Are there any aspects of competition law that apply to the franchise transaction (i.e. is it permissible to prohibit online sales, insist on exclusive supply or fix retail prices)? If applicable, provide an overview of the relevant competition laws.
Franchise & Licensing
The Angolan Competition Law (recently approved by Law 5/18, dated 10 of May) provides certain rules that could apply to the franchise transaction and be deemed as prohibited practices under that law, such as, abuse of economic dependence, in which a party imposes, directly or indirectly, fix retail prices, discounts or other commercial conditions that must be applied to the consumers, however this must be assessed taking into account the nature of the relationship between the franchisor and the franchisee, which of course requires a certain level of dependence.
The federal Competition Act applies to contests held in Canada, as well as marketing and advertising practices. For contests, there are minimum disclosure requirements set out in the Competition Act, such as the number and value of prizes, the odds of winning, regional allocation of prizes and any fact within the knowledge of the advertiser which materially affects the chances of winning. The Competition Act also prohibits false or misleading representations and deceptive marketing practices (eg, performance claims not based on adequate or proper tests, misleading testimonials, sale of products above an advertised price).
In addition, the Competition Act regulates certain trade practices that may be of relevance to franchisors:
• For example, ‘market restriction’ (ie, the practice of a supplier requiring that its customer sell specified products within a defined market area as a condition of supplying those products to the customer) is a ‘reviewable trade practice’ under the act. If the Canadian Competition Tribunal were to find that a franchisor’s practice of mandating exclusive geographical areas is likely to lessen competition substantially in relation to a product, either because the franchisor is a major supplier of the product or because the practice is widespread with respect to the product, then the tribunal could order the franchisor to halt its practice. However, exceptions exist, and most franchisors do not wield sufficient market power to make this a concern.
• Similarly, ‘price maintenance’ (ie, the practice of a supplier influencing the price at which its products are to be resold by its customer) and ‘tied selling’ (ie, the practice of a supplier, as a condition of supplying a particular product, either requiring or inducing a customer to acquire a second product or preventing the customer from using or distributing another product (eg, a competitor’s product) with the supplied product) are also ‘reviewable trade practices’ which the tribunal can enjoin if they threaten to lessen competition substantially in a given market.
‘Exclusive dealing’ (ie, where a supplier requires or induces a customer to deal only, or mostly, in products supplied by the supplier or someone designated by the supplier) is a practice that is often engaged in by franchisors and which may similarly be enjoined if it threatens anti-competitive effects. Franchisors in Canada should be aware of each of these practices and should discuss them with their legal advisers, but again, most franchisors do not wield sufficient market power to make them a practical concern.
The Competition Bureau is responsible for administering and enforcing the Competition Act. Those found to be in contravention of the act may be subject to significant monetary fines, imprisonment and court orders to cease the offending conduct and compensate consumers, where appropriate.
The only restriction under Chilean competition law that is generally applicable to franchising relates to exclusive or designated supplier provisions, which are permitted provided that they are linked to the need of preserving product’s quality level. Likewise, franchisor's imposition of resale prices on the franchisee under a penalty is also contrary to Chilean Competition Law. On the contrary, a mere resale price suggestion resulting in no punishment to franchisee if not taken, would generally not violate local Competition law. Additionally, Chilean Competition Law do not set a maximum permitted term for franchise agreements and/or for related product supply agreements.
Geographic exclusivity is also a relevant matter to franchisors on which it shall turn to what the franchise agreement provides on territorial exclusivity. However, if a franchise agreement does not expressly grant territorial exclusivity to a franchisee, the franchisee can claim that franchisor's actions reasonably led it to believe in good faith such exclusivity was granted to franchisee if (i) franchisor informally conveyed franchisee that some sort of territorial exclusivity was granted on franchisee; (ii) franchisor and franchisee discussed about granting territorial exclusivity to franchisee; and, (iii) franchisor and franchisee exchanged correspondence, the contents of which implies a grant of territorial exclusivity to franchisee. Proof of the foregoing facts can be produced by exchange of e-mails and/or other relevant documentation between franchisor and franchisee, which would support franchisee’s allegation that such actions on the part of franchisor resulted in an implied amendment of the franchise agreement and, as a consequence thereof, franchisee could issue proceedings against franchisor in case third party franchisee’s outlets are opened within franchisee’s exclusive territory.
Post-termination non-compete covenants have been held to violate the constitutional right to work and are unenforceable, unless the franchisee is compensated for relinquishing its right to work (see answer to Question 11).
Franchisor can prevent franchisee from having its own website, from promoting its business on the internet or from engaging in e-commerce. Additionally, foreign franchisors usually register the “.cl” brand-related domain name before signing and executing franchise agreements.
The Danish competition rules, which are found in the Competition Act and executive orders issued on the basis of the Act, are in all relevant aspects identical to the EU competition rules. In particular, the European Commission’s Block Exemption Regulation for vertical agreements has been incorporated into Danish law. This means that issues of online sales, exclusivity/exclusive supply, retail price maintenance, pricing, product ties, e-commerce and full‑line forcing are treated in the same way under Danish law as under EU competition law.
