We would like to ensure that you are still receiving content that you find useful – please confirm that you would like to continue to receive ILO newsletters.
13 October 2009
Franchising as a sales method is characterized, among other things, by the franchisee acting in its own name and for its own account. The franchisee is an independent, self-employed entrepreneur and is not an agent or representative of the franchisor. For this reason, the franchisee not only becomes the contractual partner of its customers and suppliers, but is also responsible for its own actions under liability law. In general, a franchisor cannot be held liable for the actions of a franchisee.
An important exception to this rule applies to competition law. According to the Federal Supreme Court, a franchisor can be called to account by third parties for acts by its franchisee in breach of competition or unfair advertising law(1).
According to Section 8(2) of the Unfair Competition Act, a claim for forbearance under unfair competition law against the so-called business owner (but no claim for compensation) can arise if the breach of the act was committed by an agent in the course of its business. According to case law, the terms 'business owner' and 'agent' must be interpreted widely. With regard to breaches of competition law, the aim and purpose of the act is to prevent the business owner from hiding behind third parties which are more or less dependent on it. The Supreme Court has justified this position by stating that the business owner benefits from an extension of the scope of its business through the agent and can control this risk area.
However, the agent must be integrated into the business owner's sales organization in such a way that (i) the success of his or her activities also benefits the business owner, and (ii) the business owner has a decisive influence over the activities of the agent. Independent companies can also be considered to be agents under these principles. The term 'independent company' can include:
In a recent case the Düsseldorf Regional Court applied these principles in holding a franchisor liable for a franchisee's use of advertising materials in breach of competition law(2).
A franchisee of a pizza delivery service had repeatedly delivered advertising flyers through letterboxes which bore signs saying 'no advertising'. The plaintiff demanded that the franchisor put an end to such practices and reasoned that, under competition law, the franchisor was responsible for advertising practices which were in breach of Section 1(1) of the act. The franchisor denied responsibility and highlighted that its franchise contract clearly informed the franchisee that such advertising was not permitted.
The court rejected this argument and passed judgment against the franchisor, ordering it to refrain from such advertising practices or from having such advertising practices undertaken on its behalf. The court based this ruling on the facts that: (i) the franchisor participated in the franchisee's success through licence fees; and (ii) the franchise was using uniform advertising through which the individual franchisee could not be separately identified (ie, the franchisee was not named and only addresses and telephone numbers were featured on the advertising). The court held that a deliberate attempt had been made to create the impression that a single enterprise was involved.
The court held that the activities of the franchise were decisively influenced by the franchisor. The franchisor structured the franchise contracts and every advertising measure undertaken by the franchisee had to be agreed with the franchisor. In addition, the franchisor had failed to demonstrate the measures that he had taken in order to supervise compliance with competition law. All of these circumstances justified attributing responsibility for the franchisee's breaches of competition law to the franchisor.
Although this decision may ultimately be in line with the established case law of the Supreme Court, the reasons behind it are misleading. It is not the uniform appearance of the franchise system in the market – and therefore an aspect of liability for the ostensible existence of a legal situation – which is decisive in attributing responsibility to the franchisor under competition law, but rather the integration of the franchisee into the franchisor's sales system and the franchisor's potential influence over the franchisee. This has nothing to do with the franchisor's liability for the ostensible existence of a legal situation, which is why a franchisor is not liable for compensation for a franchisee's acts in breach of competition law.
In addition, the entire approach taken in case law is open to criticism, since it would be practically impossible for the franchisor to supervise compliance with competition law rules effectively. Is the franchisor obliged to accompany the franchisee or its staff when they deliver advertising flyers to letterboxes? This would obviously be going too far because the franchisor and the franchisee are often geographically remote from one another. Therefore, franchisee's practices in breach of competition law should not be attributed to the franchisor if the latter has taken all measures in its power to ensure that the franchisee does not breach competition rules.
One such measure is a stipulation in the franchise contract that the franchisee complies with the rules of competition law. In addition, regional advertising measures by the franchisee could be made subject to the franchisor's consent (although such a reservation of consent could not be allowed to affect the franchisee's freedom to set its prices). Finally, franchise handbooks could stipulate penalties for the implementation of advertising practices which are particularly relevant from a liability point of view (eg, advertising flyers).
However, in view of the recent Düsseldorf Regional Court decision, it is doubtful whether such measures will be considered sufficient to change decisional practice that attributes responsibility for a franchisee's advertising practices to the franchisor.
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), fax (+49 30 20 94 20 94) or email (email@example.com or firstname.lastname@example.org).
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
ILO is a premium online legal update service for major companies and law firms worldwide. In-house corporate counsel and other users of legal services, as well as law firm partners, qualify for a free subscription.