A contractual non-compete clause in a franchise agreement was at the centre of a case before the Dusseldorf Higher Regional Court. Its decision concerns the prerequisites for a franchisee's claim to information where it has reasonable suspicion of its franchisor having breached a contractually agreed non-compete obligation, and the right to claim damages from the franchisor.
The Dusseldorf Higher Regional Court recently ruled that a contractual duty of protection against competition on the part of the franchisor can arise only if the financial survival of the franchisee is at sustained risk due to competing activity. The court explicitly left open the question of whether the franchisor has a contractual obligation to protect against competition over and above the contractual provisions in principle.
Whether supplier rebates received by a franchisor are passed on to franchisees is a subject of practical importance in franchising. The Federal Court of Justice had previously ruled that a franchisor is not obliged by law to pass on these benefits to franchisees, except in cases where such an obligation has a contractual basis within the franchise agreement. The Dusseldorf Higher Regional Court recently confirmed this.
Contractual penalties are of great significance, especially in franchising. This is because losses arising from causes such as a breach of a non-compete provision or a confidentiality obligation relating to know-how are very difficult to quantify. The Erfurt District Court recently considered a contractual penalty clause and set strict criteria for its validity, in line with previous case law. In order for the clause to be valid, the court required penalties to be limited in cases of multiple breaches of the prohibition on competition.
The Dusseldorf District Court recently dismissed a breach of good faith claim. While the ruling did not concern a franchise system, its reasoning may be extended to similar situations within franchise systems. The judgment is therefore significant for franchise systems, especially since there are few rulings on the topic of imminent competition protection.
The Mönchengladbach Regional Court has held that a franchisee has no claim to compensation under Section 89b of the Commercial Code, analogously applied, if it is not contractually obliged after the end of the contract to transfer the customer base to the franchisor. The de facto retention of the customer base by the franchisor is not adequate to establish such an analogy.
The demarcation between the status of an employee and that of a franchisee determines which court has jurisdiction over disputes and whether labour law and social insurance law apply. In the commercial respect too, the demarcation can be significant for the franchisor, considering the social insurance law contributions which must be paid by the employer for its employees.
The Dusseldorf Higher Regional Court recently clarified in unexpectedly clear form that even a strict integration of a franchisee by contractual provisions which leave him or her only limited commercial discretion is not subject to any legal objection if these provisions are necessary, for example, for the maintenance of quality standards typical of the system.
The possibility of dismissing an employee without notice because he or she is suspected of a crime has long been acknowledged in German employment law, and these principles have often been applied to recurring contractual relationships in other areas of law. However, until recently the higher courts had not ruled on the application of the principles of dismissal on suspicion to franchising.
In light of a recent Federal Supreme Court ruling, a valid obligation to participate in the pre-authorized withdrawal method will be difficult to secure under general conditions. Measures to mitigate the unreasonable detriment to the franchisee of using the method are worth considering. The advantages of agreeing to use the pre-authorized withdrawal method should be weighed carefully against the associated risks.
A Federal Cartel Office decision in which a company was found to have exerted pressure on its dealers in seeking to impose price stabilization measures has serious implications for franchisors. Parties exchanging information within franchise systems must bear in mind the broad interpretation of the term 'exercise of pressure' in the ruling, and internal communications should avoid the phrase 'price monitoring'.
In general, a franchisor cannot be held liable for the actions of a franchisee. However, an important exception to this applies to competition law. The Federal Supreme Court recently held that a franchisor was liable for a franchisee's advertising practices in breach of competition law, despite the fact that the franchise contract clearly informed the franchisee that such practices were not permitted.
When agreeing upon the jurisdiction which is to apply to a franchise agreement, a review must be made as to whether that law recognizes a fairness test for general conditions of business. If that is the case, a remote place of arbitration should not be agreed so as to avoid problems with the recognition and execution of arbitration awards.
When termination for good cause is invoked, it is often to end business agreements which have been projected into the long term. Furthermore, such agreements are often connected with major investments on the side of both parties. The law therefore sets out relatively onerous requirements that must be fulfilled before termination for good cause can take place.
A recent decision highlights that if a franchise agreement to be concluded in Germany is to be made subject to a foreign law, the question of whether that law provides a fairness test for general conditions of business must be asked. If German law is applied, a place of arbitration which is far away and outside Europe should not be chosen.
For a long time it has been unclear whether franchisees are required to make statutory pension insurance scheme contributions. However, a recent judgment of the Berlin-Brandenburg State Social Court suggests that they may be required to do so if, despite the lack of a formal legal bond, they are financially dependent on mainly one principal.
Externally a franchise system is perceived as a single business rather than as a group of legally independent entrepreneurs. However, it does not follow that the franchisor becomes contractually bound by contracts between the franchisee and the customer. The Federal Supreme Court recently dealt with a case which clearly illustrated the problem.
Repayment systems are evident in many franchise systems. The suppliers to the system grant the franchisor discounts depending on the purchase volume from franchisees. In a recent decision, the Dusseldorf Higher Regional Court dealt with this issue with refreshing clarity and confirmed that the law does not oblige the franchisor to pass on any part of these benefits to the franchisees.
The provisions on internet sales found in franchise agreements vary considerably, ranging from a total ban to a partial restriction with qualitative requirements imposed on the franchisee's internet presentation. The Berlin Regional Court recently ruled on whether a manufacturer was entitled to prohibit the sale of goods by a distributor via an auction platform.
Franchise agreements which are based on model agreements deriving from foreign law frequently contain a considerable number of clauses which - although lawful in their country of origin - cannot be enforced under German law. If the court establishes a large number of unreasonable clauses the consequences can be dramatic: it could hold the entire franchise agreement to be against good morals and therefore invalid.