AUSTRIA
- Franchise Agreements and Arbitration Clauses
FRANCE
- Franchising: termination of agreements in the context of safeguard proceedings
- Franchising: the necessity to abide by competition rules
GERMANY
- Vertical Price Fixing in the Premium Headphones Market
POLAND
- Planned amendments to laws governing quasi-consumer protection for sole proprietors
PORTUGAL
- The Franchisor’s Obligation of Means and Pre-Contractual Disclosure: Insights from the Porto and Lisbon Courts of Appeal
UNITED KINGDOM
- Navigating the Employment Rights Bill: Compliance Strategies for Franchisors, Licensors, and Distributors
EUROPEAN UNION
- The new EU Packaging Regulation: What franchise systems can expect now
FRANCE
Franchising: termination of agreements in the context of safeguard proceedings
Court of Appeal of Reims, 22 April 2025, No. 24/00893; 24/00894; 24/00895
In a decision rendered on 22 April 2025, the Court of Appeal of Reims ruled on a court-ordered termination of franchise and supply agreements in the context of safeguard proceedings initiated by a franchisee.
Article L.622-13, IV of the French Commercial Code (applicable to safeguard proceedings) allows the supervisory judge (Juge commissaire), at the request of the court-appointed administrator, to terminate an ongoing agreement with a business partner if two cumulative conditions are met:
- the termination must be necessary for safeguarding the debtor;
- the termination must not cause excessive harm to the counterparty’s interests.
In the present case, the supervisory judge had ordered the termination of the franchise agreement on that legal ground, and the Court of Appeal of Reims upheld that decision.
With respect to the first criterion (the necessity to terminate in order to safeguard the company), the Court of Appeal noted that despite the fact that the franchisee’s sales were rising, its profitability was falling sharply, largely, according to the Court, because of constraints imposed by the franchisor (high pricing and logistical constraints, as well as constraints related to the fact that the franchisor was also a shareholder of the franchisee, which made any renegotiation of the agreements impossible).
The Court concluded that terminating the agreements would enable the franchisee to resume viable operations with a new partner.
With respect to the harm caused to the franchisor’s interests (the second criterion required by Article L.622-13, IV of the Commercial Code), the Court of Appeal held that it was not excessive, since the losses that the franchisor was claiming he would suffer (loss of a point of sale, harm to the brand image, and destabilization of the franchise network) were, for some, to be put into perspective with the franchisor’s important economic power, and for others, to be dismissed as they were not proven.
The franchisor had argued that early termination of the franchise agreement would generate a compensation claim in its favor. The Court rejected this argument, considering such claim to be hypothetical. On this point, it is surprising that the issue was not analyzed in light of the first criterion of article L.622-13, IV (the necessity to terminate in order to safeguard the company). Case law has indeed, and logically, already held that termination cannot be considered necessary for the debtor’s recovery where, as a result of the application of the contractual provisions, terminating the agreement would entail a significant financial cost for the debtor (Court of Appeal of Bordeaux, 24 September 2014, No. 13/02015).
While this decision shows a firm intention to protect a company which is facing difficulties, it nevertheless raises serious concerns: franchisees should not, with the support of well-disposed court-appointed administrators and the backing of the courts themselves, find, at little cost, a way to free themselves from their contractual ties with franchisors without the decision being grounded on a proven material fault on the part of the latter.
Franchising: the necessity to abide by competition rules
Court of Appeal of Paris, 4 June 2025, No. 22/06185
In this case, a franchisor operated in France a system consisting in the sale of dietary products combined with advice provided by professionals in nutrition and dietetics.
Between 2014 and 2017, several franchise agreements were entered into with franchisees. However, a few years later, many of them denounced contractual breaches by the franchisor and left the network by terminating their agreement early or by refusing the renewal of their agreement.
They then launched a competing business under a new brand and sign.
The franchisor then initiated legal proceedings against the franchisees for (i) the wrongful termination of the agreements, (ii) the breach of their post-term non-compete undertaking and (iii) acts of parasitism.
