The franchisor is entitled to compensation if the franchisee transfers its business without transferring the franchise agreement

Paris Court of Appeal, 1 July 2020, No. 18/21756

In the absence of a clause expressly excluding it, the victim of a contractual breach is entitled to compensation on the ground of common contractual liability rules.

In the case at stake, the franchisor was seeking compensation for the loss of royalties caused by the early termination of a franchise agreement as a result of the transfer, by the franchisee, of its business to a third party who had not wished to continue the franchise agreement.

The early termination of the franchise agreement occurred in application of the termination clause of the agreement. This clause expressly provided for the case of the transfer of the franchisee's business without the contract being continued to the successor or without the successor being approved by the franchisor.

The franchisee argued that he had the right to transfer the business and that the franchisor had no right to compensation since the termination clause did not provide for any compensation for this event of early termination, whereas the agreement expressly provided for such compensation in other cases of termination (for serious non-performance or default).

The Paris Court of Appeal rejected the franchisee's arguments.

It first recalled that although the agreement did not expressly provide for a financial compensation in case of early termination compensation deriving from a transfer of the business without the franchise agreement before the end of the term, it did not expressly exclude it either and the silence of the agreement in this respect was not sufficient to exclude a right to compensation in such a case.

The Court then confirmed the first instance ruling which had held that in the absence of a clear provision relating to compensation in the franchise agreement in the event of a transfer of business before the end of the term, the common contractual liability rules, as set out in article 1147 of the Civil Code (which became article 1217 of the Civil Code after the contract law reform of 2016), should apply.

If it is possible for the parties, subject to certain conditions, to provide for cases of exclusion of their contractual liability in an agreement (e.g. Cass. Com., 29 June 2010, No 09-11841), the party wishing to rely on it must provide evidence of the knowledge and acceptance of this exclusion by the other party at the time of the conclusion of the agreement (e.g. TGI Paris, 1re ch., 1re sect., 19 May 1999, Juris-Data n° 043654).

Clauses which exclude a party’s liability are interpreted strictly and on a case-by-case basis by the courts. The parties must therefore provide for them clearly and precisely in order for them to be effective.

With regard to the amount of compensation, the franchisor had limited its claim to half of the royalties he would have received until the end of the agreement. Nevertheless, the Paris Court of Appeal agreed with the first instance commercial Court who had valued the franchisor's damages at 40% of the amount of such royalties. Indeed, the franchisee had argued that it was surprising that the franchisor's claim was higher than the sanction provided for under the agreement in case of termination for serious breach of its obligations by the franchisee. The Paris Court of Appeal found that this argument was relevant.

Online sales: the ban on internet sales is once again sanctioned

Paris Court of Appeal, 15 September 2020, No. 18/06869

If it is widely accepted that suppliers/licensors are free to organize the distribution system of their products, it is however subject to the condition that they do not harm competition.

Since sales on the Internet are considered as a form of passive sale, i.e. "unsolicited request(s) from individual customer(s)" (EU Commission Guidelines of Regulation (EU) No. 330/2010 of 20 April 2010 on vertical restraints, points 51 and 52), the prohibition on members of distribution networks to resell on the Internet is a hardcore restriction of competition within the meaning of Article 4 of EU Regulation No. 330/2010 of 20 April 2010 on vertical restraints.

The ruling rendered by the Paris Court of Appeal on 15 September 2020 in a dispute relating to IP rights infringement is an opportunity to recall these now well-established rules.

In the case at stake, Mr. C. and a company called “Pierre Cardin” filed a claim for IP rights infringement against a retailer and a wholesaler, who marketed products they considered to be counterfeit under the famous French trademark "Pierre Cardin".

The claim was dismissed. The Court of Appeal considered, following the Paris first instance court, that the goods had been lawfully purchased from a licensee of the Pierre Cardin trademark located in the European Union and that consequently, they had been put on the market in the European Economic Area with the consent of the trademark owner. The goods thus benefited from the exhaustion of trademark rights.