If there is no provision in the franchise agreement about exclusivity, the franchisor is free to appoint other franchisees in the same territory and to sell the products or services in competition with the franchisee. The franchisor must, however, observe the contractual duty of loyalty meaning that the franchisor also has to look after the franchisee's interests and may not act contrary to the prerequisite of the franchise relationship.
Chapter 35 of the Civil Code of the Republic of Azerbaijan does not contain on-going competition rules. However, it provides for post-term competition, which is given below.
We would like to differentiate between two aspects of competition, i) competition in the Egyptian Market resulting from the conclusion of a franchise agreement, and; ii) competition between the Franchisor and Franchisee, as follows:
i) Competition in Egypt is regulated under the Protection of Competition Law and Prohibition of Monopolistic Practices which was promulgated by Law No. 3 of 2005 and its Executive Regulations (“Competition Law”). This Competition Law prohibits specific acts and agreements that are considered to be anti-competitive acts and might have a negative impact on the economic activity in the relevant market, such as:
a) Agreements between Competitors (Horizontal Agreements):
According to Article (6) of the Competition Law prohibits agreements or contracts between competing persons of the same level in any relevant market, if their intension is to cause any of the following:
- Increasing, decreasing or fixing the prices of the sale or purchase of commodities.
- Allocating the markets according to geographic areas, distribution centers and type of customers, commodities, seasons or time periods.
- Coordination regarding refraining from or participating in tenders, auctions, negotiations as well as other procurement offers.
- Restricting production, marketing or distribution operations whether with respect to availability, kind or volume.
b) Agreements between a person and his suppliers or clients (Vertical Agreements):
According to Article (7), these kind of agreements are prohibited, if they restrict freedom of competition. The Egyptian Competition Authority determines such agreements according to the criteria stated under Article (12) of the Executive Regulations as amended by the Prime Minister Decree No. 2509 of 2016, such criteria are:
- The effect of the agreement on the freedom of competition in the relevant market.
- Benefits accrued by the consumer based on such agreements.
- Preserving the quality, reputation and safety of the product, as well as all security requirements.
c) Illegal use of control (abuse of dominant position):
According to Article (4) of the Competition Law, a Person is considered to be in a Dominant Person if:
• Its Market share exceeds 25% of the total relevant market.
• It has an effective impact on the prices or the volume of supply in the relevant market.
• Other competitors do not have the capability to restrict his practices in the relevant market.
However, it should be noted that being in a dominant position is not in itself considered as a violation but rather the abuse of the dominant position is the violation. In this regard, Article (8) of the Competition Law provides, exhaustively, a list of abusive practices that the dominant persons are prohibited to engage in:
• Any act that leads to non-manufacturing, non-producing or non-distributing a product for a certain period of time.
• Refraining from entry into sale or purchase agreement with any person or to cease dealing with such person, in a manner that could limit his freedom to access or exit from the market at any time.
• An act that would lead to the distribution of a specific product according to the geographic areas, distribution centers, clients, seasons or time periods between persons having vertical relations.
• Concluding a sale of product or service agreement on a condition that leads to the acceptance of the buyer to purchase products or services irrelevant to the original agreement.
• Discriminating between sellers or buyers with similarities regarding commercial positions/standing either in respect of sale or purchase prices or as regards terms of the transaction in a manner that limits their ability to compete.
• Refrain from producing or providing a scarcely available product when its production is economically possible.
• Mandating the dealers with the dominant person to prevent a competitor from having access to their facilities or services, when it is economically possible.
• Selling goods or services below their marginal or average variable cost.
• Obliging a supplier not to deal with a competitor.
In light of the above mentioned, we are of the view that the above mentioned will not be applicable to the transaction/agreements that would be concluded between the franchisor and franchisee.
ii) Since Egypt does not have a comprehensive law on franchising to regulate the specific aspects of the franchising contracts such as non-competition, due to this fact, we believe that the non-competition obligation will be agreed upon in the contract itself in application to the rule of pacta sunt servanda.
Franchise agreements in France are subject to both EU and French competition law, which are substantively very similar. French law will apply where EU law is not applicable.
The following French and EU law are applicable to franchising activities:
- Articles L. 420-1 et seq. of the Commercial Code
- Commission Regulation (EU) no. 330/2010 of 20 April 2010 on the application of Article 101(3) of the TFEU to categories of vertical agreements and concerted practices (“Block Exemption Regulation”)
ARTICLES L. 420-1 ET SEQ. OF THE COMMERCIAL CODE
Restrictions on anti-competitive practices are set forth in Articles L. 420-1 et seq. of the Commercial Code, which addresses the following that are relevant to franchising:
Territorial exclusivity clauses are permitted under French law so long as they benefit consumers.
French courts have held that a territorial exclusivity clause is not violated by website sales in the protected territory. Accordingly, a franchisor is free to concurrently sell the products online in the protected territory without being in violation of the exclusivity clause.
