The franchise agreement organises cooperation between independent undertakings. That is precisely what makes it suspect under competition law: an agreement between independent undertakings is, in principle, what Article 101 of the Treaty on the Functioning of the European Union prohibits. The Court of Justice resolved this tension forty years ago.
1986: the Pronuptia judgment
A franchisee selling wedding dresses refused to pay her fees, arguing that the contract was void under European competition law. On a reference for a preliminary ruling, the Court of Justice delivered its judgment Pronuptia de Paris v. Schillgalis (case 161/84) on 28 January 1986. It laid down a method: the contract is assessed clause by clause, in its economic context.
The Court begins by dismissing suspicion in principle: a franchise system “does not in itself interfere with competition”; it is “a way for an undertaking to derive financial benefit from its expertise without investing its own capital”. Then it sorts the clauses.
What is not a restriction of competition
- clauses essential to prevent the know-how transferred from benefiting competitors: a prohibition on opening a competing shop during the contract and for a reasonable period afterwards, a prohibition on transferring the shop without consent;
- clauses organising the control essential to preserving the identity and reputation of the network: application of business methods, layout of the premises, approval of the transferee, supplies from selected suppliers where objective specifications are impracticable - but this last clause “may not have the effect of preventing the franchisee from obtaining those products from other franchisees”;
- the communication of recommended prices, provided that there is no concerted practice aimed at their actual application.
What is one
- clauses that bring about a sharing of markets between franchisor and franchisees, or between franchisees;
- those that prevent them from engaging in price competition with one another.
On territorial exclusivity, the Court takes a nuanced view: the single-location clause combined with the franchisor's exclusivity undertaking “results in a certain sharing of markets” and restricts competition within the network. It accepts that a candidate might not take the risk of investing without some protection - but refers that consideration to the examination of a possible exemption.
2022: the regulation that never says “franchise”
The current regime is based on Regulation (EU) 2022/720 of 10 May 2022, in force since 1st June 2022 and until 31 May 2034, which grants a block exemption to vertical agreements. A notable and verifiable fact: the word “franchise” does not appear in it a single time. In European law, franchising is not a stand-alone regime - it is one vertical agreement among others.
Three limits structure the system.
| Question | Rule |
|---|---|
| Threshold (article 3) | The exemption applies if the market share of the supplier and that of the buyer each do not exceed 30%. Above that: no automatic illegality, but an individual assessment. |
| Prices (article 4(a)) | Maximum sale price and recommended price: lawful. Fixed or minimum price: hardcore restriction. The guidelines specify that imposing a price range is equivalent to a fixed price, and prohibit indirect means - fixing the margin, capping discounts, threats, delivery delays or termination for failure to observe a price level. |
| Territory (article 4(b)) | An exclusive territory may be protected against active sales by other distributors, and the place of establishment may be imposed. Passive sales - responding to an unsolicited order - may not be blocked. Absolute territorial protection remains a hardcore restriction. New in 2022: exclusivity may be shared among a maximum of five distributors. |
On non-competition after the end of the contract, article 5(3) codifies exactly what Pronuptia said, putting figures on it: it is exempted only if it relates to competing goods, is limited to the premises of operation, is indispensable to protect the know-how transferred, and its duration does not exceed one year. Protection of know-how that has not entered the public domain may, however, be imposed without time limit.
The Commission's guidelines add that the restrictions in a franchise agreement “will be assessed in light of the principles applicable to the distribution system that most closely corresponds” to that agreement: selective distribution for a closed network, exclusive distribution for a network with territorial exclusivity.
The link with the case file
This framework sheds light on two points debated in Antibes. First, competition within the network: Bernard Collorafi contested the opening of a restaurant in his area, and McDonald's countered with the absence of territorial exclusivity in the contract - which European law, as we have seen, fully allows. Second, the interplay between competition law and contract law, which was precisely the subject, at the time, of the two scholarly articles added to the case file: “Competition law and contract law” and “Viability and competition”.
The same problem, seen from the United States
The European reasoning consists in asking whether a clause is indispensable to protecting the know-how and identity of the network: if it is, it escapes the prohibition; if not, it falls within it. US law asks a similar question, but in formidably different terms.
Under the Sherman Act, a restriction is either illegal per se - in which case no justification is admitted and it suffices to prove the agreement - or subject to the rule of reason, which requires the plaintiff to define a relevant market, establish market power and demonstrate an anti-competitive effect. In practice, the choice between the two regimes decides the outcome of the case. And a clause escapes the former only if it is genuinely ancillary to a legitimate collaboration - franchising, for example.
The point of contact between the two systems is clear: territorial exclusivity. In Europe, it is permitted within the limits of the block exemption regulation; it secures the franchisee's catchment area, but only if the contract provides for it. Without a clause, no right.