On the defense side, the wholesaler had raised the abuse of trademark rights, but was not followed by the Court of Appeal. However, it had also filed a counterclaim for infringement of competition law based, notably, on the following elements:

• Several clauses of the license agreements entered into by the licensor (which were exclusive distribution agreements) prohibited online sales, unless with the prior approval of the licensor. In particular, the following clauses were concerned: "The licensee also undertakes, unless expressly authorized in writing by the licensor, not to market the products covered by this license by means of distance selling and/or telematics (such as the Internet)" and "the licensee undertakes to sell the products only to customers who give an assurance that they will not export them outside the licensed territory and may not use electronic networks such as the Internet without the written agreement of the licensor".
• The network head had sent letters to its licensees asking them to stop supplying the wholesaler and had terminated several agreements.
  Unsurprisingly, the Paris Court of Appeal welcomed the wholesaler's argument and ruled that "by inserting, in trademark license agreements that contribute to the establishment of an exclusive distribution network, contractual clauses which have the effect of generally restricting passive sales, and by taking measures to prevent the Malu Company from continuing to market Pierre Cardin products, Company X and the Pierre Cardin Company have implemented measures contrary to competition law which have the effect of restricting the access of this company to this market, thus constituting a fault triggering their liability.”

The wholesaler received Euros 100,000 as damages for its commercial loss and Euros 50,000 as damages for moral damage on the ground of Article 101 of the Treaty on the Functioning of the European Union (which prohibits anticompetitive agreements) and Article 1240 of the Civil Code (tort liability).

This decision is in line with established case law on the subject (see, for example, CJEU, 13 October 2011, Pierre Fabre Dermo-cosmétique, C-439/09; Paris Court of Appeal, 13 March 2014, No. 2013/00714; ADLC, 1 July 2019, No. 19-D-14) and recalls the imperative need for suppliers/licensors to ensure that they do not prohibit their distributors from selling online, it being emphasized, however, that the supervision and control of online sales by the supplier remains authorized in order to preserve the reputation of the brand.

The victim of a significant imbalance may request the nullity of the unlawful clause on the ground of former article L.442-6, I, 2° of the Commercial Code

Court of Cassation, Commercial chamber, 30 September 2020, No. 18-25204 and No. 18-11644.

In two rulings dated 30 September 2020, the Court of Cassation has put an end to the controversy over the possibility, for the victim of a significant imbalance, to request the nullity of the disputed clause on the basis of former article L.442-6, I, 2° of the Commercial Code. The Court held that "the party that is the victim of a significant imbalance is entitled to have the clause that creates this imbalance declared null and void, since it is an unlawful clause that violates the public policy provisions of this text.”

Although since Ordinance No. 2019-359 of 24 April 2019, new article L.442-4 of the Commercial Code expressly provides for the possibility for the victim of a significant imbalance to request the nullity of the clause that caused such imbalance, doubts remained regarding agreements governed by former article L.442-6.

Indeed, under the former version of the article, only the Minister of the Economy and the Public Prosecutor's Office were expressly entitled by law to request the nullity of a clause creating a significant imbalance.

The Paris Court of Appeal hesitated on the possibility of extending this right to the victim of the significant imbalance. Whereas, in several of its rulings the Paris Court of appeal had admitted this possibility (Paris Court of Appeal, 29 October, 2014, No. 13/11059; Paris Court of Appeal, 22 February 2017, No. 16/17924), in others, it had refused to pronounce the nullity as this sanction was not expressly provided for in the law (Paris Court of Appeal, 18 May 2016, No. 14/12584; Paris Court of Appeal, 6 September 2016, No. 15/21026).

In a decision dated 24 May 2017, the Court of Cassation had approved a Court of Appeal for holding that article L.442-6 did not allow a clause to be annulled at the request of the victim (Court of Cassation, Commercial Chamber, 24 May 2017, No. 15-18484).

This solution appeared debatable. It is indeed difficult to understand why a clause which is contrary to a public policy rule can only give rise to the payment of damages for damage resulting thereof and could not be annulled at the request of the victim party, in contradiction with the rule provided in article 6 of the Civil Code.

With these two decisions of 30 September 2020, the Court of Cassation has thus put an end to the uncertainty relating to the applicable sanction in the event of a violation of former Article L.442-6, I, 2° of the Commercial Code and has brought it into line with the new law (Articles L.442-1, I, 2° and L.442-4 of the Commercial Code).

