On 4 October 2016, the European Parliament published the results of a study on how the regulatory environment of the EU impacts franchising. The study recommends the re-engineering of the regulatory environment to harmonise the regime and allow franchisors more control over franchisees.
The current regulation of franchising
The study recognises that franchising is substantially underperforming in the EU, with the revealing statistic that, although the USA has only 60 per cent of the population of the EU and a lower GDP, turnover from franchising in the USA is more than double that of the EU. The European Parliament puts this failure down to dysfunctional and uncoordinated systems among Member States. Legal regulation, particularly competition law, has been developed to address macroeconomic issues (such as the impact of unlawful price fixing), without taking into account the commercial realities of the relationship between franchisor and franchisee.
The proposed European Legal Act
In response to these failings, the study recommends the adoption of a European Legal Act which will have three key focuses:
- Promote market confidence in franchising by underpinning and supporting the commercial advantages that franchising delivers to franchisors, franchisees and the single market.
- Ensure pre-contractual hygiene by giving franchisors the right to require disclosure of information such as details of the franchisee’s business
- Ensure a fair relationship by obliging both parties to not act in an “unconscionable manner”, replacing any general duty of good faith found in EU Member State law.
The call for a more comprehensive regulatory framework on franchising may be encouraged by pan-European businesses, who currently have to navigate differing regimes across the EEA. For example, under the laws of Germany, Spain and the UK, there is no specific regulatory framework that covers franchising, leaving the courts to develop guidance based on several laws that apply to the various different aspects of franchising. In contrast, Italian law contains clear rules on disclosure in franchise agreements, including the essential elements of franchise agreements and the information required, depending on the type of franchisor.
What impact does this have on Competition law?
From a competition law perspective, the European Parliament argues that franchise chains are at a competitive disadvantage compared to corporate chains in terms of both price fixing and the use of the internet, because franchisees are treated as being outside the franchisor’s corporate group and so are caught by competition law. As it stands, resale price maintenance is a hardcore restriction under EU competition law, meaning the franchisor can only recommend resale prices, or set a maximum. The franchisor is also unable to control the franchisee’s use of the internet.
The development of e-commerce is a particularly topical issue, with the preliminary results of the Commission’s on-going e-commerce sector inquiry highlighting the increasing importance and use of e-commerce (read more here). The franchising study therefore recommends allowing franchisors to use retail price maintenance in some circumstances, allowing franchises to deliver price promises, and increasing their reliability and consistency as compared to corporate chains. It also suggests allowing franchisors a greater level of flexibility and control over internet strategy.
How will this affect businesses?
An EU-wide regulatory framework may foster increased cross-border franchising within the EU. Indeed, parallels can be drawn with the commercial agents
directive, which provided for a common basis and led to standardisation. Businesses involved in franchises, or interested in franchising as a potential business structure, should be positively encouraged that if the recommendations of the report are taken on board, franchising is likely to grow in the EU and begin to fulfil its potential.