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18 November 2014
According to Section 5a(3)(2) of the Act against Unfair Competition, an advertiser must display its identity and address on advertisements. If a company advertises not only its brand (image advertising), but also actual products and their prices, it must identify in print where the offer originates from and where the company is based.
This obligation presents considerable problems for franchise systems and groups, as well as for distributor systems. Most advertisements do not have the space to include the identities and addresses of potentially hundreds of franchisees. Whether a reference to a website of the company providing that information is adequate (Ie, the change from one medium to another) is disputed. Judgments have thus far rejected such references on different grounds. However, associations of competitors have sometimes accepted this solution in their claims and concluded settlements accordingly.
The Dusseldorf Higher Regional Court has to a certain extent added to this problem.
Cartel law provides that a retailer can, in principle, determine its own sale prices. Franchisees, groups of stores or distributors can therefore decide themselves how much to demand from customers. This must be taken into account in the franchisor's supra-regional advertising. Such advertising should not put any pressure for uniformity on the franchisee, to the effect that the franchisee is de facto compelled to charge the prices in the advertisement.
For this reason, supra-regional advertising by franchisors (or distributor systems) usually carries a footnote saying "non-binding price recommendation" or "only at participating dealers". According to the Federal Cartel Office, a franchisor's or manufacturer's enquiry as to whether a sales partner has complied with or is participating in the price recommendation carries the risk of being classified as an inadmissible pricing measure under cartel law.
In view of the August 5 2014 Dusseldorf Higher Regional Court decision, this footnote or notice could breach Section 5a(3)(2) of the Act against Unfair Competition, because the advertising does not contain the name and address of all participating dealers.
A retail franchisor issued an advertising supplement of approximately 20 pages listing more than 100 products and prices nationwide. All prices were offered as "non-binding price recommendations" and "obtainable only in participating outlets".
A consumer association commenced proceedings, complaining that the advertisement did not specify the outlets in which the offers were actually available. It is presumed that a customer who had enquired about the offer in a franchise outlet which did not provide the offer or non-binding price recommendation had complained to the consumer association, which then sued the franchisor for cessation of the advertisement.
While the Krefeld District Court correctly dismissed the claim (June 17 2011, 11 O 12/11), the Dusseldorf Higher Regional Court banned the franchisor from this form of advertising.
The Dusseldorf Higher Regional Court first rejected the need to refer the case – because of the cartel law issue – to the relevant cartel court (the senate of the higher district court hearing the case is not responsible for cartel matters). Cartel law was not decisive to the case. The higher regional court based this incorrect view on the general reference that the franchisor could avoid the cartel law problem by refraining in future from using this form of special offer or advertisement. The court held that the franchisor "could restrict itself in accordance with its role as franchisor, which does not sell the products to the consumer, to image advertising for the franchise system".
This demonstrates the court's lack of understanding of franchising distribution methods.
In addition, the court stated that it could not be assumed that the average consumer would know how a franchise company differs from a branch and, to a lesser extent, what legal significance this has for advertising. The reference that "all offers are exclusively non-binding price recommendations and only obtainable in participating outlets" did not change this.
The court also commented that consumers are accustomed to non-binding price recommendations originating from the manufacturer and not, for example, from wholesalers, or – in this case – from franchisors. When buying a vehicle, a consumer is accustomed to vehicles being offered by independent distributors at differing prices; but a non-binding price recommendation makes no sense in the case of a trading company (eg, the franchisor). A consumer would not be aware or would not perceive a non-binding price recommendation as a reservation of price changes of the trading company actually advertising the offer.
A consumer is also not required to consider a notice that "offers are available only in participating outlets". This is all the more relevant if the consumer is also unaware that a franchise system is involved, and of the legal consequences. A customer would see the advertisement as typical retailer advertising and assume the offer to be available in all of the retailer's outlets.
Advertising by a franchisor (which operates no outlets of its own) for its franchisees must state the franchisees' names and addresses. If a company, such as a franchisor, advertises the offers of other companies, the identities of the advertising companies must be stated.
The franchisor could do this in a brochure, as all franchisees providing the offer need not be included. According to the court, this "must however be those which actually provide the advertised offer".
If the franchisor is unable to legally determine the participating franchisees, "it cannot advertise with offers and must leave this form of advertising with concrete offers to its franchisees".
According to the court, if a franchisor observes cartel law and does not ask franchisees whether they are following the price recommendation, it may not issue any supra-regional advertising. This is because the franchisor, without making such an enquiry, cannot say which franchisees or dealers are participating in a campaign offer and what the associated price recommendation is. It is unrealistic for franchisees and unusual for most franchise systems to issue supra-regional advertising.
In this case the court forced the franchisor either to enquire about the participation of franchisees in the price recommendation and thereby risk a penalty under cartel law, or to dispense with such risky inquiry and forgo nationwide advertising by the system base or franchisor.
Even if a franchisor takes the risky option under cartel law and asks about participation, the problem of what form the names and addresses of participating outlets should be provided remains (ie, whether displaying this on a website is sufficient or whether the printed advertisement itself must contain the names and addresses of participating outlets).
It remains to be seen whether in the pending appeal (I ZR 194/14), the Federal Court of Justice will put an end to this and confirm a practicable, reasonable way for franchisors to advertise supra-regionally in compliance with the law.
For further information on this topic please contact Karsten Metzlaff or Tom Billing at Noerr LLP's Berlin office by telephone (+49 30 20 94 20 00), fax (+49 30 20 94 20 94) or email (firstname.lastname@example.org or email@example.com). Alternatively, contact Karl Rauser at Noerr's Munich office by telephone (+49 89 28 62 80), fax (+49 89 28 0110) or email (firstname.lastname@example.org). The Noerr LLP website can be accessed at www.noerr.com.
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