European Franchise & Distribution Newsletter n°32

FRANCE

• Franchise law. Nullity of the franchise agreement on the ground of misrepresentation and starting point of the limitation period.
• Unfair Competition. Non-compliance with the GDPR can be sanctioned at the request of a competitor.

POLAND 

• The new Law on Franchising on the horizon.

UNITED KINGDOM

• The future of trade marks in the metaverse.

EUROPEAN UNION

• Regulating the commercial agent's commission claims, especially for follow-up and repeat orders.
• New European Court of Justice ruling on sub-agents goodwill indemnity.

NETHERLANDS

• The relationship between know-how and non-competition clauses.

FRANCE

Franchise law. Nullity of the franchise agreement on the ground of misrepresentation and starting point of the limitation period

Court of cassation, Commercial chamber, November 16, 2022, n° 21-22845

Pursuant to Article 2224 of the French Civil Code, the common limitation period of an action for annulment of an agreement is five years. The period runs "from the day when the holder of a right knew or should have known the facts enabling him/her to exercise it".

However, it is not always easy to determine with certainty the date on which the facts were known or should have been known. This is particularly true in the case of a franchisee who claims that his consent has been vitiated by mistake or misrepresentation and seeks the annulment of the franchise agreement.

In the case that gave rise to the Court of Cassation's ruling dated November 16, 2022, a franchise agreement had been entered into on November 30, 2010. The agreement had taken effect immediately, but the point of sale (a real estate agency) had not open until May 2012.

In November 2015, the franchisee decided to sell his assets to a third party.

Informed of the transfer, the franchisor objected to the payment of the sale price and sued the franchisee to obtain the judicial termination of the agreement and payment of various sums. The franchisee then filed a counterclaim for annulment of the franchise agreement on the ground of willful misrepresentation (about the state of the local market).

The Paris Court of Appeal ruled that the franchisee's action for annulment in May 2016 was time-barred on the grounds that "although the agency had only opened in May 2012, the contract did not provide for any postponement in its entry into force and payment of the royalties was due immediately. (...) in case of a structure as light as the real estate agency (...), the franchisee should have realized, day after day, the poor results and financial losses that were accumulating, without waiting for the closing of its first annual accounts period that occurred in January 2014."

The Court's reasoning that the franchisee should have been aware of the poor results as the days went by was certainly correct, but the starting point retained by the Court of appeal - the effective date of the agreement, i.e. November 30, 2010 - was not.

This decision was unsurprisingly overruled by the Court of Cassation, which considered that since the franchisee had started operating the real estate agency only in May 2012, it was not possible for the franchisee to realize the actual state of the market and of the poor quality of the information he had received before that date. The limitation period could therefore only start running from that date, so that in May 2016, it was not time-barred.

This decision was foreseeable. In the case of willful misrepresentation, the date of conclusion or entry into force of the contract is generally not considered to be the date on which the limitation period starts, because the discovery of what was concealed can only take place after the franchisee has started operating.

With respect to erroneous forecasts, the Paris Court of Appeal even considered in a 2018 ruling that the discovery of the misrepresentation could only have occurred at the closing of the franchisee's second financial year (Paris Court of appeal, October 24, 2018, No. 16/10932), which in our view, is highly disputable.

Unfair Competition. Non-compliance with the GDPR can be sanctioned at the request of a competitor

Paris Civil Court, April 15, 2022, No. 19/12628

Case law traditionally recognizes that a company that fails to comply with a mandatory legislation may be sued by its competitors on the ground of unfair competition.

In the case that gave rise to the decision of the Paris Civil Court of April 15, 2022, a company accused its competitor of not complying, on its website, with the rules imposed by the French Data Protection Act of January 6, 1978, and by the General Data Protection Regulation of April 27, 2016.

Rather than effectively ensuring the confidentiality and security of the personal data collected, as required by French and European regulations on the protection of personal data, the company only provided limited information in the "legal notice" section of its website and had no privacy policy made available to its customers and potential customers. The dedicated link also referred to an error page.

The Court found that the company's failure to comply with these mandatory rules constituted an act of unfair competition that necessarily resulted in an undue competitive advantage in its favor.

The Court therefore ordered the company to pay, as a provisional award, Euros 15,000 to the plaintiff as compensation for its loss.

The solution is consistent with applicable case law (Court of cassation, Commercial chamber, March 17, 2021, n°10-10414) and logical. Complying with any applicable mandatory regulation generally entails costs for companies. Companies which do not comply with mandatory regulations, through the savings they make, take an unfair advantage over their competitors.

It should be noted that whereas the Court granted damages to the plaintiff, it rejected the request to order the company to comply with the law or close its website, considering that it had no such police power.

