Franchise agreements: “King of the Month”/Low-price promotions

Franchise agreements regularly provide for advertising funds which the Franchisor creates and administers for advertising and promotional programs in the Territory in order to have a uniform advertising and promotion to the goodwill and public image of the franchise system. In Germany, a franchisor of a restaurant chain used such funds, amongst others, for campaigns called „King of the Month“ or „Tasting Weeks“, advertising specific products at low prices, e.g. „Menu X at EUR 3.99“ instead of the usually higher price. At the side of such advertisement, the message "In all participating restaurants. Recommended retail price" was displayed for a few seconds.

The court of first instance declared such promotion to be anticompetitive – for having the effect of restricting the franchisees‘ ability to set the sales price (contrary to Art. 101 Treaty on the Functioning of the European Union and Art. 4 a) Vertical Block Exemptions Regulation; cf. decision of the Regional Court of Munich, 26 October 2018, Case No. 37 O 10335/15). That decision caused a sensation amongst franchisors. Now, however, the Higher Regional Court of Munich overruled the decision, arriving at the opposite result: The promotion was exempt from the ban on anticompetitive practices as it only imposed a maximum sale price, however leaving the franchisees the option to sell the products at lower prices than the one advertised (Case No. 29 U 4165/18 Kart).

The decision can be criticized for details of its arguments, especially: such pricing supra-regional campaigns could be considered as inherent to franchise systems and therefore exempted as contractual ancillary agreements from the prohibition of restrictive agreements, as ruled in the European Court of Justice’s famous franchise judgment in the Pronuptia case (judgment of 28.1.1986, ECLI:EU:C:1986:41).

Practical advice:

• Ancillary stipulations which are essential for implementing the franchise agreement are not considered as unlawfully restricting competition (“ancillary restraints doctrine”).

• The decision – even though it can be criticized for details of its arguments (see above) – illustrates that franchisors – to avoid unnecessary disputes and ensure compliance with antitrust law – should:
  • make clear where price campaigns apply (e.g. “Participating Restaurants Only”) and
  • ensure that price recommendations are only recommendations, hence avoid any impression that they might result into fixed prices or minimum prices because of any pressure exerted or incentives offered.