L'Officiel de la Franchise no. 6

The pocket dictionary, in episodes, of franchising: we continue in these pages the publication of definitions taken from the book by Yves Marot, "Le Langage de la Franchise" La franch Le Langage de la Franchise, 110 pages, is on sale at the FF or at the Yves Marot firm (see the address book). Price: 49F. Roestranchises Franchising being a system for repeating success that works through a transmission with a view to reproducing know-how, the recruitment of franchisees is a very important point of the efficiency of the system. Not just any franchisee candidate with the financial means is fit to repeat the success of the Not just any franchisee candidate is fit to receive and then reproduce the know-how. It is therefore for the franchisor to define the profile of the ideal franchisee or at least the profile of the franchisee meeting the minimum conditions. Recruitment systems vary greatly from one network to another. In some franchises, the franchisors recruit through advertising placed in the relevant professional sector and/or in magazines specialising in franchising; franchisors may also use word of mouth, the Chambers of Commerce, etc. In other franchises, the franchisors call only on non-professionals, considering that a non-professional will follow the know-how manuals more rigorously since he will not integrate his "personal touch". In a themed restaurant network, it is true that a franchisee who has no training as a cook will better respect the culinary preparations prescribed by the franchisor, the cook surely not resisting the urge to add his personal recipes and techniques! Franchisors have however moved away from this approach. They have indeed realised that the personal competence of the franchisee could be an excellent stimulus. It is se Newille Chocolata Fronais then for the franchisor to know how to discipline this competence so that the coherence of the system is not called into question as a result. eru. Rde vendr The refusal to sell arises in franchising in several matters 1. Refusal to "sell a franchise" Is the franchisor entitled to refuse a franchisee candidate even though he has the professional skills, the premises and the financial means required and the territory in which he plans to set up is available? Yes, without any reservation because the franchisor is the only one able to assess whether this candidate meets the required conditions. Except where he refuses an application for the sole purpose of harming the person concerned, the franchisor may perfectly well say no. 2. Can a franchisee refuse to sell to a customer on the ground that this customer comes from a territory where another franchisee exists? This is not possible for him, provided however that this customer came spontaneously to this franchised point of sale. On the other hand, the franchisor may perfectly well forbid each of his franchisees from advertising, carrying out commercial promotion actions, or communicating outside their territory. That is the whole difference between acts of passive competition (selling to a customer who comes spontaneously from a neighbouring territory) and acts of active competition (seeking customers in the neighbouring territory). As in many distribution networks, the franchisor is often called on to manage the conflicts that arise from these practices and to ensure the sharing of commissions. L'officiel de la Franchise no. 6 glossary franchising from A to Z LOUVRE A TIMHOTEL •eglemer inexempto European A definition is needed because the term "Exemption Regulation" is not obvious for a non-initiate. Article 85, paragraph 1, of the Treaty of Rome prohibits agreements because it sees in them an infringement of free competition, free competition which the authors of the Treaty consider beneficial for economic and social progress and the final consumer. Consequently, paragraph 2 of the same article 85 strikes such agreements with nullity. However, paragraph 3 exempts from nullity (that is to say ultimately "makes valid") the agreements that contribute to economic and social progress and reserve for the final consumer a fair share of the profit resulting from them. Franchising is indisputably an agreement between a franchisor and each of the franchisees of the network. This agreement is therefore null by application of paragraphs 1 and 2 unless it can claim to benefit from the exemption by application of paragraph 3. Since the Pronuptia judgment and the decisions Pronuptia, Yves Rocher, Charles Jourdan, Services Master and Computerland, it is known that under certain conditions, franchise agreements can escape nullity. But which conditions? To know and to have a "reassuring" answer, each franchisor could refer the matter to the Brussels Commission to obtain an individual decision. One can imagine the number of civil servants who would have been mobilised in Brussels and the extraordinarily long delays that would have been necessary to obtain a decision! That is the reason why, as it had done previously in other fields (motor vehicle dealerships, etc.), the Commission of Brussels published a Franchise Exemption Regulation no. 4087/88 on 30 November 1988. This Regulation has essentially the purpose of stating what conditions a franchise agreement must meet to be valid and to benefit from the exemption provided for by article 85 paragraph 3 of the Treaty of Rome. The Regulation is applicable until 31 December 1999. etour Su R investissemen In English: Return on Investment or ROI. This is the time needed to ensure the profitability of the capital committed by the franchisee in the franchise. The return on investment can be assessed in the following way: capital committed by the franchisee * cash flow + financial costs Cash flow can be defined here as made up of the sum of operating results before tax + the allocations (to depreciation and to provisions). The capital committed includes the works and fittings of the point of sale, the opening stock, the entry fee but generally does not include the right to the lease or the key money because it is not specific to franchising. The European Code of Ethics requires that the duration of the franchise agreement (see this word) be at least equal to that of the ROI. •responsabilit Ldu franchise The franchisor has a contractual or non- contractual liability similar to most other economic agents. The liability of franchisors being called into question mainly results from the following causes: • ineffectiveness of the concept. • lack of assistance to franchisees, absence of actions aimed at developing the reputation of the brand, • failure to respect the provisions relating to territorial exclusivity. ш contra de franchise Transfer of the franchise agreement essentially raises the problem of intuitu personae (see this word). The franchisor is concerned that the franchisee should not be able to freely transfer his agreement. Such a transfer could have the effect that the new franchisee would not meet the conditions required by the franchisor. It could possibly bring in an assignee who came from a competing network. The franchisor therefore puts in place in the agreement a set of provisions aimed at prohibiting transfer of the agreement unless authorised by the franchisor. L'Officiel de la Franchise no. 6 Olivier Gast Doubin Law A text more topical than ever The DOUBIN law of 31 December 1989 E EN has been applied Barrister (Avocat à la Cour) for