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02 June 2020
Special deals are common among competing burger chains. Although this may be detrimental to franchisees, the Munich Higher Regional Court recently decided that such deals do not infringe antitrust rules.
On 26 October 2018 Munich Regional Court 1 ruled that a franchisor's centralised TV advertising of discount promotions was inadmissible (Case 37 O 10335/15). The court held that the franchisor (Burger King) had breached the price-fixing prohibition because its reference to the non-binding nature of the price recommendation was insufficient. On 7 November 2019 the appellate court, the Munich Higher Regional Court, ruled that the advertising of special offers is permissible (Case 29 U 4165/18 Kart). Further, it held that even if the price recommendations in question were inadmissible, they qualified as an admissible setting of maximum prices. Burger King's actions would be prohibited only if fixed or minimum prices were imposed (ie, if burgers could not be sold at a higher or lower price).
A Berlin franchisee sued Burger King in an attempt to prevent it from using its franchisees' advertising contributions for special promotions such as King of the Month (menu offered for €3.99 instead of €6) and trial weeks. The franchise agreements provided that the franchisees' contributions to the costs would be pooled into a promotional fund and used for the general benefit of the franchise restaurants for advertising, promotions and public relations.
Burger King used part of the advertising contributions to promote products from the franchisees' menus at low prices. For example, over several years, King of the Month specials and trial weeks were regularly advertised for different products, particularly burgers, where the advertised products were offered at a lower price than usual.
The dispute concerned TV ads broadcast by German TV channels ProSieben, Sat1 and RTL as part of the King of the Month and trial week advertising campaigns. At the end of the ads, the words "in all participating restaurants. While stocks last. Non-binding price recommendation" were displayed in small font for a few seconds, horizontally along the bottom or vertically along the side of the screen. The price shown in the ad was in large font and was not accompanied by the non-binding notice by way of an asterisk (the 'asterisk reference').
The Berlin franchisee disagreed with the promotions. It claimed that they caused it financial damage and subsequently:
By participating in the promotions and the resulting low prices, the franchisees' turnover and hence their turnover-related fees increased. In the court proceedings, the franchisee claimed that it could not have increased its own profit by participating in the promotions. Instead, by participating in the promotions, it had incurred a loss. Only Burger King had benefited, as the increase in franchisees' turnover had led to an increase in franchise fees.
The franchisee also claimed that despite the reference to the non-binding price recommendation, the concerned ad had had a de facto binding effect. The franchisees had been confronted by disappointed customers who, as a result of the promotions, had assumed that they would receive the King of the Month (a different special-offer burger) at the advertised low price and had defected to other restaurants in protest if the advertised price was not offered.
In its action, the franchisee demanded, among other things, that the franchisor be ordered to refrain from using its advertising fees for discount campaigns such as King of the Month and trial weeks.
Munich Regional Court 1 decided in the franchisee's favour and ordered Burger King to refrain from using the advertising fees for the King of the Month and trial week promotions. In particular, Burger King was ordered to refrain from advertising the entire product range via TV ads. However, the Munich Higher Regional Court set aside the lower court's decision.
No grounds for claim
According to the Munich Higher Regional Court, there was no basis for asserting a cease-and-desist claim in relation to the contested use of the advertising cost contributions. Neither the agreement itself nor statutory law provided for a cease-and-desist claim prohibiting the disputed use of the advertising contributions. According to the court, this applied even if it were assumed that the use of contributions was contrary to the contract and therefore a breach of contractual obligations. Neither Clause 9(2) of the franchise agreement (which concerned advertising contributions) nor Section 280(1) of the Civil Code could be invoked to assert such a claim.
No contractual grounds for claim
The Munich Higher Regional Court held that the franchise agreement contained no cease-and-desist provision. According to Clause 9(2) of the agreement, the franchisees' advertising cost contributions were to be used for the general benefit of the franchised restaurants for advertising, promotions and public relations.
