Federal Supreme Court decision complicates franchisor advertising on behalf of franchisees

Introduction
Facts
Decision
Federal Supreme Court decision
Comment

Introduction

Under Section 5a(3) of the Act against Unfair Competition, an advertiser must include its identity (ie, trade name) and full address in advertisements if the information on the advertised product and its price is sufficient for a consumer to make a transactional decision.

In light of a recent Federal Supreme Court judgment,(1) this obligation seems to conflict with established franchising advertising practice. Previously, franchisors would include the recommended retail price of a product in their advertisements. This left the franchisee free to decide whether it would participate in a promotion and whether it would assume the recommended retail price. This practice was thought to comply with cartel law, which provides that a retailer must fix its own sale prices. This had to be considered by a franchisor in regards to its supra-regional advertising, as such advertising could not put pressure for uniformity on a franchisee to the extent that it was compelled to charge the prices in the franchisor's advertisement.

Facts

A retail franchisor issued a nationwide advertising supplement of approximately 20 pages, containing more than 100 products and prices. All prices were stipulated as being "non-binding price recommendations" and obtainable only "in participating markets". The last page of the leaflet contained the addresses of markets in the respective local area.

A consumer association filed a complaint that the advertisement had not shown in which markets the offers were actually obtainable. Presumably, a customer had enquired about the offer in a franchise market that did not offer the franchisor's non-binding price recommendation and had complained to the consumer association, which then sued the franchisor for cessation of such advertising.

Decision

While the Krefeld Regional Court dismissed the claim,(2) the Dusseldorf Higher Regional Court banned the franchisor from using such an advertisement in future.(3)

The Dusseldorf Higher Regional Court held that cartel law did not have a decisive effect on the case as the franchisor could avoid breaching cartel law by refraining from using the same form of advertisement in future. The Dusseldorf Higher Regional Court stated that the franchisor "could restrict itself in accordance with its role as franchisor which does not sell the products to the consumer, to an image advertising for the franchise system", which showed the court's lack of knowledge about the franchising distribution method (for further details please see "Available only in participating outlets' notice inadmissible?"). The franchisor filed an appeal before the Federal Supreme Court.

Federal Supreme Court decision

The Federal Supreme Court rendered its judgment on February 4 2016. It found that such a promotion constitutes an act of unfair competition if it fails to show the identity (including the trade name and full address) of each participating franchisee outlet.

The disclaimer "recommended retail price, only in participating outlets" was found to be insufficient for consumers. The court held that consumers may not have seen the disclaimer as it featured only at the bottom of each page and on the last page of the advertisement, in small print. There was also no link between the indicated prices and the disclaimer at the bottom of a page (eg, by including an asterisk).

Thus, the Supreme Court held that the advertisement as a whole qualified as an advertisement with fixed retail prices, not as an advertisement with recommended retail prices. In light of this, the franchisor should have indicated – in accordance with unfair competition law – which franchisees (ie, those indicated on the last page of the leaflet) were participating in the promotion. Given that the court viewed the advertisement as an advertisement with fixed prices, it unsurprisingly saw no reason to deal with the cartel law aspects of the case.

Comment

The judgment raises a lot of questions: what happens if the disclaimer is large enough for consumers to notice it? In such cases, will there also be an obligation to refer to participating franchisees and their respective trade names and addresses? If so, does cartel law prevent the franchisor from enlisting the franchisee to participate in the promotion?

If a franchisor observes cartel law and does not ask franchisees whether they will follow its price recommendations, it cannot then issue any supra-regional advertising because it cannot specify which franchisees are participating in the campaign and offering its price recommendations without making such an enquiry. The issuing of such supra-regional advertising by franchisees instead would be unrealistic and also uncommon for most franchises.

For further information on this topic please contact Karsten Metzlaff at Noerr LLP's Berlin office by telephone (+49 30 20 94 20 00) or email (karsten.metzlaff@noerr.com). Alternatively, contact Karl Rauser at Noerr's Munich office by telephone (+49 89 28 62 80) or email (karl.rauser@noerr.com).The Noerr LLP website can be accessed at www.noerr.com.

Endnotes

(1) February 4 2016, I ZR 194/14.

(2) June 17 2011, File 11 O 12/11.

(3) August 5 2014, File I-20 U 140/11.