In defense, the former franchisees put forward the incompatibility of the franchise agreements with French and European competition rules and sought not only their termination for franchisor’s default, but also their annulment.
The Commercial Court of Bordeaux ruled in favor of the franchisees, terminating the agreements for franchisor’s default and dismissing all of its claims, but refused to annul the challenged clauses.
On appeal, the Paris Court of Appeal confirmed the termination of the agreements for franchisor’s fault and ruled on the validity of a series of clauses in said agreements in light of competition law. It is this latter issue, and this alone, that will be commented on here.
The Court of Appeal first considered that the practices at stake had to be assessed both in light of national law (Article L. 420-1 et seq. of the Commercial Code) and European law (Article 101 of the Treaty on the Functioning of the European Union (TFEU)), since they were likely, “having regard to their nature, their scheme and their geographical scope,” to substantially affect trade between Member States.
The contract first prohibited the franchisee from selling online. The Court held that this clause constituted a restriction of competition by object within the meaning of Article 101 of the TFEU and Article L. 420-1 of the French Commercial Code and that it had not been shown that this restriction benefited from an individual exemption.
The franchisor had argued that the prohibition on online sales was justified by the fact that the sale of the products (food supplements) was associated with advice given by dieticians and required traceability. However, the Court, referring to the Pierre Fabre ruling of the European Court of Justice (CJEU, 13 October 2011, Pierre Fabre, C-439/09), emphasized (i) that it had not been shown that this sales technique (combining sales with advice from professionals) was imposed by regulations but stemmed only from the franchisor’s choice, (ii) that the goods were sold online in Spain (by the franchisor itself), and (iii) that the requirement for product traceability or the prohibition on selling these products on the internet did not result from any specific regulation.
The Court therefore held that the clause prohibiting online sales was not objectively justified considering the products at stake and that it had to be annulled.
With respect to the exclusive purchasing clause, which required exclusive sourcing of the contractual products from the franchisor, the Court recalled that such a clause is analyzed, under European competition law, as a non-compete obligation. It further recalled that “in franchising, clauses which organize the control necessary to preserving the identity and reputation of the network, symbolized by the brand, do not constitute restrictions of competition.”
In the present case, the Court considered that the exclusive purchasing obligation was indispensable to preserve the know-how and the identity of the franchise system, which is “based on a match between the technical methods developed by the franchisor in dietary counselling and the products associated therewith.” It therefore refused to annul the clause.
This analysis appears perfectly consistent with applicable rules since the products at stake are manufactured by the franchisor’s parent company and are specific to the brand.
With respect to the clause prohibiting the resale and purchase of the contractual products between franchisees, the Court referred to the Pronuptia decision (CJEU, 28 January 1986, C-161/84) according to which a clause providing that the franchisee may sell only “products supplied by the franchisor or by suppliers selected by him” could not result in preventing a franchisee from purchasing those products from other franchisees.
The Court deduced that the clause in the franchise agreement prohibiting resale between franchisees was void, as it was a restriction of competition by object, and the franchisor did not provide objective justification to such reselling prohibition between franchisees.
Lastly, with respect to the post-term non-competition clause included in the franchise agreements, the Court considered that it was disproportionate and that it should be annulled. Indeed, while the Court first emphasized that the post-term non-competition clause is legitimate in franchise agreements in so far as it aims at protecting the franchisor’s know-how, it must be proportionate to the aim pursued.
In this case, the clause extended to the entire French territory.
It could therefore not benefit from the exemption under Regulation (EU) 2022/720 (which grants the exemption only to clauses limited to the premises or land from which the business was previously carried out), and the Court considered that the franchisor “does not justify, nor even explain, how the specificity of the know-how requires protection over the entire national territory.”
Thus, of the four clauses in the franchise agreement examined by the Court of Appeal, three were declared void. The decision has the merit of reminding franchisors of the necessity to ensure compliance with competition rules in their franchise agreements as well as in their ongoing relations with franchisees.
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