However, EU law does allow the restriction of online sales of luxury goods on third-party platforms, such as a marketplace, so long as it is primarily to preserve the luxury image of those goods. Such restriction must also be applied uniformly across the network, and must be proportionate in the light of the objective pursued.
Restrictions on the sources of supply
The franchisor may impose an exclusive source of supply on the franchisee subject to the following restrictions:
- Under EU law, the duration of the contract must be limited to a maximum of five years, but may be further renewed by a new contract. The duration of the exclusivity clause must not exceed that of the franchise contract. French law allows for a duration of 10 years, however, it must also not limit or jeopardize the free competition of the market.
- Compliance with the pre-contractual disclosure requirements of Article L. 330-3 of the Commercial Code
- The franchisor cannot have sole discretion regarding the quantity or the quality of the products
To justify an exclusive source of supply clause, it must also be shown that it is necessary to protect the identity and reputation of the network, and would be otherwise impossible for the franchisor to apply and regulate quality control (i.e. due to a large network and high costs).
Discrimination by the franchisor among franchisees
Generally, although a franchisor can freely select franchisees, it should recruit them according to objective criteria to avoid any discrimination.
Article L. 420-1 prohibits agreements that have the aim or may have the effect of preventing, restricting or distorting free competition in a market, particularly when they are intended to:
- Limit access to the market or the free exercise of competition by other companies;
- Obstruct price fixing through market forces by artificially promoting the increase or reduction of prices;
- Limit or control production, opportunities, investments, or technical progress;
- Distribute markets or sources of supply
Such practice is punishable only if it can have an appreciable effect on the market.
Article L. 420-2 prohibits the abusive exploitation by a company in dominant position, and the abusive exploitation of a company in an economically dependent position. Such abuses may include refusal to sell or discriminatory conditions of sale.
The provisions on the abusive exploitation of an economically subordinate company is seldom applied to franchise agreements, as franchising considered a normal form of distribution and the franchisee freely chooses to enter into the franchise network.
French and EU law prohibit the franchisor from directly or indirectly imposing minimum resale prices. The franchisor may provide recommended resale prices, so long as it does not lead to uniform resale prices throughout the network, and is not used as a mechanism of directly or indirectly imposing minimum resale prices.
Maximum price fixing is allowed in order to maintain the homogeneity of the network.
Practices directly or indirectly causing uniform pricing along the franchise network can be penalized or result in the invalidation of the contract. Such practices include requiring a franchisee to strictly adopt the franchisor’s commercial and marketing policies, or pre-labeling products for resale.
The Business Relationship
The abrupt termination of an established business relationship without sufficient prior notice is prohibited.
The sufficiency of prior notice will be deemed on the basis of several criteria, including the duration of the business relationship, and the level of economic dependence of the terminated party.
In such cases, the court may order damages, or even order continuation of the contractual obligations for a limited period of time.
EU BLOCK EXEMPTION REGULATION
The framework of EU competition law is contained in Commission Regulation (EU) no. 330/2010 of 20 April 2010 on the application of Article 101(3) of the TFEU to categories of vertical agreements and concerted practices, known commonly as the “Block Exemption Regulation”. This regulation is applicable to franchising agreements, of which the following provisions particularly relevant:
- Article 101(1) of the TFEU, which prohibits agreements that may affect trade between EU member states and have as their object or effect the prevention, restriction, or distortion of competition within the EU. Article 101(3) provides for the possibility of exemption for agreements that create sufficient benefits to outweigh the anti-competitive effects.
- Article 102, which prohibits the abuse by one or more businesses in a dominant market position within the EU in such a way that may affect trade between EU member states.
Franchise agreements are subject to review from a competition law viewpoint. Article 1(1) of Greek Law 3959/2011 on the protection of free competition (which is almost identical to Article 101(1) of the TFEU) prohibits all agreements between undertakings, decisions by associations of undertakings and any kind of concerted practices that have as their object or effect the prevention, restriction or distortion of competition in the Greek market. In particular, this includes those that:
- Directly or indirectly fix prices or other trading conditions.
- Limit or control production, supply, technical development or investment.
- Share markets or sources of supply.
- Apply dissimilar conditions to equivalent transactions, making the operation of competition difficult (in particular, unjustifiably refusing to sell, purchase or conclude any other transaction).
- Make contracts subject to the other parties accepting supplementary obligations that by their nature or according to commercial use have no connection with the subject of the contracts.
The above prohibition applies to horizontal and vertical agreements, such as franchise agreements.
Any agreements falling under Article 1(1) of Law 3959/2011 are null and void, unless:
- they qualify for a block exemption. Law 3959/2011 specifically provides that EU block exemption regulations (therefore also Commission Regulation 330/2010 on vertical restraints) apply in Greece by analogy to agreements between undertakings, decisions by associations of undertakings and concerted practices with a purely national effect. OR
- they meet the criteria for an individual exemption under Article 1(3) of Law 3959/2011 (which is almost identical to Article 101(3) of the TFEU).
