Towards the Polish Franchising Act?

As indicated in our previous newsletter, franchising became an increasingly popular business model in Poland. This popularity is still rising as some large nationwide distributors, which only used to operate their own stores, decided to develop the franchising networks in parallel to their existing outlets (e.g. recent decision of Jeronimo Martins Polska S.A. which operate the “Biedronka” concept[1]). Apart from the stories of successful franchisees who build their prosperous businesses under the franchisors’ logos, the opposite situations have happened as well. The worst cases include the situations where some retailers lost their life savings as a result of unsuccessful franchising projects. Also, some (ex-)franchisees drew media attention to the alleged exploitative conducts of  franchisors.

In Poland, the franchising agreement is so-called “non-codified” civil law contract which means that its provisions may be almost freely shaped by the parties in accordance with the principle of the contracting freedom. In practice, most of the franchisors would be inclined to rely on the standard template agreements. Also, given that the franchisees are considered entrepreneurs under Polish law, they cannot benefit from consumer protection laws.

The improvement of franchisees’ legal position has been fiercely debated among businesses, politicians, regulators and lawyers. Two alternative models emerged in the course of this debate, namely the self-regulation of business organisations and the regulation sensu stricto (by way of the legislative act). It seems that the latter solution is gaining advantage and the first draft bill prepared by the expert panel has been recently published (the “Draft”).

Legal definition of the “franchising”

The Draft introduces the legal definition of the franchising contract which is supposed to cover the agreements between franchisors (organisers of the network) and franchisees, concluded for a definite or indefinite period of time, whereby the franchisor allows the franchisee to use the intellectual, industrial property rights and/or know how related to the business operations, as well as to assist the franchisee in such operations. In exchange, the franchisee would be obliged to carry out business activities on its own behalf in accordance with the directions of the franchisor, as well as to pay the remuneration. The definition also covers the sub-franchising agreements.

Statutory framework of the franchising contract

The Draft puts some significant limitations on the parties’ contractual freedom in relation to the franchising agreements. These include some minimum standards of franchisee protection:

• The franchisor has anobligation to provide primary economic and legal training for the new franchisee who does not have the relevant business experience,
• It is prohibited to require the new franchisee to make the upfront payment exceeding six-month remuneration,
• It is prohibited to force the franchisee to buy the relevant products at prices which “do not correspond to the average market level”,
• The franchisee has the right to demand to lower the remuneration payable to the franchisor if the franchisee’s income dropped as a result of external events,
• There is an obligation to communicate the value and/or scope of the investments which the franchisee would be obliged to make.
  
  

The Draft also intends to prohibit the endorsement of the promissory note or cheque in order to secure the franchisor’s claims. Moreover, the Draft is aimed to limit the reasons and terms of termination in order to protect the franchisee against its stronger partner. Last but not least, the Draft contains the confidentiality provisions and stipulations related to intellectual property rights which might be created during the franchising contract.

Information prospectus

According to the Draft, the franchisor would be obliged to hand so-called “information prospectus” to the franchisor. In the prospectus (which should be drafted in Polish) the franchisor should provide the franchisee with detailed information about the concept. Apart from the general and available information – such as the franchisor’s identity, description of the business model, financial data, trademark –the franchisor would be obliged to make a significant disclosure towards the prospective franchisee. According to the Draft, the information prospectus should contain inter alia information on the executed and active franchising contracts, information on the corporate structure of the franchisor (parents, subsidiaries, affiliates), as well as information on the court proceedings where “the franchising system is being questioned or which may jeopardise the functioning of the franchising”.

Unfair competition acts

The Draft aims to introduce new categories of unfair competition acts against franchisees. The unfair competition act is a specific civil law tort defined as the unlawful or unfair conduct which threatens or violates another business’ or customer’s interest. Similar to other civil law torts, the injured party may seek judicial protection against the infringer (e.g. action for damages or claim to cease the infringement).

The new categories of unfair competition acts introduced by the Draft are (i) organising the franchising system without prior examination of its business model, (ii) organising the franchising system in a manner that does not allow the franchisee to cover its justified costs, (iii) significant discrimination between franchisees and (iv) violation of requirements related to the information prospectus.

Public enforcement

The most notable change which the drafters would like to introduce is granting the Polish Competition Authority (Prezes Urzędu Ochrony Konkurencji i Konsumentów) (“UOKiK”) the new powers dedicated to franchising agreements. UOKiK would be able to investigate “violations of collective franchisees’ interests” which would include inter alia failure to provide the franchisee with a fair, true and verified information, demanding excessive contractual damages from the franchisees and/or unfair competition acts against franchisees. The Draft does not contain specific procedural provisions but only refers to the provisions of the Competition Act governing the protection of collective consumers’ interests.

In practice, the renvoi to the Competition Act would mean that UOKiK would be able to impose fines up to 10% on the franchisors who violated the collective franchisees’ interests. It seems that the drafters’ intention is also to grant the PCA the power to impose fines up to PLN 2 million [ca. EUR 450,000] on the franchisors’ managers (the authority already has such power in relation to the managers of companies which violated the collective consumers’ interest).

Entry into force

As long as the Draft assumes that the enforcement provisions would come into force after passing the bill through Parliament, the civil law requirements (statutory limitations of the content of the franchising contract) would be applicable to the agreements executed beforehand. If such solution is accepted by the legislator, the franchisors would be required to review their existing agreements in order to avoid the administrative sanctions or the civil lawsuits.

Impact

The idea of regulating franchising at the legislative level comes back and forth in the public debate in Poland. This time things have moved forward significantly because the draft legislation has been published. The project is still in its very early stage and the Draft has not been submitted even for pre-parliamentary discussions so far. The Draft however is an important message for business which should closely review the contracts in force in order to be prepared to make the necessary alterations required by future law.