The limitation period for a liability action on the grounds of abrupt termination of an established business relationship runs from the date of notification of the termination and not from the date on which the damage is quantified

Court of Cassation, Commercial Chamber, 8 July 2020, No. 18-24441

In domestic (i.e. non-international) disputes, the liability action for abrupt termination of an established commercial relationship sanctioned by Article L.442-1, II of the Commercial Code (former Article L.442-6, I, 5°) is a tortious (i.e. non-contractual) action. Pursuant to article 2224 of the Civil Code, such an action is time barred after 5 years from the day on which the victim knew or should have known the facts enabling it to exercise it.

It is therefore essential for the victim of an abrupt termination of an established business relationship to be able to determine the starting point of the limitation period applicable to its action to avoid that its claim be rejected as being time-barred if it opts for not bringing an action against its business partner immediately or soon after termination.

The ruling handed down by the Commercial Chamber of the Court of Cassation on 8 July 2020 provides useful clarifications on this matter.

In the case at stake, the victim of the termination had initially chosen to file a claim for wrongful termination against the author of the termination on the ground of former Article 1147 of the Civil Code (i.e. contractual liability).

After the dismissal of this claim by the Toulouse Court of Appeal, the victim of the abrupt termination then decided to bring a second action against its former business partner before the Commercial Court of Bordeaux to obtain compensation for the damage caused by the abrupt termination of its commercial relationship pursuant to former article L.442-6, I, 5° of the Commercial Code.

In appeal, the Paris Court of Appeal dismissed the claim because it was time-barred pursuant to Article 2224 of the Civil Code. The victim challenged this decision before the Court of Cassation arguing that the starting point of the limitation period was the day on which the victim became aware of the extent of its damage.

To reject this argument, the Court of Cassation first recalled its settled case law according to which "the limitation period for an action in tort runs from the time when the damage occurs or from the date when such damage is disclosed to the victim if the victim establishes that it had not previously been aware of it" (Court of Cassation, 1st Civil Chamber, 9 July 2009, No. 08-10820). The Court of Cassation thus approved the ruling of the Court of

Appeal which had decided that the limitation period ran from the day of the notification of the termination, since the victim had necessarily been aware, on that date, of the absence of sufficient notice period and of the resulting damage.

The Court of Cassation’s decision provides a clear and predictable solution for victims of abrupt termination of an established commercial relationship, who must take into account the date of notification of the termination of their relationship to be sure of the admissibility of their action.

Although useful, the decision of 8 July 2020 does not, however, settle the question of the starting point of the limitation period in the absence of written notification of the termination. Practitioners may refer in this respect to a recent decision rendered by the Paris Court of Appeal on 21 October 2020 (No 18/08717), recalling that courts rely on all the factual circumstances to determine the date on which the victim of the termination became aware of such termination, in the absence of a notification.

A party who terminates an established commercial relationship can still grant a notice period even in the case of serious breaches by the other party

Court of Cassation, 14 October 2020, No. 18-22119

In the case at stake, a major perfume company had entered into an exclusive distribution agreement for its products in Italy with an Italian distributor.

Dissatisfied with the services rendered by the exclusive distributor, the supplier had chosen, rather than immediately terminating the relationship, to not renew the exclusive distribution agreement by giving the distributor 5 months' notice while claiming serious misconduct on the part of the distributor to justify the non-renewal.

Given the length of the relationship (15 years), the Italian distributor had sued the supplier for compensation for the abrupt termination of their established commercial relationship.

The Paris Court of Appeal had welcomed the claim, considering that by choosing not to terminate the exclusive distribution agreement with immediate effect but simply not to renew it, the supplier had admitted that the faults alleged against the distributor were not sufficiently serious to justify an immediate termination (i.e. without reasonable prior notice) given the seniority of the relationship and other factors. The 5 months' notice given to the exclusive distributor had been deemed insufficient and the Court had sanctioned the perfume company.

The Court of Cassation overruled the decision of the Paris Court of Appeal. It considered that the Court of Appeal had deprived its decision of legal basis by sanctioning the supplier on the grounds that it had granted a notice. According to the Court of Cassation "even in the presence of a breach that sufficiently serious to justify the immediate termination of the commercial relationship, it is still possible to grant the breaching party a notice period". The Court of Appeal should have examined whether the faults committed by the exclusive distributor were serious enough to justify the immediate termination of the commercial relationship (or the termination with a short notice, as the supplier had chosen).

This is a balanced decision. After all, if the supplier could purely and simply deprive the distributor of a notice period, why could he not be more lenient?

