France - Franchise and Distribution newsletter #25

The importance of the franchisee's experience in the assessment of the existence of a vitiated consent at the pre-contractual stage

Paris Court of appeal, 20 January 2021, No. 19/03382 ; Court of Cassation, 10 February 2021, No.18-25474

Two recent decisions were rendered respectively by the Paris Court of Appeal and the Court of Cassation in disputes relating to the issue of the vitiated consent arising from an incomplete pre-contractual information document and overly optimistic forecasts.

In the first case (Paris Court of appeal, 20 January 2021, No. 19/03382), a franchisee was asking for the annulment of its franchise agreement based on his error about the profitability of the franchise system, on the grounds that the franchisor had failed to provide it with a market presentation and had sent it overly optimistic forecasts at the pre-contractual stage.

The Paris Court of appeal confirmed the incompleteness of the pre-contractual information document (regarding the presentation of the market and the network), and despite overly optimistic forecasts and even an "unfair intention to hide from the franchisee the real state of the network in the pre-contractual information document", the Paris Court of appeal dismissed the franchisee's claims, noting that:

• Regarding the alleged error on the profitability of the franchise:
  • there was insufficient evidence that the franchise in question was structurally loss-making
  • the franchisee had significant experience in the sector concerned. The Court of Appeal deduced from this that "the franchisee's knowledge of the local market was such that it enabled it to put the franchisor's exaggerations into perspective" and that "it was well aware that the forecast document provided by the franchisor had no contractual value and did not commit the franchisor to the results announced". Thus, if the franchisee was mistaken on the profitability of the operation, this error had not been caused by the information provided by the franchisor. This decision is a reminder that the error on the profitability can only be retained if it is not inexcusable (Court of Cassation, 10 June 2020, No. 18-21536).

• As to the impact of the misleading information provided by the franchisor, the franchisee did not "prove that it would not have entered into the franchise agreement if it had received all the information required by law" and that "it has not been shown that the delivery of the disputed forecast provided by the franchisor, even when taken together with the franchisor's failures to comply with its legal obligation to provide information” may have led the franchisee to make a mistake.
  
  

Alternatively, the franchisee had sought the termination of the contract for breach by the franchisor, but the Court considered that it had not demonstrated any breach by the franchisor to its obligations and dismissed the franchisee's claim in this respect as well.

In the second case, which gave rise to the Court of Cassation's decision of 10 February 2021 (Court of Cassation, 10 February 2021, No. 18-25474), the Court confirmed a Court of appeal decision which had ordered a franchisor to fully compensate the loss suffered by a franchisee's shareholder as a result of the franchisee's bankruptcy, after noting the franchisor's communication of "figures that were clearly overvalued to such an extent that it was impossible for the franchisee to successfully reproduce the business model defined by the franchisor".

According to the Court of Cassation, the franchisee did not have the means to check the seriousness of the forecasts communicated by the franchisor, who was a major player in its sector of activity.

These rulings are part of a legal trend initiated by the Court of Cassation in a series of rulings rendered in 2016 (Court of Cassation, 5 January 2016, No. 14-15701, 14-15702, 14-15705, 14-15706 and 15710), which put at the center of the analysis the in concreto examination of the franchisee's past experience and his ability to inform himself and analyse the proposed franchise.

The franchisor's obligations with regard to click & collect

In this case, a consumer had ordered a product on the franchisor's website to pick it up a few days later by "click & collect" at the franchisee's premises.
After having unsuccessfully tried to exercise his right of withdrawal on the basis of Article L.221-18 of the French Consumer Code, the buyer asked the competent Court to order the franchisee and the franchisor jointly and severally to reimburse the price of the product.

The Court welcomed this request and sentenced the franchisor and the franchisee jointly and severally, considering that, in the case where the franchisor closely monitors the conditions under which its franchisees carry out their activities, it incurs a "certain responsibility".

The franchisor then appealed the decision before the Court of Cassation, arguing in particular that "the contractual liability of the franchisor cannot be retained based on an agreement entered into between a franchisee and a third party and to which the franchisor is not a party" and that its terms and conditions of sale available on its website expressly provided that franchisees were "fully liable for sales concluded with third parties in their establishment and online, without joint liability of the franchisor".

