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11 July 2006
In many cases franchisors receive purchase benefits from their suppliers in
the form of price discounts (eg, rebates, quantity discounts, differential discounts)
which are calculated according to the quantity of goods purchased by the franchisees.
In recent years the question has arisen as to whether and to what extent the
franchisor must pass on such benefits to the franchisee.
Initial clarification of the issue was provided in the Sixt decision of the Federal Court of Justice, handed down on February 3 1999. The court established that there is no general principle under German law that the franchisor must pass on to the franchisee all benefits deriving from the procurement of goods from the suppliers selected by the franchisor. It was considered to be a question of the franchise agreement concluded by the parties, and the interpretation thereof, as to whether a claim for the passing on of purchase benefits accrues to the franchisee under that agreement. In its Apollo judgments of May 20 2003 and the Hertz judgment of February 22 2006, the Federal Court of Justice proceeded on the assumption that contractual purchase benefits do arise. However, the judgments of the court do not indicate any willingness to recognize a statutory claim.
In a decision dated May 8 2006 the Federal Cartel Office commented on the kickback issue. The decision questions the overall admissibility of kickback systems involving a procurement obligation. In view of the strict line adopted, it is unsurprising that an appeal has been lodged against the decision.
The case concerned the franchise system of the Praktiker group, which operates a chain of do-it-yourself (DIY) stores in Germany; it has about 275 of its own stores and also acts as franchisor in relation to about 20 franchisees. The conduct objected to by the Federal Cartel Office concerned, among other things, the tie-in of an exclusive procurement obligation imposed by the franchisor with a refusal to pass on to franchisees the purchase benefits obtained from the suppliers. Under the franchise agreement, the franchisees had to procure a certain range of goods. The supply contracts were concluded between listed suppliers and Praktiker, which was also the recipient of the invoices and sole negotiator regarding the terms of purchase (including any annual rebates). Based on the supply contracts, the franchisee requested the quantities of goods it required directly from the supplier (circumventing the franchisor's storage centre). The franchisor granted certain discounts to the franchisees in various forms (eg, by granting a bonus on additional purchase volumes or through rebates).
According to the findings of the Federal Cartel Office, the purchase benefits
obtained were considerably higher than the level of the discounts granted to
the franchisees. Praktiker took the view that the franchisees were not entitled
to a contractual or statutory claim for passing on of (all) discounts agreed
with the suppliers. The Regional Court of Cologne had rendered two judgments
in this vein in two parallel proceedings and had dismissed complaints filed
by two franchisees for payment of the difference; the appeal proceedings before
the Higher Regional Court of Düsseldorf are still pending.
The Federal Cartel Office held that it amounted to an inequitable and hence unlawful obstruction of dependent enterprises pursuant to Section 20(1) of the Act Against Restraints of Competition to tie in the franchisee's obligation to obtain the entire range of goods typical for the system from listed suppliers with a refusal to pass on (in full) purchase benefits granted to the franchisee in case of a purchase. This practice was considered to obstruct significantly the independent franchisees in competition. It was conceded that such an exclusive procurement obligation was in principle admissible under cartel law within franchise systems; however, in the present case there was the additional element of the franchisor's refusal to pass on the benefits gained. This meant that access to favourable terms of purchase was blocked almost completely for the franchisees. In trade, however, access to favourable procurement possibilities and to favourable terms of purchase is an essential parameter of competition. This meant that, in competition with Praktiker's own stores and with competitors outside the system, the franchisees were at a significant disadvantage.
No objective justification for the franchisor's conduct was ascertained. The office held that the question of whether the procurement obligation was admissible at all under cartel law could remain undecided. The tie-in between the procurement obligation and the withholding of purchase benefits by the franchisor was considered to be decisive. The fact that, according to Federal Court of Justice case law in the Sixt Case, there is no statutory obligation on a franchisor to pass on purchase benefits did not provide objective justification in the present case. It was held that the Sixt decision related to an individual case and did not address the issue of handling a tie-in between a procurement obligation and the withholding of purchase benefits.
The decision of the Federal Cartel Office on the kickback issue is not convincing. For example, insufficient attention is paid to the conflict with the case law of the Federal Court of Justice, which in its recent Hertz judgment (not mentioned by the Federal Cartel Office) confirmed that a franchisee does not have a statutory claim to the passing-on of purchase benefits. The decision of the Federal Cartel Office is not consistent with this view, contrary to its protestations. Nor is it convincing why Praktiker cannot generate purchase benefits or a margin as long as the terms of purchase for franchisees are on the whole competitive and more favourable than those granted to an isolated DIY store. Apart from this, the Federal Cartel Office has not explained why the franchisee should receive the entire kickback attributable to the volume of goods it purchases. It is hoped that, during the course of the proceedings, this conflict will be taken into account and that kickback systems such as the Praktiker system will be deemed consistent with competition law.
For further information on this topic please contact Karsten Metzlaff or Karl Rauser at Nörr Stiefenhofer Lutz by telephone (+49 30 20 94 20 00) or by fax (+49 30 20 94 20 94) or by email (email@example.com or firstname.lastname@example.org).
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