The fact remains that this decision is a radical change with previous case law (that has been followed by the Paris Court of Appeal) which held that when notice is given (even if it is short) then it means that the fault is not serious enough to deprive the co-contracting party of the reasonable notice to which it is entitled under Article L.442-1, II of the Commercial Code (former Article L.442-6, I, 5°) (Court of Cassation, Commercial Chamber, 1 March 2017, No. 15-12785; Paris Court of Appeal, 5 March 2019, No. 18/04137; Paris Court of Appeal, 3 July 2019, No. 17/22808). Indeed, “serious fault” is defined as the fault which makes it impossible to continue the contractual relationship.

In any case, the decision of the Court of Cassation seems reasonable. Indeed, making the existence of a prior notice period an irrefutable indication of the absence of serious fault does not appear to be coherent.

In reality, Courts should decide on a case by case approach : the notice period granted by the party who terminates the relationship will sometimes reflect its leniency, sometimes the fact that the fault was not so serious and that a notice period taking into account the duration of the relationship should have been given. It is up to the judge to verify this without preconceived ideas.

Adoption of the ASAP Act - Impacts on the relationship between suppliers and distributors

Law No. 2020-1525 of 7 December 2020 on the acceleration and simplification of public action

The law on the acceleration and simplification of public action (known as ASAP) published in the Official Journal on 8 December 2020 and immediately applicable, provides, among other measures, for new provisions concerning relations between suppliers and distributors. These provisions are in part motivated by the current crisis caused by the Covid-19 epidemic and the need to bring balance and transparency to relationships between suppliers and distributors.

They relate to (i) the extension of the provisions of the EGALIM Act that relate to the raising of the resale below cost threshold and the supervision of price reductions on food products, (ii) the introduction of new obligations for the so-called “annual agreements” and (iii) the addition of new prohibited unfair practices in the Commercial Code.

Extension of the EGALIM mechanism relating to the raising of the resale below cost threshold and the supervision of promotions on food products

The ASAP act extends for two years, i.e. until 15 April 2023, the provisions of Ordinance No. 2018-1128 of 12 December 2018 relating to the resale below cost threshold and the supervision of price reductions on food products. Regarding resale below cost, the act includes a coefficient of 1.10 to the notion of effective purchase price which obliges distributors to set the resale price of said products at least 10% above the actual purchase price. Regarding price reductions on these products, the latter are subject to a limitation in terms of value (34% of the selling price to consumers) and volume.
Exemptions are provided for seasonal, perishable products that are threatened of rapid deterioration.
Failure to comply with these provisions is punishable by a fine of up to Euros 375,000 or half of the advertising expenses for a legal entity.

Additional obligations in respect of “annual agreements"

In order to, inter alia, avoid fictitious commercial cooperation services or to avoid disproportion between the services actually rendered by the international central listing units and the amounts invoiced by the latter, the ASAP act adds a §4 to Article L.441-3, III of the Commercial Code. From now on, in addition to (i) the conditions of the sales transactions, (ii) the description of the commercial cooperation services and (iii) the obligations intended to foster the commercial relationship between the supplier and the distributor, the annual agreement must include "the object, date, performance terms, remuneration and products to which it relates, of any service or obligation under an agreement entered into with a legal entity located outside the French territory with which the distributor is directly or indirectly linked.”

The annual agreement will therefore have to indicate the sums paid to international entities as long as they concern products marketed by a distributor in France.

This obligation is likely to pose a difficulty since agreements concluded with foreign central listing units are not necessarily formalized as of 1st March, which is mandatory in France for “annual agreements”.

New unfair commercial practices

Finally, the ASAP act (re)introduces two unfair practices into the Commercial Code:

• the fact of imposing disproportionate penalties on a business partner in case of non-performance of contractual obligations
• the fact of refusing or returning goods or automatically deducting penalties or discounts from the amount of the invoice established by the supplier, in case of late delivery or non-conformity of the goods, when the debt is not certain, liquid and due, without the supplier having been able to control the reality of the claim.

The first practice is new but not the second is not. It had been deleted in 2019 when the Commercial Code was revised and is simply reinserted in the Code.

In case of non-compliance with the above mentioned provisions, the non-compliant clauses can be annulled and the Court can order a civil fine of up to the higher of (i) Euros 5 million or (ii) three times the unduly received benefits or (iii) 5% of the revenue VAT excluded generated in France during the last fiscal year.