FRANCE
-
Significant Imbalance: a final decision in the Pizza Sprint and Domino’s Pizza Case
-
The French Competition Authority imposes a series of sanctions for restrictions of online sales and sales to professional customers
GERMANY
POLAND
PORTUGAL
SPAIN
THE NETHERLANDS
UNITED KINGDOM
FRANCE
Significant Imbalance: a final decision in the Pizza Sprint and Domino’s Pizza Case
Court of cassation, Commercial Chamber, 28 February 2024, No. 22-10314.
Following an investigation between 2013 and 2016 in the fast-food franchise sector, the General Direction for Competition, Consumer Affairs and Fraud Control (in French “DGCCRF”) took legal action against Pizza Sprint and Domino's Pizza France (which acquired Pizza Sprint in 2016), alleging that the franchise agreements contained significantly imbalanced clauses.
The ruling rendered by the Court of Cassation on February 28, 2024, which has upheld the entirety of the Paris Court of Appeal's ruling dated January 5, 2022, was eagerly awaited, given the high stakes involved for franchisors.
The Court of Cassation had been asked to rule on several issues relating to (i) the admissibility of the Minister's action, (ii) the methods used by the lower courts to assess whether the practices constituted a submission to significant imbalance, and (iii) who was liable for the practices at stake.
Turning first to the admissibility of the Minister's action, the Court of Cassation noted that this action was not “subject to any specific rules” and thus concluded that the five-year statute of limitations set out in article 2224 of the French Civil Code was applicable and that the starting point of the statute of limitations runs from the discovery of the significantly imbalanced clause or practice, which corresponds to the first act of investigation.
This position is disputable, as it means that as long as the Minister is not investigating, the five-year statute of limitations does not begin to run.
Admittedly, however, the Minister’s action is subject to the maximum time limit set out in article 2232 of the Civil Code, which is 20 years as from the event giving rise to the claim, but this time limit is particularly long and equivalent to that applied to crimes under criminal law…
The Court of Cassation then specified that “the conclusion of a settlement agreement between business partners does not have the effect of depriving the Minister of his powers under article L.442-6, III, now article L.442-4 of the French Commercial Code.” This solution is logical, given the independent nature of the Minister's action.
The Court of Cassation further ruled on the Paris Court of Appeal's assessment of the condition of submission to a significant imbalance. The Court of Cassation followed the reasoning of the Paris Court of Appeal and ruled that the reputation and simplicity of the Pizza Sprint concept combined with the fact that the franchise agreements were not negotiated by the franchisees in practice and all contained the same clauses was sufficient to characterise the franchisees' submission by the franchisor.
In view of this decision, it is likely that Courts will almost always consider that the franchisor is able to submit its franchisees. This is hardly consistent with the case law of the Paris Court of Appeal, which had admitted as a criterion for characterising submission, the existence, or lack of existence, of alternative solutions for the co-contractor, at the date when the contract was entered into (see, for example, Paris Court of Appeal, June 7, 2023, No. 22/19733; Paris Court of Appeal, February 23, 2022, No. 20/07566; Court of Cassation, commercial chamber, April 26, 2017, no. 15-27865).
Finally, on the assessment of the existence of a significant imbalance, the Court of Cassation made an important clarification about transfer clauses. The Pizza Sprint contracts contained a non-reciprocal intuitu personae clause which (i) required the franchisee to inform the franchisor of any project “having an impact” on the distribution of the franchisee's share capital or that of its main shareholder, and on the identity of its effective managers, and (ii) authorised the franchisor to terminate the contract early if it did not authorise the evolution proposed by the franchisee. Conversely, the assignment of the contract or changes in the franchisor's share capital were unrestricted, the franchisee having no right to oppose the transfer.
This clause had been annulled by the Paris Court of Appeal as being significantly imbalanced and the Court of Cassation dismissed the appeal against the Court of Appeal's decision but did specify that the latter had not “confined itself to deducing the existence of a significant imbalance from the mere fact that the disputed clause did not provide for reciprocity.”
