Important Court Decision on Franchise Agreements in France

In particular, the Paris Court of appeal ruled on a variety of issues further to proceedings brought by the French Minister for Economic Affairs which point to, inter alia, the existence of a significant imbalance in the rights and obligations of the parties to the franchise agreements as per Article L. 442-6, I, 2° of the French commercial code then in force (which is now Article L. 442-1, I, 2° of the French commercial code).

The context of the decision handed down by the Paris Court of appeal:

From 2013 to 2016, the General Directorate for Competition, Consumer affairs and Prevention of Fraud (know-as “DGCCRF)” which is the French Authority in charge of ensuring the proper functioning of markets for the benefit of consumers and the competitiveness of business, conducted investigations regarding the commercial relationships between franchisors and franchisees of twelve franchise networks and, in particular, the Pizza Sprint franchise network.

During the investigations and after the acquisition of the Pizza Sprint franchise network on January 26, 2016, several franchisees challenged the network’s practices. In this respect, at the end of its investigations, the DGCCRF considered that the aforementioned commercial relationships revealed the existence, in the franchise agreements, of clauses imposing obligations on the franchisees that limit their freedom and commercial autonomy to such a degree that could characterise a significant imbalance in the rights and obligations of the parties under Article L. 442-6, I, 2° of the French commercial code due to the weak position of the franchisees in relation to the negotiating power of the franchisor.

In this context, the French Minister for Economic Affairs brought an action against the franchisor Pizza Sprint and its buyer before the Rennes commercial court for restrictive competition practices.

The main issues ruled by the Paris Court of appeal:

(i) The characterisation of significant imbalance of certain clauses provided for in the franchise agreements:

On the one hand, the Paris Court of appeal recalled that the characterisation of a significant imbalance presupposes two cumulative criteria, namely (i) the existence of a submission or attempted submission of its commercial partner which implies “the demonstration of the absence of effective negotiation or the use of threats or retaliatory measures aimed at forcing acceptance, implying an absence of effective negotiation” and (ii) the existence of obligations creating a significant imbalance which may be inferred “from a total absence of reciprocity or consideration for an obligation or from a significant disproportion between the parties’ respective obligations”.

On the other hand, after having characterised the “absence of genuine room for negotiation of the franchise agreements” by the franchisees (lack of information on the franchise network, the franchise agreements are identical, dominant role of the franchisor, etc.), the Paris Court of appeal analysed certain clauses of the disputed franchise agreements and three of them deserve attention as they were clearly sanctioned for significant imbalance:

• the supply and minimum stock clauses:
  
  The Paris Court of appeal considered that the combination of these two clauses and their effects led to a significant imbalance.
  
  Indeed, even if the franchise agreements did not provide an exclusive supply clause, the Paris Court of appeal noticed that the franchisees were in fact obliged (or forced) to obtain supplies from a central office belonging to the same group as the franchisor, whose prices were higher than those applied by competitors.
  
  Consequently, the Paris Court of appeal ruled that these clauses generated a significant imbalance because these supply arrangements were not justified for the preservation of the homogeneity of the franchise network or the development of the franchisor’s know-how and did not offer any advantage to the franchisees who were subject to a real constraint to their freedom to manage their business.
  
  
• the intuitu personae clause:
  
  The ruling of the Paris Court of appeal was also significant because the assessment of the imbalance in the disputed contracts was led to an interesting and new debate on the role of the intuitu personae in franchise agreements.
  
  In the case at stake, the intuitu personae clause provided that the contract was concluded in consideration of the person of the franchisee (in particular its director) which implied (i) the obligation for the franchisee to notify the franchisor of “any project” that could “affect” the person of the franchisee (identity of directors, majority shareholders, franchisee’s capital distribution), (ii) the prior and mandatory consent of the franchisor for any assignment of the contract to a new franchisee and (iii) the franchisor’s right to terminate the contract in such case at no cost.

That said, the Paris Court of appeal considered that the significant imbalance was characterised due to (i) the vagueness of the clause and (ii) its unilateral nature: 

- regarding the vagueness of the clause: the Court of appeal considered that the formulation is too general as the event (any project that may affect) and its effect (the termination) generate serious consequences for the franchisee. To reduce the risk of the clause being null and void, it could be recommended for franchisors to limit termination to precise events that may lead to a substantial change in the franchisee.

- regarding the unilateral nature of the clause: the Court of appeal considered that franchise agreements also include a right for franchisees to consent to certain changes in the franchisor. Thus, to reduce the risk of the clause being null and void, it could be recommended for franchisors to stipulate a bilateral intuitu personae clause allowing each contracting party to agree to the assignment of the franchise agreement and/or to be able to terminate the agreement at no costs in the event of a change in the director and in the distribution of the capital of the legal entity concerned.

• the termination clause:
  
  

The Paris Court of appeal also criticised the significant imbalance in the termination clause in the franchise agreements:

- for the initial franchise agreements, the Court considered that the significant imbalance was characterised by the one-sided nature of the clause insofar as it only gave the right to terminate to the franchisor;

- for the subsequent drafting of the termination clause (that gave both parties the right to terminate), the Court considered that no sanction can be pronounced as it gave both parties the right to terminate the contract, even if the terms are different (for example, only the franchisor benefits from a penalty clause).

(ii) The sanctions ordered by the Paris Court of appeal:

In view of these above findings, the Paris Court of appeal firstly pronounced void and null the intuitu personae clause and the termination clause (in a symbolic manner as the sanction only concerns the initial franchise agreements) as they imposed obligations on franchisees creating a significant imbalance in the rights and obligations of the parties.

However, the supply and minimum stock clauses were not declared null and void because the Court considered that it is not the wording of the clause that created the significant imbalance but its implementation, so that the sanction must be aimed at the practice and not the clause.

In addition to the cancellation of the disputed clauses, the Court of appeal ordered Pizza Sprint and its buyer to cease the disputed practices that were restrictive of competition by (i) amending the intuitu personae clause both for the existing contracts and for the future contracts and (ii) requiring the franchisors to cease the practice of inserting in the franchise agreements a minimum stock clause coupled with a supply clause that could impose on the franchisees an exclusive or quasi-exclusive obligation to obtain supplies from a supplier belonging to the same group of the franchisor.

Moreover, the Court imposed a fine of € 500,000.00 on the franchisors regarding the seriousness of the breaches, their duration and the disturbance to the economic public order.

Finally, the Court ordered Pizza Sprint and its buyer to publish an extract of the decision in the general press and on the franchisors’ websites.

The scope of the decision:

Although this decision is part of a trend towards tighter control of commercial practices in franchise networks, the immediate impact of this decision must be tempered, in particular the findings relating to the intuitu personae clause, insofar as an appeal against the decision has been lodged before the French Supreme Court.

Consequently, even if this decision appears to be favourable to franchisees and appears to have ruled on important issues on franchise agreements, the answers given should not be considered at this stage as new principles in franchise agreements.