The disputed use of the cost contributions was covered by the franchise agreement, which did not require Burger King to agree with the individual franchisees on the practical implementation of each advertising campaign or provide that Burger King could use only the funds of franchisees which had agreed to a specific advertising campaign for such promotions. Clause 9(2) of the agreement merely stated that the franchisor had to use the advertising cost contributions "for the general benefit of the franchise restaurant for advertising, promotion and public relations". Given the franchisees' increased turnover as a result of participating in the promotions, it could not be argued that the franchisor had failed to fulfil this obligation.
No statutory grounds for claim
The Munich Higher Regional Court also held that no cease-and-desist claim could be derived from Section 280(1) of the Civil Code. According to this rule, a party affected by a breach of contract is entitled only to damages. While the case law on Section 280(1) provides that a cease-and-desist claim may also be considered in certain cases, this applies only if the breach is ongoing or any resulting damage remains irreparable. However, since the advertising campaigns in question had already taken place and the ads were no longer being broadcast, the court held that none of these situations existed in the present case.
Were promotional funds used in contravention of antitrust law?
Irrespective of whether there were grounds for a cease-and-desist claim, the dispute also concerned the question of whether the advertising measures employed by the franchisor contravened the cartel prohibition (Sections 1 and 2 of the Act Against Restraints of Competition (ARC)). While the Munich Regional Court affirmed this, the Munich Higher Regional Court ultimately rejected it.
The main questions at issue were as follows:
Munich Regional Court 1 considered the advertising measures to be concerted practices between Burger King and its franchisees. According to the court, the franchisees' contractual consent to the centralisation of advertising and their subsequent participation without objection in Burger King's advertising promotions constituted a concerted practice under the cartel prohibition (Section 1 of the ARC).
The Munich Higher Regional Court essentially agreed with this view. The advertising campaigns qualified as a vertical arrangement (ie, between the supplier and the customer). The court recognised that the franchisor alone was responsible for deciding the promotions under the franchise agreement. However, regular consultations had taken place with the franchise advisory council, which had expressly praised the measures at issue. The measures were therefore considered to be 'concerted' within the meaning of Section 1 of the ARC in order to ensure a largely uniform advertising image.
This view cannot be accepted. The franchisor's general mandate to carry out nationwide centralised advertising cannot constitute a concerted practice that restricts competition. The same applies to its consultation with the franchisee advisory council, whose role is merely consultative. Further, the conduct of the franchisees' representatives on the advisory council cannot be attributed to each individual franchisee on a blanket basis. The franchisees' subsequent participation without objection in the promotional activities likewise does not qualify as concerted conduct. Instead, the franchisees were generally free to decide whether to participate in the promotions. Whether they chose to participate was an autonomous action.
Breach of price-fixing prohibition
If it were assumed that a measure within the meaning of the cartel prohibition (ie, an agreement or concerted practice) existed, the advertising campaigns would also have to have been aimed at restricting or have led to a restriction of competition. Munich Regional Court 1 found that the King of the Month and trial week ads had violated the price-fixing prohibition. It held that:
The wording in the TV ad "in all participating restaurants. While stocks last. Non-binding price recommendation" was insufficient clarification as it was barely perceptible to viewers. The information was displayed at the end of the ad and only for a few seconds in small print which was difficult to read and was, in most cases, positioned vertically. Where it was vertical, the fade-in time was particularly short (two to three seconds). Further, viewers had no reason to read the fine print as it was not referred to by means of an asterisk next to the price. The result was that viewers associated the prices mentioned in the ads with all of the franchisees. The claimant franchisee had therefore been de facto obliged to offer its products at the recommended prices.
The Munich Higher Regional Court accepted this view. In any case, the reference to the non-binding nature of the offer was so small and inconspicuous that it was unlikely to be noticed by the targeted audience.
The assumption of a breach of the price-fixing ban in the manner described (ie, small font, brief display time and no asterisk reference) is generally acceptable. It is true that the reference to the non-binding nature of the offer could still be noticed in two to three seconds and that this is not unusual in advertising. The size of the font is also a matter of discussion. That said, two asterisks referring to each other (the asterisk reference) is indispensable in order to refer to the non-binding nature of a offer. However, according to the Munich Higher Regional Court, these defects (ie, small font, brief display time and no asterisk reference) were not decisive factors in this case.
