Are there any consumer protection laws that are relevant to franchising? Are there any circumstances in which franchisees would be treated as consumers?
Franchise & Licensing
The Consumer Protection Law in Angola (approved by Law 15/03, dated 22 July 2003) does not expressly predict any specific protection to franchisees, and, in general, franchisees are not considered as consumers, which are defined in article 3 no. 1 of the Consumer Protection Law as being: “(…) any natural or legal person to whom are supplied goods and services or assigned any rights for purposes of using them as final consumer, provided that the supply or assignment are made by someone that undertakes an economic activity seeking profit.”
As the franchisee would not in principle qualify as final consumer, but rather a retailer, we are of the view that he would not benefit from the provisions set out in the consumer protection law.
Although no consumer protection laws specific to franchising and franchise sales exist in Canada, Franchisors (and each individual franchisee) are still required to abide by all such laws in the day-to-day operations of their businesses. This includes the relevant consumer protection law in each province and territory (such as the Consumer Protection Act in Ontario), that regulates topics like the delivery of goods, remedies available to a party harmed by a seller’s misrepresentation, consumer cooling-off periods, etc.
The Marketing Practices Act includes statutory rules on consumer protection and applies to franchising structures in Denmark.
When entering into a franchise agreement, the franchisee is considered to act in the course of business, and the franchisee will therefore not be treated as a consumer in accordance with any of the Danish laws concerning consumer protection. However, the parties’ position of strength may be of relevance in relation to Section 36 in the Contracts Act (see Question 9).
Due to the fact that the franchise agreement is based on that the franchisor grants the franchisee the license to use the franchisor’s commercial rights for example the know-how and trademarks etc. in order to sell and market the franchisor’s goods or services, therefore, the Consumer Protection Law will not be applied to the relationship between the franchisor and the franchisee but rather it shall be subject to the provisions of the executed franchisee agreement. However, the franchisee being producer or service/goods provider will be subject to the provisions of Law No. 181 of 2018, throughout the practice of the business with the end user/ consumer.
Article A441-1 of the Commercial Code requires the franchisee to inform consumers that it acts as an independent undertaking. This information must appear on all information documents, particularly advertising.
It is unlikely that a franchisee could be treated as a consumer, as the notion of consumer is only applicable to natural persons who act for purposes that do not fall within the scope of commercial or industrial activity. This distinguishes the consumer from a trader or legal persons, such as a business entity.
According to art. 6 of Law 2251/1994 on Consumer Protection, a product liability claim may be filed against the franchisor for a defective product, if the franchisor is the producer of said product, or the person who imports said product into the European Union for sale, hire, lease, or any form of distribution in the course of his business.
According to art. 1a par. 1 of the same Law 2251/1994, as recently amended, ‘consumer’ means any natural person who is acting for purposes which are outside his trade, business, craft or profession. On the basis of the above, a franchisee is unlikely to be considered as a consumer.
In terms of the Federal Consumer Protection Law (FCPL), a consumer is considered to be the “the natural person or entity that acquires or enjoys goods, products or services as the final beneficiary of the same”, while a supplier is considered to be “the natural person or entity that regularly offers, distributes, sells, leases or grants the use of goods, products, services or a combination of those”.
According to the Mexican legislation, a franchisee may be considered to be more a supplier than a consumer, except for when a transaction between a franchisee and a third-party supplier involves a claim equal to or less than 367,119.59 pesos, in which case the franchisee would be considered to be a consumer under the FCPL, and therefore may benefit from its protection.
Additionally, if the franchisee is an entity, it may be considered to be a consumer if it is considered to be a micro-entity in terms of the Law for the Development of Competitiveness of Micro, Small and Medium Entities and the Federal Law for the Promotion of the Micro-Industry and Handicraft Activity.
The Consumer Protection Law No 659/2005 is applicable to franchise agreements in Lebanon due to the similarities between the franchisor and the supplier on one hand and the franchisee and the consumer on the other hand in relation to the rights and obligations of the parties (eg. disclosure requirements, safety of the goods and services, etc.).
When selling goods or service to customers, the franchisee shall comply with the Law of the Protection of Rights and Interests of Consumers, Cyber-security Law and other related laws and regulations relating to customer protection and collection, disclosure, use and protection of personal information and data, etc.
There is no legal definition of a “consumer” under the PRC laws. According to the Law of the Protection of Rights and Interests of Consumers, the rights and interests of consumers who purchase and use goods or receive services for life consumption needs will be protected by the Law of the Protection of Rights and Interests of Consumers. Considering the franchisee purchases goods or services from the franchisor for the purpose of business operation rather than life consumption, generally speaking, the franchisee would not be treated as consumer.
There are not consumer protection laws that are relevant to franchising specifically, but the franchisee must know that the final consumer may seek consumer protection under the Consumer Protection and Defence Code. In this regard, it is important for the franchisee to know elementary rights of consumers, such as:
- Supplier must provide consumers with all relevant information to make a decision or an appropriate choice of consumption, and to make proper use or consumption of products or services.