In applying the above provisions Greek Competition Commission and Greek Courts largely follow European Commission’s guidelines and precedents at an EU level. In light of the above:
- Resale price fixing is considered as a hard-core restriction. A franchisor may not impose a fixed or minimum resale price either directly or indirectly (e.g. by fixing distribution margins, fixing the maximum level of discount the franchisee can grant from a prescribed price level, making the grant of rebates or reimbursement of promotional costs by the franchisor subject to the observance of a given price level, linking the prescribed resale price to the resale prices of competitors, threats, intimidation, warnings, penalties, delay or suspension of deliveries or contract terminations in relation to observance of a given price level etc). Recommended or maximum resale prices are allowed, provided that they do not amount in practice to fixed or minimum resale prices.
- Exclusive supply obligations are allowed provided that they refer to the main object of the franchise business and they are necessary for preserving the identity and reputation of the franchise network and the quality and uniformity of the products/services provided to the customers. Restrictions of cross-supplies between members of a selective franchise network are not allowed.
- An absolute ban on online sales or other measures having similar effect would be prohibited. However, a franchisor may require quality standards for online sales provided that they are laid down uniformly, they are applied in a non-discriminatory manner, they pursue the same legitimate objectives of preserving the identity and reputation of the franchise network and the quality and uniformity of the products/services provided to the customers and they do not go beyond what is necessary in light of the objectives pursued.
The Federal Economic Competition Law (FECL) is the law which is applicable to competition matters. According to the provisions of such law, if agreements between economic agents tend to diminish, harm or impede the production, processing, distribution or commercialization of goods and services, it would be considered as monopolistic practices. In this regard, an obligation imposed by a franchisor to a franchisee to sell products and determined prices may be considered as a monopolistic practice depending on the substantial power that the economic agents have in the relevant market; however, in order to avoid risks derived from such law, it is recommended to include a provision in the corresponding franchise agreement specifying that the franchisor will provide a list of suggested prices which will not constitute an obligation but a recommendation.
Violations of the provisions of the FECL may result in the nullity of the acts or agreements which cause such violations, as well as the imposition of fines and payments of damages and losses.
There is no competition law in Lebanon. A draft law was placed before the Lebanese Parliament in 2009 but it has not yet been approved. This being said, and in the absence of competition law in Lebanon, it is permissible to prohibit online sales or insist on exclusive supply or fix retail prices.
Yes, the Anti-unfair Competition Law and the Anti-monopoly Law apply to the franchise transaction mainly in the following aspects: (1) false advertisement, (2) commercial bribery, (3) infringement of commercial secret, (4) monopoly agreements such as fixing or altering prices of commodities and dividing sale market or procurement market of raw materials, and (5) abuse dominant market position to sell commodities at below-cost prices without a valid reason, and bundle sale of commodities without a valid reason or imposition of any other unreasonable terms of transaction during a transaction.
Regarding Peruvian competition legislation, it must be noted that, the purpose of Legislative Decree N°1034 (The Peruvian Competition Law) is to prevent and to sanction anti-competitive behaviour, and to promote economic efficiency, to the benefit of consumers. Accordingly, competition law applies to natural or legal persons, public or private, state-owned or not, profitable or non-profitable that are in the market for the supply or demand for goods or services. The Peruvian Competition Law covers the antitrust enforcement of conducts as abuse of a dominant position, horizontal collusive practices and vertical collusive practices.
On the other hand, Legislative Decree N°1044 (The Unfair Competition Law) contains a set of rules that punish business conducts that undermine the adequate functioning of the competitive process. Thus, the Unfair Competition Law sanctions acts that are contrary to the requirements of good entrepreneurial faith, such as acts of deception, denigration, undue comparison, corporate sabotage, among others.
Although franchise agreements have special characteristics, they are not considered to restrict or distort competition. Under this scenario, it is possible to prohibit online sales of the products, state exclusive supply or fix prices.
The Philippine Competition Act (“PCA”) prohibits an entity enjoying a dominant position in the market from imposing restrictions on a franchise transaction when the object or effect of these restrictions is to prevent, restrict or lessen competition substantially.
The IP Code additionally deems unenforceable technology transfer arrangements which contain provisions presumed to have an adverse effect on competition and trade. Examples are: provisions which impose upon the franchisee the obligation to acquire materials necessary for production from a specific source; provisions which require the franchisee to permanently employ persons indicated by the franchisor; provisions where the franchisor reserves the right to fix the sale or resale prices; and provisions where there are restrictions as regards the volume and structure of production.
The franchise agreement may contain certain restrictive covenants on the franchisee, including those from the competition perspective. More specifically, the franchisor may vote for the following covenants to be incorporated into the contract:
- the franchisee’s covenant not to compete with the franchisor in the licensed territory in relation to the franchised business and licensed IP rights;
- the franchisee’s refusal to accept similar rights under franchise agreements from actual and potential competitors of the franchisor;
- the franchisee’s covenant to distribute and sell the manufactured or purchased goods, or provide services by exploiting franchised rights and applying prices fixed by the franchisor;
- the franchisee’s covenant to refrain from distributing similar goods, providing similar services using trademarks or trade names of other franchisors;
- the franchisee’s covenant to sell goods or provide services exclusively within the boundaries of certain territory; and
- the franchisee’s covenant to obtain approval from the franchisor for the location and exterior or interior design of commercial premises (units) used for the implementation of the franchised rights under the contract.