The Court of Cassation dismissed the appeal, considering that "the court did not consider that the franchisor was a third party to the contract but noted that the order had been placed on the franchisor's website and that the franchisor had not complied with the “Hamon law” with regard to the exercise of the right of withdrawal as well as with its own rules relating to the conditions of sale appearing on its website."

This solution is questionable regarding the rule of privity of contracts: in this case, the franchisor was a third party to the sales contract entered into between the consumer and the franchisee.

In any case, the solution invites the franchisors to cautiousness when providing the franchisees with a website through which the latter can offer the products for sale. In this case, if the franchisor does not wish to be held liable, it would be in its interest to (i) considerably strengthen the prior information provided to the consumer so that it is very clear that the order is not binding on the franchisor but only on the franchisee concerned by the sale, (ii) make its franchisees aware of their obligations in terms of consumer law, and (iii) obtain a guarantee from them in the event of failure to comply with this legislation.

Validity of the ban on reselling products through third-party internet platforms in an exclusive distribution network

French Competition Authority, decision No. 20-D-20 of 3 December 2020, Dammann Frères

In this case, a supplier of premium teas had implemented, within the framework of its distribution network under trademark license, two types of practices likely to restrict competition.

The first consisted in imposing on its distributors, minimum prices for the online resale of products.

This practice consisted in the following: (i) the recommendation of resale prices by the supplier, (ii) incentives (included in particular in the supplier's terms and conditions of sale) to apply the recommended resale prices, (iii) the supplier's monitoring of the resale prices applied by the distributors, and (iv) the supplier's interventions and sanctions against distributors whose resale prices were lower than the recommended prices.

The Competition Authority deduced from these facts that the supplier had agreed with its online distributors on the resale prices of its products, the purpose of this agreement being to enable the supplier to harmonize the resale prices of its products between the various online sales sites.
Referring expressly to the established case law of the Court of Justice of the European Union (CJEU) (CJEU, 2 April 2020, Budapest Bank and others, C-228/18), the Competition Authority considered that the practice implemented by the supplier and its distributors revealed a sufficient degree of harmfulness to competition to be classified as a restriction by object.

The Competition Authority therefore imposed a fine of Euros 226,000 on the supplier and ordered it to publish a summary of the decision on its website and in an electronic and paper edition of the French daily newspaper Le Monde.

The second practice consisted in prohibiting the distributors from reselling the products via third-party platforms.
Regarding the ban on reselling products through third-party platforms, the Coty Germany decision of the CJEU dated 6 December 2017 (C-230/16) confirmed the possibility of such a ban in a selective distribution network, as long as the following conditions were met:

• the clause aimed at preserving the luxury image of the products concerned
• the clause was set in a uniform manner and applied in a non-discriminatory way
• the clause was proportionate to the objective pursued.
  
  

However, as the European Commission pointed out, the very wording of the ruling of the CJEU implied that the solution was transposable outside the luxury sector.

Shortly after the Coty Germany decision, the Paris Court of Appeal ruled that the ban was justified in a case involving a manufacturer of high-end – but not luxury – cosmetics (CA Paris, 13 July 2018, No. 17/20787).

The French Competition Authority then considered in another case that this ban legitimately allowed a supplier of motorcycle equipment, which had no contractual link with the platforms in question, to ensure, in a manner that was both appropriate and proportionate, that its products were sold under conditions that preserved its brand image and guaranteed consumer safety (French Competition Authority, No. 18-D-23 dated 24 October 2018).

In the decision dated 3 December 2020, the Competition Authority extended the solution of the Coty Germany ruling and the subsequent decisions beyond selective distribution by noting that (i) the practice in question benefits from an exemption under Regulation (EU) No. 330/2010, and that (ii) this exemption applies because the practice in question does not constitute a hardcore restriction regarding distributors' customers (within the meaning of Article 4(b) of Regulation 330/2010) insofar as the supplier did not prohibit its distributors from selling via the Internet and from advertising themselves through third-party websites.

As the market shares of the supplier and its distributors on the market for premium teas sold online were below 30% (condition for the application of Regulation 330/2010), the Competition Authority did not retain this second complaint.