more than six years now. These first six The Doubin law concerns all networks of associated commerce, and not only franchising but all agreements involving an exclusive supply commitment. Let us recall that it imposes on the franchisor transparency of information prior to any signature years of application are already significant and make it possible to draw up a first assessment. Maître Olivier Gast, of the Paris bar, does so in our columns for the readers of "l'Officiel de la Franchise"... It must be acknowledged that on certain points the wording of the law of 31 December 1989 is not precise enough or unclear, which causes difficulties of interpretation. Thus, two problems have mainly arisen as to its scope. The first was to determine the agreements to which the Doubin law should apply and the second to know from when this text was to be applied. Now, for these two questions, both in space and in time, the case law has adopted the most extensive interpretation. Doubin Law for which agreements? One of the first debates raised by the Doubin law was to determine to what type of agreement this text was addressed. Article 1 of the law sets two conditions of applicability which must be cumulatively met: the making available of a trade name, a trademark or a sign; a corresponding commitment of exclusivity or quasi exclusivity on the part of the candidate for entry into the network. On reading this article, some had concluded that the Doubin law was to apply only to the franchise agreement. This interpretation is totally erroneous. We had warned from the outset against this idea, which contradicts the very terms of the text. As soon as the two conditions of article 1 are met, making available of a trademark or a sign and corresponding commitment of exclusivity, the Doubin law must be applied. Thus, the increasing complexity of the relationships governing organised independent trade brings out a multitude of agreements which, without bearing the name "franchise agreement", are nonetheless governed by the Doubin law. This text is liable to apply to so-called concession agreements, trademark licences, coupled with quasi-exclusive supply, "partnerships" and "affiliations" in which the members are bound by a certain obligation of exclusivity. In a judgment dated 7 April 1995, the Paris Court of Appeal held the Doubin law applicable to a lease-management agreement (*location-gérance*), since an exclusive supply obligation was imposed on the lease-manager (*location-gérance*). Ultimately, it is nearly 40% of retail trade that the Doubin Law addresses. Whatever the name used to designate the agreement, what matters is what it contains, the nature of the commitments entered into. continued page 80 L'Officiel de la Franchise no. 6 continued from page 78) Doubin Law: a text more topical than ever Olivier Gast, barrister The "trick" consisting in using as the name of the agreement the term "partnership" rather than that of franchise to escape application of the Doubin law is therefore totally ineffective. From which date? If, on the scope stricto sensu, the difficulties of interpretation are now settled, the problem of the application of the Doubin law in time is a little thornier. This problem is however bound to disappear as the disputes in progress are resolved An implementing decree dated 4 April 1991 specified the information that the pre-contractual information document must contain The problem arose of knowing whether the agreements signed between 31 December 1989 and 4 April 1991 should also be subject to the requirements of the Doubin law. Despite a few decisions to the contrary (See in particular CA Montpellier, 2nd ch. A. 21 Sept. 1993), the case-law trend is to make of the law of 31 December 1989 a law of immediate application, at least as to the obligation of prior communication of the draft agreement 20 days before its In a judgment of 7 April 1995, the Paris Court of Appeal had occasion to recall it in these terms: "this provision of public policy is of immediate application as regards the prior communication of the draft agreement, in the detail referred to above, the implementing decree, promulgated on 4 April 1991 having as its sole purpose to fix the content of the information document communicated with the draft agreement". The reasoning must in our view be the same for the information mentioned in article 1 of the law of 31 December 1989, which were indeed supplemented by the decree of 4 April 1991, but which from the promulgation of the law could be complied with in its spirit. Sanctions The reason for which the law of 31 December 1989 cannot be neglected is that the sanctions attached to it are particularly All franchisors, grantors, etc., who, whatever their size, do not provide a pre-contractual information document 30 days before signature of the franchise or concession agreement bitterly regret it once before The law of 31 December 1989 does not provide for any sanction in the event of non-compliance with its provisions. Some had thought they saw there a good reason not to The courts have seen it quite differently. Admittedly the law does not provide for a sanction, but the judges have the importance of giving franchisee or concession candidates clear and sincere information. Given the importance of the investments at stake, both financial and human, it is essential that the agreement be signed on clearly defined bases. A debate has animated the case law for several years on the question whether non-compliance with the provisions of the Doubin law must be sanctioned automatically and whether this sanction must be nullity of the agreement or its termination. A few decisions have retained as the sanction for non-compliance with the Doubin law termination or rescission of the agreement, but this does not at all correspond to the majority trend The most recent trend of case law is to sanction the failure to hand over a pre-contractual information document signature of the agreement or the communication of erroneous information by nullity of the agreement, but not automatically. Indeed, the latest decisions adopt a more equitable position by deciding not to annihilate the agreement and the successive sales where the failure to communicate information before signature of the agreement had only a minor impact. The prevailing case law requires proof that the franchisee or concession candidate did not commit in full knowledge of the facts, in other words that his consent was vitiated. No automatic nullity of the agreement. This pragmatic position is in keeping with the spirit of the law The important thing is that the "weaker" contracting party was not misled in such a way that, had he known this information before signature of the agreement, he would not have contracted. But where the failure to provide information had only little impact, it would be particularly inequitable to annul retroactively an agreement that has been performed normally until then. To retain an automatic nullity is inevitably to encourage the bad faith of the members of the network. It is indeed easy to use nullity of the agreement as a pretext to escape payment of fees. Ultimately, the courts seem to have, on the whole, understood the contribution of the Doubin law to the world of distribution. This text is today known to the very great majority of those involved. It is often invoked, it is, more than ever, topical. L'Officiel de la Franchise no. 6