The above restrictive covenants are permitted under Russian law and may be enforced if not complied with, especially during the course of the franchise agreement. However, such restrictions may be recognized as invalid by the anti-monopoly service or other interested person, if they are found to contravene anti-monopoly laws, subject to the relevant market condition and economic status of the parties.
As to online trading, it is possible to oblige a franchisee to sell goods or provide services exclusively within a contracted territory. However, the relevant clause which obliges the franchisee to sell goods or provide services, including online, solely to the customers located or residing in the franchised territory will be null and void (Article 1033(2) of the Russian Civil Code). Therefore, as long as the franchisee restricts its franchising activities to its own (contracted) territory, it must sell goods or provide services to different customers, including those not necessarily resided in the franchised territory.
The Commerce (Cartels and Other Matters) Amendment Act 2017 became law in New Zealand in August 2017. This new Act amended the Commerce Act 1986 and key changes include the following:
A. Cartel Conduct Prohibitions
Broadly speaking, there are three new “cartel conduct” prohibitions that are unlawful unless an exemption applies:
(1) a prohibition on competitors fixing prices;
(2) a prohibition on competitors jointly restricting output; and
(3) a prohibition on competitors colluding to allocate markets.
These new prohibitions clarified the law in New Zealand and will have a far-reaching impact on business. However, some types of anti-competitive arrangements are exempt from the cartel prohibitions and are summarised below.
B. Collaborative Activity Exemptions
This exemption applies to cartel conduct by competitors in a “collaborative activity” where the cartel provision is reasonably necessary for the purpose of the collaborative activity. The collaborative activity exemption may also apply to a restraint of trade provision post-termination of a franchise agreement in certain circumstances. Competitors can seek clearance for proposed collaborative activities that contain a cartel provision giving certainty that the proposed activities will not breach the Commerce Act.
The collaborative activities exemption is an important exemption for those involved in franchising in New Zealand. Some provisions of franchise agreements may be regarded as cartel provisions (such as territory allocation and noncompetition agreements) and so any franchisor entering New Zealand will want to obtain legal advice that this exemption applies to any cartel provisions in the proposed franchising activities.
C. Vertical Supply Contract Exemption
This exemption recognises that there may be circumstances where a supplier and a customer may be in competition with each other, and as a result, provisions in their supply agreement risk being cartel provisions. This exemption allows cartel provisions that are included in vertical supply contracts where certain requirements are met. Those requirements are that the contract is entered into between a supplier and customer, it relates to the supply of goods and services including the maximum price at which the customer may resupply the goods or services, and that it does not lessen competition.
D. Joint Buying and Promotion Agreements Exemption
This exemption may apply when competing buyers arrange to purchase goods or services together on terms that individually the competitors could not negotiate on their own. This exemption applies only to price fixing and not the other forms of cartel conduct.
The amendments to the Commerce Act affect New Zealand businesses including:
(1) Many suppliers and resellers – for example distribution agreements with territorial allocation clauses; and
(2) Most franchisors and franchisees because most franchise agreements contain territorial allocation clauses and restraints of trade.
Because the cartels legislation impacts upon key areas contained in franchise agreements, in the author’s opinion it is very important to explain the basis of a number of clauses which are commonly inserted in franchise agreements. Such clauses include approved products, approved services, restraint area, restraint period and location of a franchised operation.
It is often of great and legitimate importance to a franchisor to regulate: (i) the source of supply of its products, their components and operational elements (such as technology); (ii) the method by which its branded products and services are distributed to the general public; and, (iii) the price of products and services that are charged by branded outlets in the system. Franchisors are generally free, so long as the franchise agreement grants them the contractual right to do so, to regulate sources and the authorized methods for distributing products and services (i.e., by requiring participation in systemwide supply contracts and/or by prohibiting online sales).
However, a franchisor’s regulation of its franchisees’ resale prices requires a 3-fold analysis. First, is the regulation of resale pricing permissible under federal law? Second, is the regulation of resale pricing permissible under the particular states in which such pricing regime is applicable? And third, does the franchise agreement grant the franchisor the contractual right to regulate such pricing and, critically, was such right properly disclosed in the franchisor’s disclosure document?
On the federal level, for nearly a century resale price maintenance (“RPM”), otherwise known as “price fixing”, was deemed a per se violation of Section 1 of the Sherman Act (the United States principal antitrust law). While there were certain exceptions to this absolute ban on RPM, those exceptions were narrow.
