International franchising - Competition Law issues. A European Union Perspective
| Autor | Marcos Araujo Boyd |
| Cargo del Autor | Abogado. Garrigues, Madrid |
| Páginas | 393-409 |
Ver nota 1
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The implementation of a distribution scheme extending beyond national boundaries requires a proper understanding of the different legal regimes that may apply in the destination country - ranging from tax to corporate/commercial, labor or indeed competition law.
In the area of franchising, however, one may be tempted to minimize the impact of national competition rules. There are various reasons for that. On
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the one hand, competition laws are sometimes wrongly perceived as quite uniform, with global networks of enforcement authorities such as the ICN2, the European Competition Network, the works of the OECD and a myriad of regional structures perhaps contributing the confusion. On the other hand, "franchising" in itself might be perceived as a novel formula that would escape national legislation. And indeed we have on top the frequent confusion that competition laws apply to horizontal cartel-type behavior and only marginally to certain features of distribution arrangements.
This paper will challenge these premises. Competition laws do apply to franchising networks, and the potential for differing standards cause tensions. We will not however overstate the point. International franchising networks do and will continue to operate across borders - but do not forget to check with local counsel, since what you may think is obvious in one jurisdiction may be open to challenge in another just a few miles apart.
One last introductory warning: This paper casts its view from a EU law perspective. Given the current legal structure of the EU this will mean discussing national competition laws and practices. It is worth starting with a brief description of how national competition laws interact within the EU and what that may mean for pan-European franchising networks.
The way how the competition laws in the EU interact is quite extraordinary. On the one hand, there are the EU laws on competition, contained in the founding Treaties and in secondary legislation3. These
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rules apply where intra-Community trade may be affected by the practice in question4. This application is concurrent with that of national competition rules; however, under a competition-specific standard of primacy enshrined in Article 3 of Regulation 1/2003, the application of national competition laws may not prejudice the uniform application of EU rules. That standard does not cover national law, competition rules on unilateral behavior5, or rules having a purpose other than competition law6.
Where intra-Community trade is not affected, national competition laws exclusively apply.
National competition laws are independent from one another and indeed from EU rules as well. It is indeed true that in recent years, and most importantly following the so-called "modernization" carried out in the first years of this century, the formulation of prohibited conduct and the main enforcement principles have converged to a large extent across the EU. This notwithstanding, there is as a matter of law no obligation on national competition laws to be consistent among themselves save where intra-Community trade is affected.
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The above principles govern the issue of which law is to be applied. However it is important to recall that enforcement of EU competition rules on agreements are not just enforced by EU authorities, but also by national competition agencies and courts. And again, the manner in which national authorities and Courts apply EU competition law may differ. The implications of the above for international franchising agreements may be summarized as follows:
· EU competition law will normally apply to international franchise agreements, since these have an impact on interstate trade. National competition laws may also apply, but on the one hand they will normally be broadly similar to EU law and on the other their application may not jeopardize the application of EU law, making them largely irrelevant;
· By exception, national competition rules on unilateral conduct and national laws having a purpose other than competition will apply in any event; and
· Most importantly, the enforcement will almost inevitably be in the hands of national competition authorities or national courts, with the inevitable influence of domestic criteria and principles.
As already noted, EU law will almost inevitably be the starting point when analyzing the compatibility of an international franchising agreement with competition law anywhere in the EU.
EU competition law on international franchising is a part of the law on vertical agreements. As such it benefits since 1 June 2000 from the "safe haven" of Regulation 2790/1999. This means in practice that as long as the main requirements of this Regulation are met, international franchising agreements will not face serious competition law issues. Among these requirements the following are noteworthy:
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Regulation 2790/1999 only applies if the market share of the participants remains below 30%7. This is discussed in some detail below.
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The main non-compete obligations, including exclusive supply, are limited to 5 years8.
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Post-contractual non-compete restrictions may not be covered by the Regulation. This is further discussed below.
Franchising agreements that do not meet the above requirements are not necessarily prohibited9, but an individual assessment of the application of competition law may be required. In order to assist in this exercise, the European Commission published in October 2000 a lengthy Communication which sets out a conceptual framework for the analysis of vertical restraints under competition law10 (hereafter, the "Guidelines"). In the specific area of franchising agreements, there is little doubt that in addition to the Guidelines it will be useful to have a look at the Pronuptia case11(still today the only authority from the Court of Justice on
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franchising agreements under European competition law) and the ensuing Regulation 4087/8812despite of being no longer in force.
The following section discusses some issues of frequent debate in franchising agreements before EU Courts. Where relevant, EU and more importantly national decisions (whether from Courts or national competition agencies) will be examined.
The discussion as to whether EU rules apply is often a point for debate. As above noted, EU rules apply where the agreement in question is capable of affecting intra-Community trade. The fact that the agreement may be a part of a network of similar arrangements, as it is often the case with franchising agreements is taken into consideration and frequently causes franchising agreements to fall under the scope of EU rules13. However, the contribution
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of each individual agreement to the restriction should be analyzed14. Where a given restriction is unique to an individual agreement, the fact that a network is in place may not be relevant15.
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Despite the above principles, it is not difficult to find administrative and court decisions regarding international franchising agreements based solely on national laws, be it because of the turnover of the franchisor (as in the Jeff de Bruges case16) or just because the agreement in question is examined in isolation despite the fact that it forms part of a wider international network (see Socovi/Jean-Louis David17).
Another field of conflicts is the "safe haven" approach and the Guidelines on Vertical Restraints.
As explained above, the "safe haven" approach differs from the old block exemption regulations in that agreements not meeting all the requirements of Regulation 2790/1999 will not be automatically condemned, but subject to a case-by-case analysis under the Vertical Guidelines. In practice, however, where the Regulation does not apply, securing "approval" of the contract under the Guidelines may be an uphill battle. The recent The Body Shop decision of the Higher Regional Court of Düsseldorf (Oberlandesgericht Düsseldorf) provides an interesting example of the above18.
This case discussed the admissibility of an exclusive supply obligation imposed on franchisees bound by a seven-year contract. It is recalled that Regulation 2790/1999 protects exclusive supply clauses in franchising (and in general in distribution agreements) but only for five years. Given that extended term, the Regulation would not solve the difficulty.
In its analysis, the Court observed that earlier agreements of The Body Shop had permitted to franchisees obtaining third party supplies up to 35% of their supplies from third parties. Upon this fact, the Court was not convinced of the "necessity" of the exclusive supply clause and refused to grant an exemption. Interestingly, the Court did not declare the contract
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void, but rather ordered The Body Shop to consent to a new provision limiting the exclusivity to 80% of the franchisee’s demand, thereby reducing the scope of the exclusive supply obligation19.
In the above case, the inapplicability of the Regulation was the result of excessive duration of the exclusive supply obligation. However, the inapplicability of the Regulation may also stem from a market share in excess of 30%.
The provision of market share data should not be terribly complicated in retail markets. There are frequently...
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