In other words, the clause was rightfully annulled by the Court of Appeal not because it was not mutual, but because it was drafted in vague terms, not allowing the franchisee to know precisely when the franchisor was likely to terminate the contract.
Non-mutual transfer clauses (which grant the franchisor approval rights in the event of transfer by the franchisee, but not to the franchisee in the event of transfer by the franchisor) are therefore valid as long as they enable “the assessment of the nature and degree of the effect of the project on the franchisee's person or shareholders, and the likeliness to motivate, on the part of the franchisor, early termination of the contract.”
The Court of Cassation’s position is reassuring, as it allows to maintain the usual transfer clauses in franchise agreements, provided they are drafted in a clear and reasonable manner.
Finally, regarding responsibility for the practices, the Court of Cassation upheld the Paris Court of Appeal's decision to sentence Domino's Pizza France jointly with Pizza Sprint to pay the civil fine on the grounds that it had “not ceased the practices in question” when it took control of Pizza Sprint.
This is a surprising and severe decision, as it means that Domino's Pizza France is liable not only for the period after the acquisition, but also for the period prior to it.
The French Competition Authority imposes a series of sanctions for restrictions of online sales and sales to professional customers
French Competition Authority, 23-D-12 of 11 December 2023; 23-D-13 of 19 December 2023; 24-D-02 of 6 February 2024.
In three decisions in a row rendered at the end of 2023 and the beginning of 2024, concerning a free distribution system (Mariage Frères), a selective distribution system (Rolex) and a franchise system (De Neuville), the French Competition Authority (hereafter the “ADLC”) imposed a series of sanctions on the grounds that they had prevented their distributors from selling online (in the three decisions) and had restricted sales to professionals (in the Mariage Frères and De Neuville decisions).
Regarding restrictions on online sales, the ADLC criticised Mariage Frères and De Neuville for restricting, and Rolex for outright prohibiting, their distributors from selling online. Each of these companies argued that these practices were justified by the need to preserve the brand image and, for Rolex, to fight counterfeiting.
However, in line with the Pierre Fabre decision of the Court of Justice of the European Union (CJEU, October 13, 2014, C-439/09, Pierre Fabre Dermo-cosmétiques), the ADLC reiterated in all three cases that the restrictions imposed on distributors regarding online sales must not have the indirect purpose of preventing the buyer’s effective use of the internet, and that the need to obtain written agreement from the supplier was a restriction of competition by object.
It also held that the objective of preserving the brand image did not justify absolute bans, even in the case of luxury goods. In the Rolex case, the ADLC pointed out that the Rolex's main competitors did not impose such restrictions, demonstrating that a less restrictive approach was possible.
The ADLC noted that these practices had the effect of partitioning markets and restricting intra brand competition, to the detriment of consumers and recalled that, regardless of the distribution system chosen (free, selective or franchise), the supplier/franchisor is not allowed to prevent its distributors from reselling online.
The ADLC also fined Mariage Frères for prohibiting its distributors from selling products to professional resellers, and De Neuville for limiting and canvassing sales to professional customers.
Mariage Frères reserved wholesale for itself and limited the commercial scope of its distributors to resale to consumers. Mariage Frères had not set up an exclusive distribution system, and the ban covered both active and passive sales. Generally, in so-called free distribution systems, it is possible to prohibit distributors from engaging in active sales to customers reserved exclusively for other distributors or for the supplier, but it is never permitted to prohibit passive sales, even when some customers are reserved.
In the De Neuville case, the franchisor allowed sales to professionals, but encouraged franchisees to develop their direct catchment area first, before prospecting other areas. In addition, De Neuville had introduced a code of conduct to preserve the harmony within the network, which, according to the ADLC, led to an allocation of customers.
The ADLC considered that these practices constituted per se restrictions of competition, thus not eligible for exemption.
These three ADLC decisions are a reminder of the strict stance (perhaps too strict, given the actual impact on the market) taken by European competition authorities, and in particular the ADLC, with regard to online resale and market partitioning.
However, franchisors are not totally helpless when it comes to Internet resale or to resale to professionals, since competition law recognises their right to protect the brand image as well as to preserve the homogeneity and coherence of the system.
Read and download the full content