But 22 years ago, in State Oil Co. v. Kahn, 522 U.S. 3, 100 (1997), the U.S. Supreme Court eliminated the per se rule against maximum RPM programs, instead subjecting such programs to a liberal “rule of reason” analysis (i.e., determining whether there is a reasonable justification for same). Thus, a franchisor without market power may require its franchisees to charge no more than a specified resale price for goods or services. And in 2007, in a dramatic reversal of its own nearly century old doctrine, the U.S. Supreme Court, in Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877 (2007), eliminated the per se rule against minimum RPM programs, holding that such programs must similarly be analysed under the liberal “rule of reason” standard. Noting the possible anticompetitive dangers of its decision, the Supreme Court in Leegin stated that lower courts in future cases, when analysing price maintenance conduct under the rule of reason, should in particular consider: (i) the number of competing manufacturers using the practice in a product category; (ii) the source of the restraint (manufacturer vs. retailer); and, (iii) the manufacturer’s market power.
Thus, federal antitrust law now permits franchisors to influence, or even prescribe, their franchisees’ retail prices so long as they can cite one or more economic justifications for doing so (i.e., meeting competition, preventing consumer confusion and customer anger resulting from advertised prices not being available consistently throughout the franchise network, etc.).
Notwithstanding the federal statutory and decisional antitrust law described above, many states have their own antitrust laws, which are not preempted by federal antitrust law. While some of these statutes, and the cases construing them, are consistent with the federal “rule of reason” analysis, others continue to prohibit RPM programs (maximum, minimum or both) as per se unlawful. As such, there currently exists a disparity between federal law and certain state laws governing RPM.
Many of the state antitrust statutes contain a “harmonization” provision, providing that the state law should be construed in harmony with judicial interpretations of comparable federal antitrust statutes (that is, the Sherman Act). In other states, the courts have ruled, even in the absence of a harmonization statute, that state statutes should be construed in harmony with judicial interpretations of federal antitrust statutes. However, a number of the larger states, such as California and New York, have taken a more independent approach. It is much more difficult to predict the outcome of an enforcement proceeding or civil action challenging the legality and/or enforceability of an RPM program in such jurisdictions.
Notwithstanding the foregoing, maximum resale price maintenance is generally not regarded as inflicting the same sort of consumer harm as minimum resale price maintenance and, thus, it would likely take the truly exceptional case, such as a maximum price used to disguise minimum price fixing, to trigger an antitrust challenge to a maximum resale price regime.
The question of whether a franchisor may establish a maximum RPM program has been addressed in a series of cases involving the Burger King and Steak N Shake franchisors, the decisions of which slightly diverge based on the court’s examination of the contractual language at issue.
The Eleventh Circuit and the U.S. District Court for the Southern District of Florida ruled, on three separate occasions, that Burger King Corporation (“BKC”) had the right to impose on franchisees maximum prices for its “Value Menu” items by virtue of the Burger King franchise agreement provision stating that the franchisor could make changes and additions to its operating system “…which BKC in the good faith exercise of its judgment believes to be desirable and reasonably necessary…”.
In the Eleventh Circuit case, Burger King v. E-Z Eating 41 Corp., 572 F.3d 1306 (11th Cir. 2009), the court affirmed the lower court’s determination that: “BKC has the right, under the parties’ franchise agreements, to require compliance with the Value Menu. The franchise agreements specifically require Defendants to adhere to BKC’s comprehensive restaurant format and operating system.” Id. at 13-14.
In a subsequent but entirely parallel case, National Franchisee Association v. Burger King Corporation, 715 F.Supp. 2d 1232 (S.D.Fla. May 20, 2010), the U.S. District Court for the Southern District of Florida issued two opinions. In the first - - rendered in May, 2010 - - the court held that under the above-quoted language of the Burger King franchise agreement, “…(plaintiff’s) claim that (the Burger King franchise agreement) does not grant BKC the authority to impose maximum prices…fails as a matter of law.”
However, since the subject Burger King franchise agreement language permitted Burger King to compel modifications of its system “which BKC in the good faith exercise of its judgment believes to be desirable and reasonably necessary…”, the court in its first decision granted Burger King’s motion to dismiss its franchisees’ claim that it did not have the authority under said franchise agreement to set maximum prices but let proceed the franchisees’ claim that Burger King’s imposition of the $1.00 double cheeseburger violated its contractual duty of good faith.
However, on that issue, too, Burger King prevailed. In its second decision, National Franchisee Association v. Burger King Corporation, Slip Copy, 2010 WL 4811912 (S.D. Fla, November 19, 2010), the Southern District of Florida held:
The purpose of Section 5 (of the Burger King franchise agreement) is to give BKC broad discretion in framing business and marketing strategy by adopting those measures it judges are needed to help the business successfully compete… (T)o adequately raise a claim of bad faith, Plaintiffs must allege some facts suggesting that BKC did not believe that the prices would be helpful to the businesses competitive position, but, for some other reason, deliberately adopted prices that would injure Plaintiffs’ operations. As currently pled, none of the allegations support such an inference of bad faith. Plaintiffs rely principally on their allegation that franchisees could not produce and sell (a double cheeseburger or a double hamburger) at a cost less than $1.00, and therefore that franchisors suffer “a loss” on each of these items sold. Even taken as true, there is nothing inherently suspect about such a pricing strategy for a firm selling multiple products. There are a variety of legitimate reasons where a firm selling multiple products may choose to set the price of a single product below cost. Among other things, such strategy might help build goodwill and customer loyalty, hold or shift customer traffic away from competitors, or serve as “loss leaders” to generate increased sales on other higher margin products.