POLAND

The new Law on Franchising on the horizon

Under Polish law, there have been no franchise-specific regulations. For the time being, franchise agreements have been considered innominate contracts which can be entered into based on general freedom of contracting. This is about to change as the Ministry of Justice is currently working on a draft franchise law which will regulate the franchise industry.

The Ministry of Justice has actually been working on the new franchising rules for some time now. In the second half of 2022, it presented draft legislation guidelines for the new law (“Guidelines”), but the actual draft law has not been published yet. In any case, the new law, if adopted, will result in tighter regulation of the franchise industry. The Guidelines give an idea of what to expect from the new law.

What to expect

First of all, not surprisingly, the new law will define the concept of the franchise agreement. The definition has already been subject to criticism, e.g., due to the fact that it appeared to cover only agreements where the business concept or technique provided by the franchisor to the franchisee is secret, while commercial or service franchises are sometimes based on simple and open business concepts.

The new law will also impose an obligation to provide franchisees with certain precontractual information at least 14 days before the signing of the franchise agreement. The information to be provided covers, e.g., information on how the franchisor’s remuneration is calculated, what is the estimated level of costs to be made by the franchisee and his/her estimated income, how the franchisor would supervise the franchisees, if and how the franchisee is obliged to conclude contracts with third parties, details of transfer of rights, contractual penalties, non-competition clauses as well as duration of the contract and conditions for extension. The franchisor will also be required to provide his template franchise contract.

The new law will also define the scope of the non-competition clause. The franchisees will likely be required to refrain only from creating a competitive franchise system for a period not longer than one year following termination of the franchise agreement.

The lawmakers have also turned their attention to the issue of notice periods, transfer of rights, confidentiality, contractual penalties and promissory notes, which are a widespread instrument used to safeguard the franchisor’s claims. The Guidelines also state that the franchisee will be able to seek a lower franchise fee if the franchisee’s ordinary income is significantly reduced as a result of circumstances for which the franchisee is not responsible.

Included in the Guidelines is also an entire section on the choice of an arbitration court for handling disputes related to the franchise agreements. The latest official word though is that this section may be dropped.

Timeline

It is likely that work on the new law will gain momentum in the coming months. The draft law deadline imposed by the Minister of Justice’s internal regulation passes in June 2023. However, some officials have suggested that the new draft will see the light of day much earlier. It is even possible that the draft law will have been ratified well before the June deadline. In any case, this initiative should be carefully monitored by all businesses who operate or plan to operate in the franchise industry in Poland.

UNITED KINGDOM

The future of trade marks in the metaverse

While there are questions on what the metaverse will look like and if and how we will become immersed in it, what is for sure is that the internet, and virtual worlds, will continue to develop in 2023 and beyond. This will give rise to new questions about trade mark law or old questions in a new context. This article covers some of those questions from a UK/EU perspective.

There will be more trade mark filings for virtual goods and services

Trade marks are registered for specific goods/services. While many businesses will have trade mark registrations, most will only cover 'real world' goods/services. Some are already extending their trade mark portfolios by registering key brands for virtual goods and services. There are good reasons for doing so, in particular:

• To bolster enforcement. It's not yet clear the extent to which the courts/tribunals will consider real world goods (such as clothing) identical or similar to their virtual world equivalents (such as virtual clothing, effectively comprising software code sold via NFTs) – a necessary requirement for showing infringement unless your brand is famous. While it's arguable that they should be deemed, at least, similar, it is advisable to cover virtual world goods/services anyway. This will potentially allow the brand owner to bring a "double identity" infringement claim – the most straight-forward type of claim (that does not require a likelihood of confusion).

• To aid licensing. Many opportunities will be exploited by way of licensing or tie ups with third parties. This may be easier if registrations for virtual goods/services are already in place.

• To signal to the market. Those who have already applied to register key brands for virtual goods and services have received much publicity.

Budgetary constraints will usually prevent registration of every brand in every jurisdiction. Factors such as whether the brand is key, whether it lends itself to exploitation virtually, how likely that exploitation is and whether others might do so will all be relevant. As regards where to register, factors such as where users and infringers are likely to be based will be relevant. Consideration of where those who operate the metaverse (and relevant servers) might be based is also relevant since brand owners may need to take action against them to stop infringements. In general, brands which are in or plan to enter the metaverse are more likely to apply for a metaverse specification than those which are waiting to see what will happen.

There will be disputes about what types of mark are registrable

Some signs can only be registered with proof that relevant consumers have been educated to view the sign as a "trade mark" ie as distinctive of a particular organisation (so-called acquired distinctiveness through use). The sorts of signs that fall into this category are generally descriptive signs and non-traditional signs (such as colours, shapes and sounds).