This decision is to be approved, as it will benefit all suppliers and franchisors wishing to protect their brand positioning.

Authority to negotiate the commercial terms and application of the status of commercial agents: did the Court of cassation really reverse its case law?

Court of Cassation, 2 December 2020, No. 18-20231 ; Court of Cassation, 27 January 2021, No. 18-10835

In an expected decision dated 2 December 2020, the Court of Cassation reversed its case law on the commercial agent's negotiation power, thus harmonizing its position with that of the European judge.

As a reminder, the commercial agent is defined in French law by Article L.134-1 of the Commercial Code as the agent who has the authority to negotiate, and as the case may be conclude, contracts in the name and on behalf of its principal. The provisions defining the status of commercial agents and regulating their activities (Articles L.134-1 et seq. of the French Commercial Code) stem from the transposition of European Directive 86/653/EEC dated 18 December 1986 on the harmonization of the laws of Member States relating to self-employed commercial agents (the “Directive”).
It follows from this definition that the agent's authority to negotiate the sale or the purchase of goods on behalf of another person is one of the elements characterizing the commercial agent. However, the Directive does not define the term "negotiate" contained in its definition of a commercial agent. The French Court of Cassation had therefore developed its own interpretation of the notion.

Thus, in an important decision dated 15 January 2008, confirmed in the course of the same year by two other decisions, the Court of Cassation refused to classify as a commercial agent an agent who had contractually undertaken not to make any changes to the rates and commercial conditions set by its principal, thereby depriving it of any authority to negotiate contracts (Court of Cassation, 15 January 2008, No. 06-14698; Court of Cassation, 20 May 2008, No. 07-13488; Court of Cassation, 20 May 2008, No. 07-12234).

Subsequently, despite criticism from law professors and practitioners, the Court of Cassation maintained this position (see for example: Court of Cassation, 20 January 2015, No. 13-24231).

However, this rigorous interpretation was contradicted by the Court of Justice of the European Union (CJEU) in a decision dated 4 June 2020 (CJEU, 4 June 2020, case C-828/18, Trendsetteuse).

Referred to by the Commercial Court of Paris for a preliminary ruling on whether a company which does not have the authority to modify the prices of the goods it sells on behalf of another company could be considered as having the authority to "negotiate the sale or the purchase of goods” within the meaning of the Directive, the Court of Justice ruled that: "Article 1(2) of Council Directive 86/653/EEC dated 18 December 1986 relating to the coordination of the laws of the Member States relating to self-employed commercial agents must be interpreted as meaning that a person does not necessarily have to have the power to modify the prices of the goods which it sells on behalf of the principal in order to be classified as a commercial agent within the meaning of that provision."

In its decision dated 2 December 2020, the Court of Cassation aligned its position with that of the CJEU and clearly indicated that the absence of the agent's authority to modify the price of the goods or services was not an obstacle to the application of the status of commercial agent (Court of Cassation, 2 December 2020, No. 18-20231).

However, another decision rendered by the Court of Cassation less than two months later cast doubt on the scope of its case law reversal (Court of Cassation, 27 January 2021, No. 18-10835).

In this case, a company had suffered the termination of its “business introducer” agreement by its co-contractor. It had requested the reclassification of this contract as a commercial agency contract in order to obtain the payment of a termination indemnity. The company's claims were rejected by the Montpellier Court of Appeal, which had classified the contract as a brokerage contract on the ground that the intermediary had no authority to negotiate the terms of the agreements.

The Court of Cassation confirmed this decision, holding that the claimant, while enjoying full freedom to organize and prospect for customers, did not intervene in the company's commercial policy and had no power to sign or negotiate the contractual terms of the agreements. In the absence of any authority to negotiate on the part of the intermediary, the Court of Cassation held that the parties had concluded and implemented a brokerage contract, not a commercial agency contract.

At first glance, this decision seems to reconsider the case law reversal that the Court of Cassation had just made a few weeks ago. Indeed, is it consistent to distinguish between the authority to negotiate the prices (expressly and solely referred to in the Trendsetteuse decision of the CJEU dated 4 June 2020 and the decision of the Court of Cassation dated 2 December 2020) and the power to negotiate other commercial conditions?