In Stuller, Inc. v. Steak N Shake Enterprises, Inc. et al., 877 F. Supp. 2d 674 (C.D. Ill. 2012), the court, based on the subject franchise agreement language, reached a different conclusion in response to Steak N Shake’s attempt to compel one of its franchisees to follow its pricing directives. Steak N Shake, much like Burger King, relied on its franchise agreement’s rather standard “system modification” provision as entitling it to mandate franchisee prices (despite language of the franchisee’s existing franchise agreements which provided the franchisee the right to set its own menu pricing). Unlike the decision in Burger King, however, the Steak N Shake court held that this general “system modification” language was insufficient to entitle Steak N Shake to require its franchisees to adhere to prices established by the franchisor, observing that “[t]he agreements do not specifically address whether [Steak N Shake] can modify operational standards to require uniform pricing and promotions...[T]his Court finds that the undisputed extrinsic evidence demonstrates, as a matter of law, that the parties did not intend for the System to include pricing and promotion…The undisputed extrinsic evidence demonstrates that price and promotions were not part of the System. As such, [Steak N Shake] could not modify the System to require Plaintiff to following [Steak N Shake] pricing and promotions.” Accordingly, the Court granted plaintiff-franchisee’s motion for summary judgment, and enjoined Steak N Shake from implementing its pricing policy.
Notably, neither the Burger King decisions nor the Steak N Shake decision addressed the antitrust aspect of a franchisor compelling (or attempting to compel) its franchisees to observe fixed retail prices, whether under federal antitrust law (and its now prevailing “rule of reason” analysis) or under state antitrust laws. Rather, such decisions limited their analysis to the language of each respective franchise agreement.
Norway has implemented the EU/EEC regulation on competition law but in the following, the focus will be on the applicable regulations regarding vertical agreements and vertical restraints.
In respect of franchise transactions and franchise agreements, the franchisors and the franchisees are per definition independent businesses, and any agreements are therefore subject to the Competition Act (2004). The main rule in the Competiton Act (2004) prohibits agreements that have as their object or effect the restriction, prevention or distortion of competition.
From this there are several general exemptions referred to as block exemptions. If the parties can demonstrate that the arrangement falls within a potentially applicable block exemption the arrangement can fall under the scope of exemptions to TFEU article 101 in regulation 330/210 and the corresponding Norwegian regulation FOR-2010-06-21-898. This regulation makes exemptions from the Competition Act § 10. Examples of relevant factors would be that the parties are considered to be on different levels of the supply chain and the franchise agreement can be considered as a vertical agreement, Exemption is also made for agreements regarding transfer of intellectual property rights on conditions related to use, sale or on-sale of goods and services.
The block exemptions assume that if neither the franchisor nor the franchisee has more than 30% market share in the relevant market under the agreement and that the contract period does not exceed 5 years, the contract period is unlimited or contain provisions for automatic renewal as an implied condition.
The inclusion of certain so-called hardcore provisions will remove the potential benefit of block exemption safe harbour for the entire agreement. Such provisions include facilitation of vertical price-fixing (minimum sales prices), imposition of certain territorial or customer resale obligations/restrictions, prohibition or limitation of parallel trade and prohibition or limitation of passive sales.
In relation to parallell trade and passive sales, note that online marketing and sales with some exceptions are considered as passive sale in this context. So, in response to the examples in the question, generally it is not permissible to prohibit online sales, or fix retail prices if the parties want to have the benefit of a block exemption, however, exclusive supply can be agreed within the applicable 5 year contract period.
If the block exemption is not applicable for an agreement, individual exemptions may be granted by local authorities. Such process involves an analysis of the effects of the agreements on the competition in the market.
The 5 year limit to the contract period does not apply if the goods or services are sold by the franchisee from premises owned by the franchisor or leased from a third party which is not affiliated with the franchisee. Exemptions may still apply as long as the duration of the competition clause does not exceed the time period which the franchisee utilises these premises.
Further, the parties can, within the block exemption, agree that the franchisee is prohibited from purchasing, selling or on-sell goods or services from others after expiry of the franchise agreement, as long as such goods or services are competing with the goods or services included in the agreement. This is conditional upon the franchisee selling such goods from the same premises in which the franchisee operated its business during the contract period. Such extended prohibitions are also conditional upon such prohibition being required to protect know-how information transferred from the franchisor to the franchisee. Such extended prohibition is limited to 1 year after expiry of the franchise agreement.
Finally, the block exemption does not apply to vertical agreements containing clauses prohibiting members of a selective distribution system to not sell certain competing supplier's brands.