Exemption from cartel prohibition
Rather, the Munich Higher Regional Court argued that the de facto price fixing which was to be assumed due to the above defects may, by way of exception, be permitted by virtue of an individual exemption (Section 2 of the ARC) or a group exemption under the EU Vertical Block Exemption Regulation.
Group exemption under Vertical Block Exemption Regulation
Munich Regional Court 1 held that no exemption under the Vertical Block Exemption Regulation applied as advertising campaigns qualified as price fixing which was not eligible for exemption and therefore qualified as an inadmissible hardcore restriction under Article 4(a) of the regulation. The Munich Higher Regional Court rejected this view, holding that the advertising campaigns constituted the admissible setting of a maximum price, which should not be seen as a hardcore restriction within the meaning of Article 4(a) of the regulation.
This Higher Regional Court's finding is surprising. No exemption for maximum price setting applies if the price setting, as a result of pressure or the granting of incentives by one of the participating undertakings, has the effect of setting a fixed or minimum selling price. In this case, the franchisee pointed out that it would have incurred a loss if it had offered the products at the advertised prices Therefore, it had been unable to undercut the advertised price.
This argument did not convince the Higher Regional Court. According to the court, the franchisee had not been prevented from charging lower prices than those advertised. The franchisee's calculations were inconsistent as staff costs had been miscalculated. In addition, a more favourable cost ratio resulting from increased turnover had not been considered. Further, the acquisition of entirely new customers can have a positive effect on a company's finances. Ultimately, a franchisee itself generally bears the economic risk of a successful operation of its restaurant. It is the primary task of every franchisee to adjust its costing in view of changes in turnover – for example, by reducing labour costs. In order to reduce the size of the turnover-based franchise fee, there would also be the option of lowering the price of highly sought-after products.
Individual exemption (Section 2 of ARC)
Based on the above, the Munich Higher Regional Court saw no reason to consider the issue of an individual exemption. Munich Regional Court 1 had not classified the King of the Month and trial week advertising campaigns as exemption-eligible short-term special-offer campaigns of four to six weeks, which the commission considers to be permitted as an exception. Instead, the advertising campaigns had remained the same over several years, irrespective of whether the products had changed. This question could have been assessed using a different approach to that of the Munich Regional Court 1; if special-offer campaigns of four to six weeks are allowed for all products at the same time, special-offer campaigns for different products can certainly be launched one after another.
Disclosure of information on advertising contributions pooled in advertising fund
The franchisee had asked for information on the advertisement contributions combined in the advertising fund. Previously, many franchise lawyers assumed that franchisee advertising cost contributions were committed assets held in trust. However, the Munich Higher Regional Court surprisingly rejected this blanket view. According to the court, the specific wording of the franchise agreement in question is crucial. In any event, according to the franchise agreement in this case, the assets in question were not committed assets in trust as the use of the funds was left to the franchisor's discretion, including the expressly agreed right to "mix" the funds with other contributions. Burger King had had the right to decide how to use the advertising funds and had undertaken to advertise for the general benefit of the franchise restaurant. However, nothing more than a contractual obligation could be derived from this – in particular, no fiduciary commitment. The situation would have been different had the franchise agreement stated that the franchisor would advertise the franchise system and place orders with third parties in place and on behalf of the system partners.
This Munich Higher Regional Court's decision deserves particular attention. It concerns the common situation of a franchisor using non-binding price recommendations in its advertising and once again clarifies how important the asterisk reference is in such cases. Whether this ultimately qualifies as an admissible maximum price limit will be determined on a case-by-case basis. However, it appears that claims for disclosure of information on the use of advertising cost contributions can no longer be raised on a general basis. Rather, the specific wording of the franchise agreement will likely be decisive.
For further information on this topic please contact Karsten Metzlaff at Noerr LLP's Hamburg office by telephone (+49 40 300 3970) or email (email@example.com). Alternatively, contact Tom Billing at Noerr LLP's Berlin office by telephone (+49 30 20 94 20 00) or email (firstname.lastname@example.org). The Noerr LLP website can be accessed at www.noerr.com.
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