Many marks have been successfully registered with evidence of acquired distinctiveness. However, it is unclear whether such evidence – if it relates to real world goods/services – would be taken into account for showing that the same mark has acquired distinctiveness for virtual world goods/services. While it would seem likely to be sufficient in most cases, there might be disputes on the point. Since distinctiveness is assessed through the eyes of the average consumer of the goods/services concerned, there will also need to be consideration of whether this person is the same in the virtual world as in the real world. If users of virtual worlds (at least initially) represent a particular age group or demographic, the average consumer may arguably not be the same across both situations.

Another question is how 3D shape marks registered for virtual goods/services will be dealt with. It is not yet clear whether such marks are properly registrable and/or whether they can satisfy the "use it or lose it" rule for registered trade marks (see more on that below). For example, is a 2D depiction on a screen of a 3D shape mark use of that 3D shape mark? Or is only a 3D VR headset/hologram use identical use of a 3D mark?

The precise goods/services to be covered will become clearer

As previously explored here, the EU IP Office has already issued guidance to brand owners on how to describe metaverse and NFT-related goods/services and the relevant NICE classes to use. The EUIPO is also currently considering comments on its draft Guidelines for 2023, which covers this and related issues. These make clear that class 9 and potentially also classes 35, 41 and 42 (and, for virtual services, the relevant established class) are appropriate. They also make clear that it is not permissible simply to cover "virtual goods" or "non-fungible tokens" since these terms lack clarity and precision. They must be further specified eg "downloadable virtual goods, namely, virtual clothing" or "downloadable digital files authenticated by non-fungible tokens". We expect the UK IP Office to follow suit with similar guidance.

A further issue is what should happen to those goods/services that don’t translate into a virtual product, as such. An example is medicines. A medicine can be used in a virtual environment in many ways eg to advertise to, or interact with, users of a real world medicine. That use all relates back to a real world product (and the standard class 3 specification should provide protection). What if a brand owner wants to use a medicine as an actual virtual world product eg to give an avatar a health boost? Is that permissible? Would such an application be accepted and – if so – how would the owner satisfy the "use it or lose it" rule (see more on that below)? Is giving an avatar a health boost use for a medicine (likely not) or use for software maintenance/repair or a video game or something else?

What is clear is that new types of mark and new uses (some of which we will not have thought of yet) are likely to emerge in virtual environments and trade mark law and practice will need to adapt.

There will be a rise in infringement actions

Brand owners have already brought actions to try to prevent the use of their marks on virtual goods/services such as digital content authenticated by NFTs, including in the US (eg in the Yuga Labs and the MetaBirkin cases - see articles here and here) and Italy (eg the recent granting of an injunction to Juventus). We await a case in the UK.

While decisions overseas will be relevant to the UK, they won't always translate directly here. For example, the UK does not have the same protection in trade mark law for artistic works under the US First Amendment (right of free speech). In the MetaBirkin case, the defendant tried to rely on a First Amendment defence for use of the mark in relation to artistic works as the basis of his motion to dismiss; however, that was not successful because, for example, there was evidence of actual confusion and so the motion to dismiss was denied.  

There will be many infringement issues to work out, including whether the mere reproduction of a trade mark in the metaverse will constitute an infringement. Trade mark infringement occurs where there is use of the mark in the course of trade in relation to goods/services. A mere reproduction of a mark in the metaverse by an avatar won't necessarily satisfy those criteria (just as wearing a T-shirt with a third-party logo on it wouldn’t constitute infringement in the real world). Conversely, it would most likely constitute infringement to offer an avatar design or accessory service whereby users can obtain a third-party trade mark for or on their avatar. The same is true where a third party trade mark is used for a virtual store front that sells goods/services.

Another pertinent issue is whether the exhaustion of rights regime will apply to goods in the virtual world. This provides that, once a branded product has been put on the market in the EEA by the trade mark owner or with its consent, the owner cannot rely on its trade mark rights to prevent that particular product from freely circulating within the EEA – the trade mark owner's rights are said to be exhausted. Will the same regime apply to virtual products put on the market in the metaverse? If so, how will it be determined whether a product has been put on the market in the EEA in the non-geographical world of the metaverse?  

It will become harder to trace infringers

Tracing the person behind an infringement in a virtual environment may not be easy. Some platforms require no ID verification for e-commerce or avatars, resulting in the operation of anonymous accounts. This is something trade mark owners have already had to tackle with the development of the internet. Current tools relied upon include:

• conducting a private investigation and/or making a test purchase to try to identify the infringer.

• making a Norwich Pharmacal/third party disclosure court application against the relevant platform or other third parties for disclosure of the alleged infringer's identity

• putting the relevant platform on notice of the infringement (since platforms could potentially be liable for infringements if they have actual knowledge of them or do not act expeditiously to remove or disable access to them on obtaining such knowledge)
• obtaining judgment in default.

