The franchising business in the Czech Republic

The franchise legal framework is absent in the Czech Republic, and therefore “franchise agreements” are not regulated by law. Parties entering into such agreements shall comply with the general rules set by the Civil Code and the general rules of contract law. No future legislative actions which would shape the Czech franchise industry, are expected. A franchise agreement usually contains certain elements of agreement types that are regulated by law, e.g. a licence, purchase, lease or agent agreement – and a franchise business relationship is always strongly regulated by intellectually property law and competition law. However, no Supreme Court judgments on franchising have been issued recently. As the Czech courts have so far not addressed the issue of franchise agreements and the legal relationships arising from them, only the Office for the Protection of Competition’s decisions will be discussed here.

Basic features of a franchise

Because of the lack of legal framework for a franchise, the Czech courts and the Office for the Protection of Competition (the “Office”) are forced to establish definitions of the scope of legal activities or agreements. Such definitions come under the category of “franchising”. From the comparison of these definitions, the basic feature of a franchise business under Czech law is further interpreted.

The most characteristic feature of the relationship is the profit motive. The franchise is granted to re-sell goods or provide services, and the scope of this legal relationship is rather specific. The franchise agreement sets out the rights and obligations, which are mainly granted and imposed on the franchisee by the franchisor. These rights and obligations specifically distinguish a franchise agreement from other types of agreements, such as a licence agreement or an agency agreement. Above all, the franchisee is granted the following rights: to use the franchisor’s trade name or brand, to use the franchisor’s know-how or other intellectual property rights or industrial rights, and to use business support provided by the franchisor, consisting mainly of centralised assistance (e.g. marketing). Conversely, however, the franchisee accepts the following obligations: to use the franchisor’s trade name or brand in a prescribed manner, to apply know-how or other intellectual property rights or industrial rights under the business model created by the franchisor and, usually, to pay the franchisor a fee periodically. The franchise agreement shall be entered into by two entrepreneurs; the European Franchise Federation emphasises that both are independent of each other.

Decision-making of the Czech Office for the Protection of Competition in franchising

EU law affects the decision-making practice of the Office, but surprisingly, such influence has been possible to track even in the decisions issued before the Czech Republic acceded to the EU. The Office usually adopts the findings of both the European Court of Justice and the European Commission, without justifying why and how these comply with the Czech legal framework for franchise (which is, however, absent). Nevertheless, some of these decisions are worth mentioning, as the Office clarified few competition law issues important for franchises, and we do believe these are essential for any franchise business operating in the Czech market.

In decision no.: ÚOHS-R66/2013/HS of 16 December 2013 (CANDY, spol. s r. o.), the Office concluded that the essential elements for managing the franchise chain involve on the one hand enabling the franchisor to share its know-how with individual franchisees and provide them with the necessary assistance. On the other hand, they involve enabling the franchisor to take the measures needed to preserve the identity and reputation of the franchise chain. Such a model and provisions in the franchise agreement, which are strictly necessary to secure the essential franchise chain operation, shall therefore fall outside the scope of anticompetitive agreements.

However, in this decision of the Office, it is also emphasised (with referral to ECJ judgement as of 28 January 1986, C-161/84 – Pronuptia, ECLI:EU:C:1986:41) that some agreements between the franchise parties might be found anticompetitive, the franchise model does not therefore enjoy full immunity from competition law.

This decision had already been confirmed, particularly in a previous decision of the Office no. S 88/04, of 28 July 2004 (Temposervis, a.s.). The Office found a practice under a franchise agreement, involving a bonus scheme for a franchisee who was following recommended prices, as a breach of the competition law. Although setting recommended prices/maximum re-selling prices is in compliance with Czech competition law, the Office found anticompetitive the bonus incentive for the franchisee, leading to the breach of intra-brand competition and thus possibly harming consumers. The Office interpreted such practice as indirect price-fixing and therefore as a hard-core restriction.

As described above, the franchising model is characterised by extremely close cooperation between two independent entrepreneurs. The intensity of such collaboration may raise competition law issues, should it go beyond what is understood as an essential and standard franchise relationship. The Office takes into consideration the specific status of franchising as vertical agreements and grants protection of know-how transfers but strictly prohibits any direct or indirect price-fixing practices.