A franchisor invests a lot of time, money and effort in developing its franchise formula. Logically, the franchisor wishes to protect the accumulated knowledge, identity and reputation of its formula amongst others by making agreements with its franchisees and imposing certain obligations. However, this protection may be at odds with competition law and, in particular, the cartel prohibition.

The cartel prohibition prohibits agreements between companies that noticeably restrict competition. Violating the cartel prohibition can have far-reaching consequences. For instance, violation of the cartel prohibition results in nullity of the specific provision or even the entire franchise agreement. High fines can also be imposed on both franchisor and franchisee.

Cartel prohibition

The cartel prohibition is included in Article 6 of the Competition Act and Article 101 of the Treaty on the Functioning of the European Union. The cartel prohibition prohibits agreements or contacts between companies that noticeably restrict competition. Franchise agreements often contain provisions that may violate the cartel prohibition. For example a (post-contractual) non-compete clause, an exclusive purchasing obligation, the division of market areas, price agreements and agreements on online sales.

However, provisions from franchise agreements that at first sight appear to be in breach of the cartel prohibition may be necessary to protect the franchise formula. It is apparent from European case law that provisions necessary to protect the franchisor's know-how and the identity and reputation of the franchise formula do not violate the cartel prohibition.

In addition, there is a generic block exemption from the cartel prohibition, the so-called Block Exemption on Vertical Agreements (‘the Block Exemption’). The Block Exemption contains a ‘safe harbour’ for a number of vertical agreements. This safe harbour is subject to two conditions. First, the market share on the relevant market(s) of both the franchisor and the franchisee may not exceed 30%. Second, the franchise agreement may not contain hardcore restrictions.

The European Commission provided further guidance on the Block Exemption in the accompanying Guidelines. It follows from the Guidelines that certain obligations imposed by a franchisor on a franchisee are considered necessary, such as the prohibition on engaging in competing activities and the prohibition on ‘transferring’ know-how to third parties. Below, we further discuss vertical restraints that may fall under the safe harbour of the Block Exemption.

If a provision from the franchise agreement is not considered necessary to protect the know-how and if the provision cannot benefit from the Block Exemption, the provision does not necessarily violate the cartel prohibition. In that case, an individual test will be applied to determine whether the agreement has the object or effect of noticeably restricting competition.

Exclusivity and selectivity

A franchisor may allocate an exclusive customer base or territory to its franchisee. If a franchisor wants to allocate an exclusive territory or an exclusive customer base to several franchisees, it may do so up to a maximum of five franchisees.

A franchisor may also select its franchisees on certain criteria to create a selective system. These criteria can be either quantitative or qualitative or contain a combination of both. Quantitative restrictions directly limit the number of franchisees. Qualitative restrictions indirectly limit the number of franchisees by imposing certain quality requirements. This may include requirements on staff training or the service to be provided in the point of sale.

Non-compete

Most franchise agreements contain a non-compete clause. A non-compete clause prohibits the franchisee from manufacturing, buying or selling goods or services that compete with the franchise formula. An obligation on the franchisee to purchase more than 80% of its total procurement from the franchisor or a company designated by it is also considered a non-compete clause.

Non-compete obligations during the term of the franchise agreement do not fall under the scope of the Block Exemption if they are indefinite in duration or exceed a period of five years. However, a non-compete obligation does fall under the scope of the Block Exemption if it is tacitly renewed after a period of five years, provided that the franchisee has been able to renegotiate the franchise agreement and the non-compete obligation after those five years or if the franchisee has been able to terminate the franchise agreement at reasonable notice.

This restriction in maximum duration does not apply, if the franchisee operates the franchise business in premises or on land owned or leased by the franchisor. Practically translated, this concerns cases where the franchisee (sub)rents the premises from the franchisor. In such cases, the duration of the non-compete may be equated to the duration of the use of the site or space.

Non-compete obligations that apply after the ending of the franchise agreement (post-contractual non-compete obligations) only fall under the scope of the Block Exemption if they meet a number of conditions. For instance, the clause must be indispensable to protect the know-how transferred by the franchisor to the franchisee, it must be limited to the point of sale where from where the franchisee operated during the franchise agreement and it may not exceed a period of one year after the ending of the franchise agreement. The requirements under the Block Exemption are (almost) identical to the requirements of a post-contractual non-compete obligation stipulated in the Franchise Act.

Vertical price maintenance

Vertical price maintenance is the direct or indirect limitation of the franchisee's ability to set a sales price. Vertical price maintenance is classified as a hardcore restriction. Thus, a franchise agreement containing such an agreement will never fall under the scope of the Block Exemption. Thus, to benefit from the Block Exemption, a franchisor must not impose a fixed sales price or minimum sales price on its franchisees. However, a franchisor is allowed (under the condition that this does not amount to imposing a fixed or minimum resale price) to impose a recommended or maximum resale price on its franchisees.

An important exception to this concerns promotions. A franchisor may impose a fixed sales price on its franchisees if the promotion is short. Short means a period between two and six weeks. And if it concerns less than five per cent of the assortment offered by the franchisee, the fixed sales price may even be imposed for the duration of eight weeks.

Pricing

The franchisee may charge a different selling price online and offline. It may be necessary in some cases to encourage an appropriate level of investment in an offline channel by charging a lower selling price offline than online.

Online sales

Many franchise formulas also operate online. The starting point is that everyone, including franchisees, should be able to use the internet to offer goods or services unhindered. This principle is not absolute. In fact, franchisors can impose restrictions that do not completely exclude use of the internet, but aim to protect the reputation or quality of the franchise formula.

Restrictions or requirements that are allowed in any case are:

• requirements intended to guarantee the quality or a certain appearance of the franchisee's webshop;
• requirements on the presentation of the goods or services in the webshop;
• a direct or indirect prohibition on the use of online marketplaces;
• a requirement that the franchisee has one or more physical shops or showrooms;
• a requirement that the franchisee sells an absolute minimum quantity of the goods and/or services offered offline.

Information exchange

In franchising, it is not unusual for a franchisor to also compete with its franchisees. It regularly happens that a franchisor also operates one or more locations of the franchise formula. This may put the franchisor in an awkward position with regard to the exchange of information. Indeed, exchanging information between competitors may lead to a violation of the cartel prohibition.

The Block Exemption therefore provides that if the franchisor also competes with its franchisees, information exchange is only allowed if the information is directly related to the performance of the franchise agreement and if the information is necessary to improve the production or distribution of the goods or services.

Furthermore, there is a non-exhaustive list of information that may be exchanged and information that may not be exchanged. Information that may be exchanged includes technical and logistical information, as well as information on prices at which the goods or services are sold by the franchisor to the franchisee and marketing. Information that may not be exchanged in any case includes information on future prices at which franchisor or franchisee intends to sell the goods or services to the customers and information on identified end-users.

Conclusion

A franchisor is allowed to protect its franchise formula by making certain arrangements with and imposing obligations on its franchisees. However, such protection may not violate the cartel prohibition. Violation of the cartel prohibition has far-reaching consequences. Franchisor and franchisee would be wise to be well informed beforehand about the legal validity of the agreements to be made in the franchise agreement.