New bill may thwart franchising in the retail sector

Introduction
Distribution networks amendment
Rationale
Issues
Next steps

Introduction

The National Assembly recently adopted a new bill on growth and business, known as the 'Macron Bill' after the minister of economy. The law – which has been the subject of heated debate in recent months over issues such as Sunday trading and the deregulation of certain legal professions – is a long, catch-all piece of legislation. As is often the case in the French parliamentary process, this kind of text often presents last-minute surprises as some members of Parliament (MPs) attempt to use the opportunity of a general text to incorporate new provisions, which may have little to do with the government's original intention and may have a serious impact on businesses.

Distribution networks amendment

In regard to the Macron Bill, one such surprise related to distribution networks. An MP from the ruling Socialist Party put forward an amendment in the bill adopted by the National Assembly which, if included in the final act, may materially affect relationships between franchisors and franchisees.

The scope of the amendment relates to non-integrated retail shops operating under a third-party brand where the head of the distribution network requires exclusivity or quasi-exclusivity. Although franchising is not specifically mentioned in the bill, there is no doubt that it is covered.

The main provisions introduced by the amendment are as follows:

• The main agreement (ie, the franchising contract) and any ancillary agreements (eg, a product supply agreement) must all have the same duration. If one is terminated, all of the related agreements will also be terminated.
• Any post-contractual non-compete clause imposed on the franchisee is void per se.
• The franchising agreement may not have a term exceeding nine years and may not be tacitly renewed. In other words, if the franchisor and the franchisee intend to extend their relationship beyond the nine-year term, they must expressly agree and enter into a new agreement which may include new terms.
• None of these principles may be derogated from as a result of bylaws or shareholder decisions (this provision relates to corporate franchisees where the franchisor has a stake).
• A ministerial decree will set out the level of turnover below which these new provisions will not apply.

Rationale

The parliamentary amendment follows on from an important Competition Authority decision of December 7 2010 concerning food retail distribution. In France, this sector is highly concentrated as the six major retail brands (Carrefour, Auchan, Casino, Leclerc, Intermarché and Système U) account for 85% of the market. It is evenly split between two models:

• the integrated model adopted by Carrefour, Casino and Auchan, which also have a significant number of franchisees for the operation of supermarkets and convenience stores; and
• the cooperative model used by Leclerc, Intermarché and Système U, where the shops are operated by independent merchants who are also members of the cooperative.

Due to the structure of the market, the Competition Authority highlighted the need to strengthen competition between retail brands by removing certain restrictions on the owners of independent sale outlets (operating as franchisees or licensees) preventing them from leaving a network. This particularly applied to:

• post-contractual non-compete covenants;
• multiple interlinked agreements with different expiry dates;
• minority stakes taken by the retail brands in the capital of their franchisees or affiliated companies; and
• rights of pre-emption in favour of the franchisor in the event of sale.

The Competition Authority concluded that such restrictions had the effect of unduly locking the franchisees for a long time into a particular brand and prevented the entry of new actors on the food retail distribution market.

Issues

The parliamentary amendment, which received strong support from franchisees' organisations and other types of independent merchant, is causing both irritation and uncertainty for the heads of distribution networks.

The arguments put forward by the cooperative trade associations revolve around the deterring effect that the Macron Bill could have on common investments; they argue that if there is no longer any guarantee of durability between the cooperative and its members, there will be no interest in making long-term investments, such as the creation of logistics centres for the benefit of members and, ultimately, consumers. Leclerc and its cooperative colleagues also point out that eventually they will lose significant market shares to the integrated brands, such as Carrefour and Auchan, which will have less difficulty in obtaining third-party financing.

The Franchising Federation has stated that a complete ban on post-contractual non-compete clauses contradicts the rationale of becoming a franchisee. Non-compete clauses are there to protect the know-how developed by the franchisor and used by the franchisees. If a party can use a franchisor's know-how even after it has ceased being a franchisee, what is the point of remaining a franchisee, and why should the franchisor update its know-how?

Whatever their background, most critics argue that the special features identified by the Competition Authority in the food retail sector are not applicable in other markets. Further, a de minimis test should apply even in some concentrated sectors. The minister of economy recently said that a turnover threshold of €50 million could be contemplated for the application of such new provisions.

Next steps

Before becoming law, the Macron Bill must still be approved by the Senate before returning to the National Assembly, which has the final say. In the meantime, it is likely that the bill's opponents will exert pressure on the government to remove such provisions, or at least significantly reduce their scope.

For further information on this topic please contact Raphael Mellerio at Aramis Law Firm by telephone (+33 1 53 30 7700) or email (mellerio@aramis-law.com). The Aramis Law Firm website can be accessed at www.aramis-law.com.