Is offering knock-down prices on Social Deal without the franchisor’s permission allowed in the Netherlands?

A franchisee of the Dutch slimming studio Size Zero put up cheap deals for slimming treatments on the online shopping site Social Deal. The franchisor quickly put a stop to this and asked Social Deal to remove the franchisee’s promotions from the site. According to the franchisor, these national promotions are only allowed in coordination with the franchisor. Does this restriction affect the franchisees’ competition rights? The Dutch Contract Law Lawyer Hidde Reitsma explains the case.

A franchise agreement in the Netherlands

In this dispute, the franchisor (hereafter SZ) was the owner of the “Size Zero” slimming studios, which are currently springing up throughout the Netherlands. These studios are operated by franchisees, each of whom is assigned a territory. Under a franchise agreement, the franchisees have, among other things, exclusive rights to exploit and perform promotional activities for the brand in their own territories. Furthermore, passive sales outside their territories are not excluded.

Restriction of national promotions justified?

The question in this case was to what extent franchisees are permitted to run online promotions that have a national reach in addition to their territories. The franchisee in question argued that a restriction by SZ on such promotions affected their exclusive right of use. However, SZ’s justification for the restriction of this right was that it wanted to protect its image.

Protection of the image of luxury products

It follows from an important judgment of the Court of Justice of the European Union of 6 December 2017 (ECLI:EU:C:2017:941, Coty Germany GmbH-Parfümerie Akzente GmbH) that a ban on sales of luxury products via online marketplaces is compatible with competition law if its purpose is to protect the product’s image. However, the ban must be proportionate to the objective pursued.

Restriction on right to use Size Zero brand

SZ argued that the image of the “Size Zero” formula and that of other franchisees would be harmed by the (uncoordinated) presence of the franchisee’s salons on so-called ‘cheap deals sites.’ The promotions were visible outside the franchisee’s territory. Only nationally coordinated promotions by SZ on Social Deal would be acceptable. SZ argued that advertising that is visible outside the territory should be coordinated with SZ.

Franchise Agreement Lawyer in the Netherlands

The subdistrict court gave short shrift of this defence. The fact is that SZ also used Social Deal for national promotions. Therefore, SZ’s reliance on damage to its image cannot be reconciled with this. The mere circumstance that the promotions were not coordinated in advance with SZ (or otherwise) does not change this.

Deficiency of Dutch franchise agreement

The subdistrict court ruled that the restriction which SZ had imposed on the franchisee with regard to Social Deal was disproportionate in relation to the objective pursued by SZ. In doing so, SZ had committed an unacceptable infringement of the franchisee’s contractual right to use the trademark. As a result, SZ had failed to comply with the franchise agreement.

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