Franchise Bulletin - Autumn 2009
How hardcore are your franchise contracts?
There are changes afoot to the laws that govern what franchisors can put into their contracts with franchisees.
The European Commission is currently consulting on revisions to its laws on vertical restraints in contracts and any comments are required to be submitted by 28 September 2009. From 1 June 2010 these changes will come into effect and franchise contracts that fail to comply with these changes will not be enforceable. This bulletin flags the key areas that affect franchising. If you have strong views about the changes that are proposed let us know and we would be happy to put those comments forward for you.
Fiona Boswell
0845 070 3812
fiona.boswell@freethcartwright.co.uk
Restrictions on franchisee online sales
Resale Price Maintenance - Can you fix it? Yes you can (for a limited time only!)
Restrictions on franchisee online sales
Franchisors are always keen to try to restrict franchisees from operating their own websites to provide internet sales. This can cause huge problems where franchisors grant exclusive territories to their franchisees which are subsequently devalued by customers being able to approach any franchisee to place orders via a website irrespective of location.
The issue of consumer access to products sold online has been taken up by the European Commission and it clarifies its position on this in the revised guidelines to the new laws. Basically it strictly prohibits including any such restrictions in your franchise contracts. This means contracts which contain such provisions risk being found to be void and unenforceable.
Creative franchisors have found practical ways to circumvent the European legislation however the authorities want to clamp down on this and the proposed changes to the Regulations that will come in June 2010 specifically outlaw some of these.
The No-Nos
In particular the following measures are expressly prohibited:
* Requiring a franchisee to prevent customers located in another (exclusive) territory from viewing its website.
• Requiring a franchisee to implement automatic re-routing systems that send orders through to the franchisor to redistribute to the franchisee within the correct territory or direct to the franchisee in that exclusive territory.
• Restricting the maximum amount of internet sales that can be made by a franchisee.
• Requiring a franchisee to pay a higher price for products bought from the franchisor that are to be sold online than those sold in the normal way.
• Requiring a franchisee to terminate a customers’ transactions over the internet once their credit card data reveal an address that is not within the franchisee’s (exclusive) territory.
• The franchisor cannot reserve to itself sales and/or advertising over the internet.
The OKs
There is however some light at the end of the tunnel. The Commission does highlight certain circumstances where quality standards on how a franchisee uses the internet to sell its products can be imposed and not be considered as hardcore restrictions. These will be considered in each case on the particular facts in question so you should seek advice before using these provisions on a generic basis in your contracts. The quality standards that are flagged as ok in particular circumstances are:
• Restricting what banner advertising and links a franchisee includes on its website.
• Restricting online sales altogether where its purpose is to align on a public ban on selling
dangerous substances over the internet or by mail order for reasons of safety or health.
• Also its ok to encourage your franchisees to concentrate on bricks and mortar or man
and van sales. However the form of that encouragement should not impose criteria for
online sales that are not comparable with the same criteria that apply to offline sales.
The Grey areas
As usual there will be grey areas where boundaries can be pushed but it is clear that the sentiment is very much for franchisees to have internet freedom and measures that are taken to restrict that in anyway will receive some scrutiny and need to be objectively
justified.
For example the guidelines state that where substantial investments by a franchisee to start up and/or develop a new market are necessary, restrictions of passive sales by other franchisees into that territory or to such a customer group would be ok for the first two years that this franchisee is selling the products or services in that exclusive territory or
to that exclusive customer group. The issue would be however how much is a substantial investment?
Given the prevalence of franchising as a thriving sector in the current climate it is likely to be one that the competition authorities are keen to take a look at. If you are concerned that your creative measure may fall foul of the new changes coming in next year please do contact us on the details below.
Resale Price Maintenance - Can you fix it? Yes you can (for a limited time only!)
It has been difficult to find ways of ensuring that your franchisees sell your products/services at prices that you are happy with. Whilst franchisors can recommend prices the law expressly prohibits measures that require franchisees to stick to a certain pricing structure (save for a limited number of circumstances).
The new guidelines propose that this restriction should be slightly relaxed for price campaigns on the grounds that this type of resale price maintenance benefits consumers and produces efficiencies. Franchisors may now impose set prices on its franchise stores for limited offers. However such promotions can last no longer than 6 weeks at a time.
This means that rather than having the right to opt in or out of your promotions franchise stores can now all be required to offer the prices that you want for such offers.
If you are thinking of launching a promotional offer through your franchisees let us review your marketing literature to check that it complies with the proposed new legal requirements.
For more information or to discuss any issues contact:
Paul Thorogood
0115 935 0361
paul.thorogood@freethcartwright.co.uk
Philippa Dempster
0115 936 9334
philippa.dempster@freethcartwright.co.uk
Whilst every effort has been made to ensure the accuracy of this bulletin, it does not provide complete coverage of the subjects referred to, and it is not a substitute for professional legal advice and should not be relied upon as such.
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