The Paris Court of Appeal recently held that a franchisor had not breached its duty of loyalty towards its franchisee in reorganising its business following its change of control. In the context of an internal business reorganisation, franchisors should therefore be careful in statements that they may make to franchisees, including in the pre-contractual disclosure documentation.
The concept of loyalty is frequently used as a general (and often fallback) principle by franchisees and franchisors in the litigation context. As a franchise agreement cannot identify every illegal behaviour of the parties, loyalty and good faith are often used as key principles to determine what is allowed. The Court of Cassation recently considered the loyalty principle in a case opposing a franchisor and a franchisee in the computing school sector.
As part of the promotion of their networks, franchisors often edit websites displaying contact details and other relevant information regarding the franchise network's outlets, whether they are owned by them or operated by franchisees. In a recent decision, the Versailles Court of Appeal held that a franchisor had treated a franchisee's stores on its website unfairly compared with its own stores.
Where a court considers that a lack of information (or inaccuracy in this regard) has deceived a franchisee, it may hold the franchise agreement null and void and, in some cases, find the franchisor liable for damages. The challenge for franchise agreements is that restitutions made to franchisees often include entry fees and royalties paid by the franchisee during the agreement, while the services provided by the franchisor may not be restituted as such.
The French courts often address the issue of whether a franchisor has properly fulfilled its assistance obligation. In a recent case, the Paris Court of Appeal held that this obligation is exclusively technical and commercial and constitutes purely a 'best efforts' obligation. This decision has confirmed that franchisors need not provide financial assistance to their franchisees. Instead, the assistance obligation consists only of helping the franchisee to operate the business from a commercial and technical standpoint.
The extent of the group in the context of a franchising network has given rise to a number of court decisions, leading to some uncertainty for employers as to the scope of their reassignment obligations. A set of bills was recently enacted as part of the priority measures intended to bring greater flexibility to labour legislation. One such measure provides a narrow definition of a 'group' in relation to the obligations to reassign employees who are dismissed either for economic reasons or for personal inability.
One of the key components of any franchise agreement is the transmission of know-how by the franchisor to the franchisee. Absent this, the agreement may be held null and void or requalified as a mere distribution agreement. In a recent decision, the Supreme Court held that the absence of any pilot outlet run by the franchisor does not amount to a lack of know-know transmission.
Under French civil law, a party to a contract has a duty of loyalty to its contracting party in the performance of the contract. The Supreme Court recently applied this duty of loyalty to a franchisor which had concluded a framework contract with a master franchisee. The court held that the franchisor did not cooperate with, assist or advise the master franchisee loyally. The court also held that it had terminated the framework contract in an unfair manner.
Franchise agreements often contain pre-emption rights allowing franchisors to take over the shares or assets of their franchisees with priority over third parties. The rationale behind these rights is to guarantee the continuity and consistency of the network that the franchisor has gradually built and avoid the leakage of know-how to competitors. Two recent court cases have shed some light on the validity of pre-emption rights and their enforcement with regard to franchisees and their shareholders.
Franchising agreements are often part of a wider relationship between a franchisee and its franchisor. Some franchising networks include a business lease granted by the franchisor or one of its affiliates. While the combination of a franchising agreement and a business lease may seem odd, there are several circumstances under which a business lease may be entered into alongside a franchising agreement.
After a heated debate, the National Assembly has finally adopted the bill relating to new freedoms and protections for undertakings and employees. Although the far-reaching amendment requiring franchise networks to establish social dialogue committees has been softened, most franchise networks will likely still be concerned that the new provision could negate the legal independence of franchisees and their authority over employees.
The government recently published an order relating to the reform of contract law. The order generally enshrines principles and solutions that have been developed by established case law, but it also introduces notable changes that may affect franchising agreements. The order will apply from October 1 2016; agreements should be drafted in consideration of its provisions to minimise the risk of judicial intervention.
The Commercial Code requires that a franchisor give a prospective franchisee a presentation on the situation and development perspectives of the relevant market from both a general and local point of view. The Supreme Court recently considered the extent to which such information on the local market should be given to the franchisee when it already operates in a similar business.
The French courts generally allow a franchisor to issue instructions with a direct impact on the working conditions of franchisees' employees, provided that this is necessary to maintain the reputation and the uniformity of the franchise network. In contrast, if the franchisor issues direct and nominative instructions to franchisees' employees or gets involved in hiring or firing, a line may be crossed and its liability may be at risk.
The Macron Bill, which is related to growth and business and was expected to have a major impact on franchise networks, has now become law. However, the intense lobbying carried out by major cooperative retailers in France has obviously been successful, since the nine-year limitation on agreements within a distribution network (whether under franchise or under the cooperative model) has been removed from the final text.
Franchise-related mergers and acquisitions are distinct from most transactions in that there is a third party at the table apart from the buyer and the seller – namely, the franchisee. Success therefore often depends on the degree to which the buyer anticipates potential issues with the target's franchisees (and sometimes the buyer's own franchisees) that may result from the acquisition.
The National Assembly recently adopted a new bill on growth and business, known as the 'Macron Bill'. An amendment to the bill has been put forward which, if included in the final act, may materially affect relationships between franchisors and franchisees. It relates to non-integrated retail shops operating under a third-party brand where the head of the distribution network requires exclusivity or quasi-exclusivity.
The precise extent of the financial information that a franchisor must provide to franchisees as part of pre-contractual disclosure is a recurring issue in the French courts. It is not only limited to the franchising relationship, but also involves third parties, including competitors. A recent decision serves as a warning that franchisors operating in France should take care to file their annual accounts properly and in a timely manner.
Difficult economic conditions have led to a surge of insolvency proceedings in recent years. In this context, franchisors should be aware of the extent of their potential liability if the financial difficulties of one or several franchisees are serious and may lead to insolvency. This update outlines the various risks incurred by franchisors – both to franchisees and to shareholders, creditors and third parties – in light of recent cases.