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20 May 2008
Repayment systems are evident in many franchise systems. The suppliers to the system grant the franchisor discounts depending on the purchase volume from franchisees (eg, cash-back, quantity or differential discounts). According to previous judgments of the Federal Supreme Court, the law does not oblige the franchisor to pass on these benefits to franchisees. Franchisees have a right to participate in these benefits only if the franchise agreement contains such an obligation.
However, this legal position was placed in doubt by a May 8 2006 decision of the Federal Cartel Office on the repayment systems of the Praktiker Group, which owns do-it-yourself stores (for further details please see "'Kickbacks' and Antitrust Law: The Praktiker Decision"). According to the Federal Cartel Office, a refusal to pass on to franchisees purchasing benefits linked to the franchisees' obligation to purchase all goods for the franchise system from specified suppliers constitutes an inequitable, and therefore forbidden, impediment to dependent companies under Section 20(1) of the Act against Restrictions on Competition. The Federal Cartel Office thereby introduced the legal right of franchisees to participate in purchasing benefits. In view of the wide-ranging consequences, Praktiker appealed the decision to the Dusseldorf Higher Regional Court, which has now set aside the Federal Cartel Office decision and accepted Praktiker's arguments.
In a judgment of January 16 2008(1) the Dusseldorf court found that the combination of a 100% purchase obligation and the refusal to pass on the linked purchasing benefits did not infringe the prohibition on inequitable impediments set out by Section 20 of the act. Although the court found that the exclusivity and the failure to pass on all benefits received from suppliers adversely affected the franchisees in their competitive activity, thereby objectively constituting an impediment under Section 20, the impediment was not inequitable. In regard to the question of whether an impediment is inequitable, it must be considered whether the freedom of the franchisee is unreasonably restricted and therefore the interest of the franchisor is intended, in an illegal manner, to be preferred at the expense of the franchisee.
According to the court these conditions were not fulfilled in Praktiker. Exclusive purchasing obligations are necessary in franchise systems in order to protect the identity and appearance of the franchise. Therefore, such bonds are recognized by the group exemption regulation on vertical agreements and franchisors are not statutorily obliged to pass on purchasing benefits. Provided that a franchisor does not act with the intention of driving out the franchisee, the franchisor may obtain remuneration in its wholesale function with the addition of a wholesaler’s margin. This may be achieved by not passing on 100% of the purchasing benefits to the franchisees.
The Dusseldorf court dealt with this issue with refreshing clarity. The legal principle established by the Federal Cartel Office (ie, that in the case of a 100% purchasing bond, the right to 100% of the purchasing benefits accrues to the franchisees) has no basis and does not survive theoretical examination. Thus, the Damoclean sword of breach of cartel law, which hung over practically all repayment systems since the decision of the Federal Cartel Office, has been removed for the time being.
The court's view comes as no surprise. In the civil litigation conducted alongside the cartel procedure, in which two franchisees claimed payment of purchasing benefits, the Dusseldorf Higher Regional Court, in its function as appeal court, found that the conditions for an inequitable impediment did not exist and the compensation claims therefore failed.(2)
However, the last word on this matter has not yet been heard. Perhaps the Federal Supreme Court will express its views on the issue following the result of the appeal before the Dusseldorf court against the decision of the Federal Cartel Office.(3) Now that the lower court has issued its judgment, the Federal Supreme Court can proceed. In view of the persuasive reasoning of the Dusseldorf court and the existing judgments of the Federal Supreme Court, the Federal Supreme Court is not expected to rule against repayment systems.
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 (firstname.lastname@example.org or email@example.com).
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