Class actions and franchise in the Netherlands
The Netherlands have become a popular venue for class actions in general, as well as class actions arising from franchise agreements. The appeal of class actions in franchise relationships is that franchisees, when organized collectively in their interests against the franchisor, may in principal have more far-reaching powers to take actions against (proposed) amendments in franchise agreements or to claim compensation of damages. There are examples in Dutch case law of franchisee associations bringing a class action against a franchisor. Pursuant to the Dutch Civil Code franchisees have recourse to different legal remedies against a franchisor. This article aims to describe two legal remedies that have been applied by franchisees and, more importantly, outline how a franchisor can diminish the risk of being dragged into class actions.
Legal remedies for franchisees
Pursuant to the Dutch Civil Code and Dutch procedural law franchisees have two legal remedies at their disposal when trying to contest (proposed) amendments in franchise agreements. The first legal remedy applies to (a modification by the franchisor of) the general terms and conditions in the franchise agreement. The second legal remedy consists of bringing a class action. Further explanation follows hereafter.
Modification of general terms and conditions
General terms and conditions are drafted to be included in several (franchise) agreements. A unilateral change clause regarding price increases is an example of a general term in franchise agreements. Pursuant to Dutch literature a unilateral change clause can be considered unreasonably onerous for the franchisees.
At the request of a franchisee association general terms can be declared unreasonably onerous by the Court of Appeal in The Hague. As a consequence, the franchisor may no longer rely upon a general term that has been declared unreasonably onerous. Franchisors should therefore be alarmed, as this places franchisees in an advantageous position. For example, by petitioning the Court of Appeal this legal remedy can be used by the franchisees to force a breakthrough if contract negotiations reach a deadlock, which is detrimental to the franchisor.
In the explanatory memorandum to this legal remedy the Dutch legislator refers to the vulnerable position of franchisees in their relationship with the franchisor, which only increases the risk of unreasonably onerous terms in the franchise agreement. As we outlined in newsletter 23, the Dutch Franchise Act aims to protect franchisees’ interests. This legal remedy is therefore in keeping with the spirit of the law (in particular the Dutch Franchise that came into force on 1 January 2021).
Class action
Furthermore, a franchisee association can seek a remedy by bringing a class action. This legal remedy offers opportunities that go beyond the possibility of a general term being declared unreasonably onerous. As of 1 January 2020, the Wet afwikkeling massaschade in collectieve actie (Settling of Large-scale Losses or Damage (Class Action) Act) came into force. Pursuant to this Act the District Court can issue a declaratory judgement against the defendant and the District Court can, since 1 January 2020, award damages to the claimants. This offers franchisees a strong remedy to act jointly against a franchisor.
Specifically, a class action implies that a franchisee association (acting on behalf of multiple franchisees acting jointly) can claim compensation of damages from a franchisor. As previously outlined in newsletter 24, 240 franchisees have initiated proceedings against franchisor Albert Heijn, a Dutch supermarket chain. In short, the dispute relates to financial issues. In the proceedings the franchisee association have asked the courts to i.a. determine the bonuses and purchase advantages the franchisees are entitled to. In addition, the franchisee association have also claimed financial compensation from Albert Heijn.
Although this legal remedy offers more opportunities than the legal remedy described first, this remedy is also more challenging for the claimants. Pursuant to the Dutch Civil Code strict admissibility requirements apply to this class action, including requirements regarding governance and funding of the claims organization. These requirements, however, do not apply to the first legal remedy. A franchisee association that solely seeks to challenge an unreasonably onerous general term will therefore probably opt for the legal remedy with less stringent requirements.
According to case law of the Dutch Supreme Court a franchisee association is free to choose between the two legal remedies described.
Mandate Agreement
Under Dutch law a franchisor can avoid class actions via a mandate in the franchise agreement. Indeed, it is possible to deprive the principal(s) (being the franchisees) of certain powers in the mandate agreement. This can also be done in an agreement between a franchisee association and the franchisees. For example, the franchise agreement may grant exclusive power to a small group of franchisees to negotiate amendments of the agreement with the franchisor. This is in favor of the franchisor, because the franchisor is allowed to negotiate with only a smaller group of franchisees instead of all franchisees. Furthermore, the franchisor does not run the risk that, during the negotiations, other franchisees initiate legal proceedings (or a class action) against the franchisor.
