a small franchise chain were obliged to purchase 90% of their products from the franchisor. When it became apparent that the franchisees did not comply with this obligation, the franchisor demanded compliance with the franchise contract. Although the court in preliminary relief proceedings did not consider itself competent to rule on this matter, it is interesting to see where exactly the boundary lies and when there is unlawful competition in a purchase obligation.
General principles of franchise and competitio under Dutch lawn
To determine whether a franchise agreement violates competition law, the agreement should be viewed (among others) in the light of the so-called Pronuptia ruling of the European Court of Justice. This ruling stated that franchise agreements are not contrary to competition law if certain stipulations to protect the franchisor’s knowhow, and/or the identity and reputation of the trademark are necessary. These rules have been detailed further in the Block Exemption Regulation of the European Commission for franchisors.
Franchise agreement annulled?
A purchase obligation is also tested against this Block Exemption Regulation. This regulation states that if a franchisor owns more than 30% of a certain market, he cannot impose on his franchisees the obligation to purchase more than 80% of its products from a certain seller (often the franchisor). If this purchase obligation is included in the agreement, the franchise agreement can be annulled based on the competition law. This potential annulment can mean huge problems. An annulment can mean that the franchisees are no longer bound to the franchise agreement, with all due consequences for, for example, a noncompetition clause.
Proceedings on the merits on a Dutch franchise agreement
In this action, a purchase obligation of 90% was included in the franchise agreement. The franchisees invoked unlawful competition, but the court in preliminary relief proceedings found that this could not be assessed in preliminary relief proceedings. This case shall therefore be assessed by a court in proceedings on the merits. This court shall probably first determine whether the franchisor owns more than 30% of the market. If this is the case, the franchise agreement shall be annulled based on the competition law. In that case the included purchase obligation of 90% is simply too high.
Franchise lawyer in dispute franchise agreement
Of course each franchisor wants to be in complete control. A certain image and maintaining quality is the key to each franchise concept. It can be tempting for a franchisor to arrange everything in a franchise agreement. It is therefore quite common that a purchase obligation of 90% or more is included by the franchisor. However, it is crucial to always keep an eye on the competition regulations. If a franchise agreement is annulled based on competition law, this has far-reaching consequences.