European Franchise Newsletter n°36

CZECH REPUBLIC

• The Czech Trade Inspection Authority's double standard in consumer protection?
  
  
  

FRANCE

• Multi-franchising and in term non-competition clause: a bad combination?
• Franchising: what happens to customer files at the end of the contractual relationship?

GERMANY

• Commercial agents remain obliged to sell between termination and end of contract

POLAND

• The Polish consumer protection enforcement activity against dark patterns in online sales

PORTUGAL

• Portuguese Law on the inclusion of non-compete clauses in distribution agreements

THE NETHERLANDS

• Dutch Court Confirms € 40 Million Fine for Samsung

UNITED KINGDOM

• Court of Appeal departs from retained CJEU case law for first time

EUROPE

• EU changes to wine labelling
• The Evolution of Market Definition in the Light of the Digital Age

FRANCE

Multi-franchising and in term non-competition clause: a bad combination?

Paris Court of Appeal, 5-4, 13 September 2023, No. 21/14865

In the case at stake, a franchisee had signed four franchise agreements with two franchisors belonging to the same group (Orpea) called Domidom and Adhap Services, for the opening of personal care services agencies.

These contracts all included a non-competition clause for the term of the contract, prohibiting the franchisee from operating a competing business other than under the Domidom and Adhap Services brands, and a one-year post-contractual non-reaffiliation clause.

In 2017, the franchisee informed Domidom that it intended not to renew one of the franchise agreements that was about to expire, and to operate the same business under its own brand, which seemed possible to him since the contract only contained a non-reaffiliation clause prohibiting him from joining a competing brand but not from exercising a competing activity under his own brand.

The franchisor logically replied that this was not possible, as the owner of the franchisee was bound by the non-competition clauses contained in the other three contracts for their entire term. In the end, the franchisee changed his mind and continued to perform the contract that he initially did not wish to renew.

A few years later, the franchisee informed the franchisor that he did not wish to renew two contracts that were due to expire, and the two franchisors, anticipating a breach of the non-competition clause, notified him of the immediate termination of the last two contracts in force, notably on the grounds of breach of the aforementioned non-competition clauses.

One of the franchisors brought an action before the Paris Commercial Court seeking a declaration that the contract had been terminated for breach by the franchisee and compensation for the loss suffered as a result of the breach of the non-competition clause.

The first instance Court upheld the franchisor's claims and the franchisee appealed the decision.

On appeal, the Paris Court of Appeal overturned the decision and held that the termination was wrongful.

The Court of Appeal first examined the legality of the in-term non-competition clause, as requested by the franchisee, noting that although it was not limited in its geographical scope, it was proportionate to the protection of the franchisor's legitimate interests, "since the franchisor must ensure the maintenance of the common identity of the franchise network, its reputation and its continuity, as well as the protection of its know-how". The Court of Appeal therefore refused to annul the clause on the grounds of significant imbalance or abuse of economic dependence. In our view, this position is perfectly consistent: it would be absurd to limit the non-competition obligation during the term of the contract to a specific geographical area, given that the aim is to protect the know-how transmitted by the franchisor.

However, the Court refused to find that there had been a clear breach of the non-competition obligation by the franchisee and held that the franchisor's termination was therefore wrongful.

In so doing, the Court noted that it had not been proven that the franchisee was carrying on a competing business at the time the termination was notified, even though, according to the Court, it was undisputed that it had plans to do so. The franchisor's mistake here was that it thought it could terminate the franchise agreement without first putting the franchisee on notice to comply with the non-competition clause and without waiting for the franchisee to actually breach it. Such haste backfired.

But the significance of the ruling lies elsewhere: the Court took care to specify that "the non-competition clause, while in itself lawful, as enforced (… ) produces in this context an excessive and disproportionate interference with its freedom of enterprise" since the franchisee had, as early as 2017, expressed the wish to leave the network and operate under its own name and "found itself prevented from doing so by the non-competition clauses in the franchise agreements having no common expiry date and producing the effect of a post-contractual non-competition clause for nearly 5 years in favour of the Orpea group (...). "

We find this analysis particularly disputable. Indeed, we fail to see why the non-competition clause applicable during the term of the contract, if valid (as said by the Court itself), should be rendered ineffective on the grounds that the franchisee had entered into several franchise agreements with different terms. As long as the franchisee is a member of the network, the franchisor, which has transmitted its know-how to the franchisee, is entitled to require the franchisee not to compete with the franchisor.

The position taken by the Paris Court of Appeal would lead to an grotesque situation where a franchisor would be forced to keep one of its competitors among its members... It seems unlikely to us that the Court of Cassation, if an appeal has been lodged, will adopt the same position.

Franchising: what happens to customer files at the end of the contractual relationship?

Court of Cassation, commercial chamber, 27 September 2023, 22-19.436

In the case at stake, a franchisor who operated a network of men's ready-to-wear shops, both directly and under franchise, announced to its franchisees its decision to change its distribution model and adopt a commission-based affiliation system (based on the consignment of the products).

After notifying the franchisees of this proposal to terminate the contractual relationship at the end of an 18-month notice period, several franchisees served formal notice on the franchisor to obtain that the customer files be returned to them. After receiving files that they considered incomplete and unusable, they summoned the franchisor in summary proceedings to obtain the return of the said files and to prohibit the franchisor from using them, on the grounds of a manifestly unlawful disturbance and imminent damage.

The Commercial Court and then the Douai Court of Appeal, in a ruling dated 9 June 2022, granted this request, prohibiting the franchisor from using the files and ordering it to return them to the franchisees, subject to payment of a penalty.

The franchisor then appealed to the Court of Cassation, challenging in particular the prohibition on the franchisor's use of the customer files after the end of the franchise agreements. The franchisor argued in particular that the franchisees could in any case not use this file immediately because of the non-competition clause and that there could therefore be no imminent damage.

The Court of Cassation noted that the Court of Appeal had noticed "that no contractual clause allows [...] the franchisor to access the customer files of its franchisees after the end of the franchise agreements" and that the franchisor's counsel had indicated that it "would continue to use the data constituting these customer files, notwithstanding the end of its contractual relations with the franchisees".

For the Court of Cassation, the Douai Court of Appeal had therefore validly "characterized the existence of an imminent damage that had to be prevented, arising from the risk of the franchisor using the customer files of each of the franchised shops to exploit the data contained therein collected by the franchisee when the franchise agreements expired, and did not have to respond to the inoperative plea based on the existence of a post-contractual non-competition clause, which only had the effect of temporarily restricting the use of the data in these files by the franchisees themselves".

This ruling is implacable but consistent, since the contracts expressly provided that the customer files belonged solely to the franchisees...

It is a reminder of the decisive importance of the wording of clauses relating to customer files in franchise agreements. These clauses may, as in this case, grant full ownership to the franchisees, but the franchisor must then draw all the relevant conclusions. It is of course preferable to state clearly in the franchise agreement that both the franchisor and the franchisee have rights to the customer file and that the franchisor may, at the end of the franchise agreement, continue to use freely the customer file compiled with the help of the franchisee.

Read and download the full content