- Supplier shall remain liable for the suitability and quality of the products and services offered; the authenticity of brands and legends displayed by his products or the signs supporting the service supplier, for inconsistencies in commercial advertising of products and services, as well as the content and product lifecycle indicated on the package, if appropriate.
According to the Consumer Protection and Defence Code, franchisees would not be treated as consumers.
The primary local law on consumer protection is the Consumer Act of the Philippines (“Consumer Act”). Under the Consumer Act, “consumer products and services” are defined as goods, services and credits, debts or obligations which are primarily for personal, family, household or agricultural purposes, which shall include but not limited to food, drugs, cosmetics, and devices. Arguably, the sale of a franchise is not covered by the Consumer Act because a franchise is not “primarily for personal, family, household or agricultural purposes.”
Consumer protection legislation is applicable to individuals who are acting as natural persons, but not commercial organizations or business entities. In other words, the local consumer protection law governs business-to-consumer (B2C) relations, while the franchise relationship may only be created in the business-to-business (B2B) sphere. Therefore, franchisees cannot be treated as consumers under the law, although consumer-related legislation will be primarily applied to relations between franchisee and third party consumers (individuals), who are buying goods and services from franchisee.
At the same time, there are situations in practice when franchisor bears subsidiary or even joint and several liability for third party product claims that may be addressed to franchisee. More specifically, pursuant to the provisions of Article 1034 of the Russian Civil Code, if a customer of a franchisee brings a claim alleging that the quality of the goods or services sold or delivered by the franchisee is insufficient or improper, the franchisor faces the risk of subsidiary liability for such a quality violation. With respect to the subsidiary liability, if a franchisee refuses to satisfy the claim of the customer, or a customer has not received, within a reasonable time, a proper response to the claim, then the claim may be filed by the customer directly against the franchisor. Moreover, if a customer of the franchisee brings a claim of insufficient quality of goods that are manufactured by the franchisee, in such an instance the franchisor will bear joint and several liability (together with the franchisee) for such a product quality breach. With respect to such joint liability, the customer has the right to present the claim to the franchisor and the franchisee jointly, and also to each of them separately, for the purpose of recovering the whole amount of debt, or part of the same.
The Consumer Guarantees Act 1993 applies between businesses and consumers. However, the relationship between a franchisor and a franchisee is usually outside the ambit of the Act.
Most U.S. state consumer protection statutes apply only to consumer transactions, as opposed to commercial transactions such as the purchase of a franchise. Thus, in nearly all cases that the author is aware in which a franchisee asserted a claim against its franchisor under a state consumer protection statute arising from the purchase of a franchise, the claim has been dismissed.
That fact notwithstanding, U.S. franchise laws - - such as the Federal Trade Commission (the “FTC”) Franchise Rule (the “FTC Rule”), which governs the offer and sale of franchises in all 50 states, Washington DC and all U.S. territories; the 14 U.S. states which have enacted laws requiring pre-sale registration and disclosure; and, the 23 U.S. jurisdictions which feature franchise relationship laws governing the on-going relationship between the franchisor and the franchisee - - may be construed as quasi consumer protection statutes, in that they serve to protect the franchisee. In addition, many states (including states with no franchise laws or regulations of their own) have enacted statutes, colloquially referred to as “Little FTC Acts,” which render illegal any conduct that would be violative of the FTC Act and the regulations promulgated thereunder (including the FTC Rule). Unlike the FTC Act and the FTC Rule, however, these Little FTC Acts often confer private rights of action upon aggrieved franchisees (either expressly by statute or by virtue of case law that has conferred standing under such statutes) rather than reserving those rights to governmental authorities alone. If a franchisor violates the FTC Rule, its franchisee may attempt to hold it liable under an applicable state Little FTC Act (if any).
Norway has strong consumer protection laws which are applicable for the sale of goods, which would be relevant in the business relation between a franchisee and consumer customers. Consumer customers may also make claims for refund, compensation, redelivery of goods, etc. against other companies in the supply chain. Depending on the set-up of the supply chain in the franchise organisation, such claims may therefore be made against the franchisor. It is therefore important to regulate in the franchise contract how claims from consumer customers shall be dealt with and mitigation of the financial risk for such claims. Norway also have consumer protection laws for certain financial agreements.
The definition of 'consumer' implies the subject to be a physical person acting in a non-business context. A franchise agreement would normally by its nature be business related to such extent that the franchise arrangement would normally fall outside the definition of a consumer relation. Careful consideration should be made if an individual person is required to undertake obligations as part of a franchise relation, for example by making guarantees or providing security. Depending on the circumstances it can be argued that the person has acted as consumer.
In 2012 protection against unfair commercial practices was extended also to the so-called “micro-undertakings” (i.e entity companies or associations that, regardless of their legal form, engage in an economic activity, even as an individual or family, that employs fewer than ten persons and generates an annual revenue or total annual balance sheet not in excess of two million euros).
No. Franchisees are not likely to be treated as consumers for the purposes of consumer protection law. Companies are never considered to be consumers, even if an individual sets up a company for the sole purpose of entering into the franchise agreement.