May a franchisor provide financial support to its franchisees through loans or payment periods? This question is of interest as this type of financial support is often provided to franchisees in order to help them set up and run their outlets. In a 15 January 2020 decision, the Supreme Court had the opportunity to rule on this question in a lawsuit between Speed Rabbit Pizza and Domino's Pizza France.
Speed Rabbit Pizza is a French pizza restaurant chain which offers takeaway and delivery service. It operates its own restaurants as well as a franchise network. Domino's Pizza France is the French subsidiary of Domino's Pizza, the US multinational pizza restaurant chain. It operates through a franchise network.
Between 2003 and 2012, Speed Rabbit Pizza reported the closure of 26 outlets and therefore a drop in revenue. It attributed this to unfair competition practices by Domino's Pizza France. Speed Rabbit Pizza asserted that the latter had granted its franchisees excessive payment periods, unjustified debt waivers and loans in violation of the legal provisions on the banking monopoly, which had given its franchisees an unfair advantage over Speed Rabbit Pizza's outlets.
On 20 March 2012 Speed Rabbit Pizza filed suit against Domino's Pizza France before the Paris Commercial Court. However, on 7 July 2014 the Paris Commercial Court dismissed the case.
Speed Rabbit Pizza therefore appealed to the Paris Court of Appeal. For these unfair competition practices and other alleged anti-competitive practices, Speed Rabbit Pizza claimed €75.8 million in damages.
On 25 October 2017 the Paris Court of Appeal upheld the Paris Commercial Court's decision as regards Speed Rabbit Pizza's claim of unfair competition practices.
Speed Rabbit Pizza ultimately appealed on points of law to the Supreme Court. It argued that under French law:
- payment periods cannot exceed the maximum limits permitted by law. However, according to Speed Rabbit Pizza, the average payment period granted by Domino's Pizza France to its franchisees exceeded these maximum limits (greater than two months, sometimes seven months, between 1999 and 2014); and
- it is forbidden for any person other than a credit institution to grant credit facilities on a regular basis, subject to any derogations specifically set out by the laws on the banking monopoly (ie, payment periods lawfully allowed by a company to its co-contracting parties and intragroup loans). According to Speed Rabbit Pizza, none of these derogations applied to Domino's Pizza France because it:
- had not merely allowed payment periods, but had granted actual loans; and
- had not constituted any group of companies with its franchisees.
On 15 January 2020 the Supreme Court overturned the Paris Court of Appeal's decision as regards Speed Rabbit Pizza's claim of unfair competition practices. In particular, the Supreme Court considered that the Paris Court of Appeal had erred in concluding that:
- Speed Rabbit Pizza had failed to demonstrate that the financial support granted by Domino's Pizza France to its franchisees was abnormal. The question was not whether such financial support was normal, but rather whether it constituted prohibited credit facilities. The Paris Court of Appeal should have answered that question, as so requested by Speed Rabbit Pizza. It had likely focused on the normality question instead of addressing this specific legal question because this type of financial support is a well-established and longstanding practice among franchise networks. However, for the Supreme Court, the fact that a practice is well established and longstanding does not necessarily mean that it is legal; and
- the financial support granted by Domino's Pizza France was not linked to the presence of Speed Rabbit Pizza's outlets in the relevant area and had therefore not been implemented to evict these outlets. Further, the issues faced by Speed Rabbit Pizza's outlets could have been due to other reasons. According to the Supreme Court, any unfair competition practice necessarily causes damage, meaning that causation between the litigious practice and the damage need not be proved (the damage being presumed). The Paris Court of Appeal should therefore have examined whether the financial support granted by Domino's Pizza France, if unlawful as claimed by Speed Rabbit Pizza, had not given its franchisees an unfair advantage to the detriment of Speed Rabbit Pizza's outlets and therefore had not damaged the profitability and attractiveness of the competing network operated by Speed Rabbit Pizza.
The Paris Court of Appeal must now re-examine the case in light of the Supreme Court's decision. In particular, it must address the following issues:
- Are the payment periods granted by Domino's Pizza France to its franchisees unlawful? Under French law, subject to specific derogations for certain business sectors, payment must be made within 30 days of the receipt of goods. Parties may extend this payment period to 60 days following the issuance of the invoice or 45 days following the end of the month after the issuance of the invoice.
- Do the loans granted by Domino's Pizza France to its franchisees constitute prohibited credit facilities? They will certainly not be considered as falling within the scope of the derogation for intragroup loans. For this derogation to apply, the borrower and lender must be members of a group of companies where any of them has effective control over the others. Domino's Pizza France seems to have a low or no shareholding interest in its franchisees.
- If the payment periods are unlawful and/or if the loans constitute prohibited credit facilities, did these practices give Domino's Pizza France's franchisees an unfair advantage to the detriment of Speed Rabbit Pizza's outlets? According to well-established case law, any unfair competition practice necessarily causes damage. However, any violation by an industry player of the laws on payment periods or the banking monopoly does not necessarily constitute an unfair competition practice. This violation has yet to give such industry player an unfair advantage to the detriment of its competitor.
In 2015 a new derogation from the banking monopoly law was introduced to French law. The banking monopoly law no longer prevents commercial companies from granting loans to companies with which they have economic links which justify such loans. The existence of a franchise agreement between the companies is considered to evidence such economic links. For this derogation to apply, certain conditions must be met – in particular:
- the lender's last financial accounts must have been certified by a statutory auditor and comply with certain financial requirements;
- the borrower must be a very small, small, medium or intermediary company; and
- the loan must not exceed three years.
Domino's Pizza France cannot invoke this derogation as it was not in force when this case arose. However, subject to meeting the applicable conditions, it could be applied by franchisors which seek to grant loans to franchisees.