The solution adopted by the Court of Cassation on 27 January 2021 can, however, be explained by the specific circumstances of the case: in addition to its lack of authority to negotiate, the intermediary did not have the authority to sign the contracts on behalf of the company. The broker is indeed the intermediary who simply introduces the parties to each other, without being entitled to negotiate or conclude the contracts.

In so doing, the Court of Cassation leaves some room for the brokerage contract, which would otherwise simply no longer exist.

It is now up to the practitioners to draft their contracts with the necessary precision so that the applicable legal regime be as unquestionable as possible.

Overview of recent case law on the abrupt termination of established commercial relationships

Court of Cassation, 18 November 2020, No. 19-14775; Court of Cassation, 16 December 2020, No.18-20548; Court of Cassation, 10 February 2021, No. 19-10306; Court of Cassation, 10 February 2021, No.19-15369

Article L.442-1, II of the French Commercial Code (former Article L.442-6, I, 5°) provides that an economic operator commits a fault if it terminates, even partially, an established commercial relationship without giving its co-contractor sufficient notice allowing it to reorganize. These provisions are considered as overriding mandatory rules, therefore applying notwithstanding the choice of another governing law by the parties for their agreement.
To be sufficient, the notice period must, among other criteria, mainly take into account the duration of the commercial relationship.

Recent decisions of the Court of cassation recall some of the specificities of one’s liability under these provisions.

Firstly, on the applicability of the provisions relating to the termination of established commercial relationships, it is settled case law that these provisions cannot be invoked by certain civil professionals who are prohibited from performing commercial acts. These include attorneys (Court of Cassation, 24 November 2015, No. 14-22578), notaries (Court of Cassation, 20 January 2009, No. 07-17556), intellectual property advisors (Court of Cassation, 3 April 2013, No. 12 17905) and physicians (Court of Cassation, 23 October 2007, No. 06-16774). The Court of Cassation recently reiterated this principle with regard to physicians (Court of Cassation, 16 December 2020, No. 18-20548) but opened up the possibility for chartered accountants, whose activity is in principle incompatible with a commercial activity, to demonstrate that the relationship with their clients of which they suffer the termination involved a commercial activity that was ancillary to their activity as chartered accountants and authorized by their ethical rules (Court of Cassation, 10 February 2021, No. 19-10306).

Secondly, on the duration of the commercial relationship to be taken into consideration to determine the sufficiency of the notice period prior to the termination, the Court of cassation recalled in a recent decision that the commercial relationship between two same parties may, in fact, consist of several distinct commercial relationships (relating to distinct activities) having started at different dates. The termination of these distinct commercial relationships may therefore require notice periods of different durations. The same decision also addressed the issue of the possible interruption of the commercial relationship due to the transfer of the business and its impact on the duration of the relationship to be taken into account in determining the sufficient notice period. In this respect, the Court of Cassation specified that "the mere fact that the transferee, having taken over the business or part of the business of the transferor, continues a commercial relationship that the transferor had previously maintained is not sufficient to establish that it is the same commercial relationship that has continued with the partner concerned, if there is no evidence that such was the common intention of the parties" (Court of Cassation, 10 February 2021, No.19-15369). This very important clarification invites the parties to document their intentions in the event of a transfer of the business, for example by referring to or excluding the previous relationship or even a previous contract in their written exchanges.

Thirdly, with respect the reason for termination, it is settled case law that a material fault by one party justifies termination of the established commercial relationship by the other party without notice and without incurring liability (Court of Cassation, 27 March 2019, No. 17-16548; Court of Cassation, 24 May 2011, No. 10-17844). In this respect, the Court of Cassation recently specified that the serious misconduct of the manager of a company may justify termination of the established commercial relationship with that company. In this case, a service provider had concluded a contract with another company. This contract contained essential obligations of good conduct as well as an intuitu personae clause relating to the person of the manager of the service provider, who personally carried out the contractual services. As this manager repeatedly failed to comply with the contractual obligations of good conduct, the Court of Cassation approved the Court of appeal's decision which held that the manager's serious misconduct justified the immediate termination of the commercial relationship with this company (Court of Cassation, 18 November 2020, No. 19-14775).