Franchise agreements are subject to EU completion law and in particular to EU Regulation 330/2010 on vertical agreements and to the related Guidelines.
According to the Regulation and to the related Guidelines:
- On-sale sale cannot be prohibit. Every distributor must be allowed to use the internet to sell products. In general, where a distributor uses a website to sell products that is considered a form of passive selling. In particular are considered hard-core restrictions:
- any obligation on distributors to automatically reroute customers located outside their territory, or to terminate consumers' transactions over the Internet if their credit card data reveal an address that is not within the distributor's territory;
- any obligation that dissuades distributors from using the Internet, such as a limit to the proportion of overall sales that a distributor can make over the Internet, or the requirement that a distributor pays a higher purchase price for units sold online (dual pricing);
- an agreement that the distributor shall pay a higher price for products intended to be resold by the distributor online than for products intended to be resold offline.
However the franchisor may impose a maximum sale price or recommend a sale price, provided that they do not amount to a fixed or minimum sale price.
On the contrary contractual restrictions which are necessary to protect know-how and goodwill, and to maintain the common identity of the franchise network are generally admitted.
There are significant pieces of European legislation that regulate competition and these apply to franchise agreements. In particular, Article 101 of the Treaty on the Functioning of the European Union ("TFEU") regulates agreements, decisions and concerted practices that may affect trade between Member States of the European Union ("EU").
Article 101 was adopted into UK domestic law by virtue of the Competition Act 1998 ("CA"). The Competition and Markets Authority ("CMA") is the principal enforcement agency in the UK. The EU Commission only becomes involved if the suspected infringement affects trade between Member States. It is crucial that the franchise agreement does not breach the terms of either the TFEU or the UK's Competition Act, otherwise the provisions in question are void and fines may be imposed by the regulators.
Franchise agreements can affect competition, particularly if they contain territorial sales restrictions and pricing obligations. However, not all franchise agreements fall under article 101 TFEU if they are not of sufficient size and scale to be deemed relevant. Additionally, vertical agreements (including franchise agreements) are exempt from article 101 TFEU if they come within the terms of the 2010 Vertical Restraints Block Exemption ("VBER").
The key competition law issues to consider as regards a franchise agreement are listed below. However, please note that until the UK and the EU finalise Brexit negotiations there is uncertainty surrounding the applicability of EU jurisprudence within the UK.
Prohibition of Online Sales
There is a key distinction in European competition law between active and passive selling and franchisors should be aware of this distinction. Active sales occur if the franchisee has actively sought out a customer, whereas passive sales are a result of the franchisee responding to an unsolicited enquiry from a customer. Franchisors must not prevent franchisees from undertaking passive sales outside of their prescribed territory in the franchise agreement. This is a ‘hard-core’ restriction and violation of this principle means that the franchise agreement will lose the benefit of the VBER.
The Commission considers internet sales to be passive sales which cannot be prohibited. As a result, franchisors cannot prohibit franchisees from operating their own websites, though they can impose quality standards.
Exclusive Purchase Obligations
Exclusive purchase obligations are a restriction on competition pursuant to Article 101(1) TFEU as they restrict a franchisee in its choice of suppliers.
A requirement for a franchisee to source a minimum of 80% of its product supplies from the franchisor or a supplier approved by the franchisor for a period exceeding five years will be void and unenforceable unless the franchisee operates from premises owned or leased by the franchisor from independent third parties in which case the five-year period can be increased to the length of the lease the franchisor grants to the franchisee.
This provision would potentially make all product tying clauses unenforceable. However, following the European Court of Justice's decision in the Pronuptia case (Pronuptia de Paris GmbH v Pronuptia de Paris Irmgard Schillgallis  EUECJ R-161/84), a non-compete obligation tying the goods or services purchased by the franchisee is not restricted where the obligation is necessary to maintain the common identity and reputation of the franchised network, provided that the duration of the non-compete obligation does not exceed the duration of the franchise agreement.
Even if a purchase tie is both longer than 5 years and does not satisfy the Pronuptia test, the restriction will only be caught by Article 101(1) of the TFEU and/or the CA if it has an appreciable effect on competition. Where the parties' respective market shares, assuming that they are not competitors, are less than 15%, a franchise agreement will be covered by the Commission's de minimis notice and all non-hardcore restrictions will be treated as non-appreciable, including product ties of a longer duration than 5 years.
A clause whereby a franchisor seeks to fix the prices at which a franchisee sells its good or services (also referred to as "resale price maintenance") is regarded as a ‘hard-core’ restriction on competition and its inclusion can invalidate the entire franchise agreement.
There are, however, some price restrictions that are permitted – for example, franchisors may set a maximum price or can recommend prices provided they are not compulsory. In addition, it is permissible to fix the resale price as part of a short-term promotional campaign (generally of 4-6 weeks' duration). Care should be taken to avoid indirect resale price maintenance, for example granting franchisee's an additional discount of wholesale prices if they adopt the franchisor's recommended price.