While metaverses and NFT platforms are currently operated centrally by established companies, the above options may give trade mark owners what they need to tackle many infringements (assuming the same liability rules apply to platforms/ISPs in a metaverse context). However, as the number of metaverses and platforms expands and they become increasingly decentralised, anonymous and/or operated out of less established jurisdictions, the scope for persistent infringers to escape liability or simply move to another virtual environment will increase, making life more difficult for trade mark owners. And if the metaverse, infringer and/or infringement is AI-generated (with no human author), the issues will only become more difficult or complex.

Some platforms are already taking first steps to combat this. It is likely that, over time, we will see more of these policies as platforms are incentivised to assist brand owners. However, it will take co-ordination between governments and stake holders on an international basis to fully tackle the issue.

Virtual service could become a thing

If the person behind the infringement cannot be identified, trade mark owners will have to consider alternative ways to serve their claims forms and court orders on infringers. There are already ways under English law to serve proceedings on persons unknown via 'alternative' means, based on cases relating to real but unidentified drivers, squatters or protestors in buildings or on land, blackmailers, and anonymous defendants committing torts on the internet. Alternative service could perhaps include getting the metaverse operator to serve the court document on the infringer or – potentially – arranging service of the document in the virtual environment itself. That could include getting one avatar to 'serve' the document on another avatar or leaving it inside the virtual store operated by the infringer!

Jurisdictional issues will start to be worked out

Trade marks are territorial rights. To take action in a particular jurisdiction, there must be infringement in that jurisdiction. Again, this is an issue that trade mark owners have already faced with the internet. In that context, the UK/EU courts have held that the mere accessibility in the jurisdiction (eg of a particular website) is not sufficient for there to be infringement – there must be "use" of the infringing sign in the jurisdiction. This is largely assessed by whether the website in question "targets" the UK/EU, bearing in mind factors such as the language and currency used, whether delivery to the UK/EU is offered and whether there is active solicitation of customers in the UK/EU.

However, most of these factors won't have much relevance in the metaverse. A new test for jurisdiction will therefore be needed, possibly based on factors such as whether the metaverse and/or infringer's use is marketed to users in the jurisdiction in question, or whether the metaverse is used by a significant number of people in that jurisdiction.

There are already steps towards considering these issues at government level. For example, the UK Law Commission recently launched a government-commissioned review to ensure the rules of applicable law and jurisdiction can accommodate an increasingly digitalised world. This follows a consultation on the possible introduction of a third new category of personal property for data objects (including most crypto-tokens).

We'll have to wait for revocation for non-use decisions

We have already touched on the "use it or lose it" rule for registered trade marks. This provides that a trade mark registration can be revoked if it is not put to genuine use in the UK on the goods/services concerned for any continuous period of five years after registration, and there are no proper reasons for such non-use.

There will be many ways to use trade marks in the metaverse, including the sale of virtual goods and provision of virtual services (eg McDonald's trade mark applications to operate virtual restaurant services), product demos (eg Chipotle's Burrito Builder), customer support, customer events (eg Jose Cuervo distillery tour), or real estate (eg Gucci's acquisition of the vault in The Sandbox to represent the brand and sell collectibles).

In many cases, the metaverse can be seen as another medium (along with websites, TV and print publications) and so the use in the metaverse may be in relation to real world goods/services (eg advertising use). In other cases, the use will be in relation to virtual world goods/services. Sometimes, it won't be clear and the use will arguably relate to both real world and virtual world goods/services.

In time, trade mark owners who have pre-emptively registered marks without plans or capability to use them might find themselves defending revocation proceedings. We’ll find out what kinds of use counts and whether issues such as delays in developing the metaverse constitute proper reasons for non-use. See more on this here.

This won't all happen in 2023

There is much to be worked out, just as there was with the development of the internet. While all the answers might not yet be clear, at least we have the re-assurance that we have largely solved many of the same sorts of questions which some had thought might be intractable at the start of the internet age.  Of course, not all metaverse trade mark issues will be resolved in 2023 as the metaverse itself is only in its infancy, but we do expect to see progress.

For more insights on the metaverse and how it will affect your brand, see our Interface insights here.

EUROPEAN UNION

Regulating the commercial agent's commission claims, especially for follow-up and repeat orders

The decision of the European Court of Justice (13 October 2022, the second one on that day) addresses the commercial agent's commission claims for transactions of the same type within the meaning of Article 7(1)(b) of the Commercial Agency Directive (Case C-64/21 [Rigall v Bank_Handlowy]). Specifically, it is a question of whether the entitlement to commission for transactions with customers whom the commercial agent has already previously solicited is compulsory or can be waived.

Article 7(1) Commercial Agency Directive reads:

“A commercial agent shall be entitled to commission on commercial transactions concluded during the period covered by the agency contract:

(a) where the transaction has been concluded as a result of his action; or

(b) where the transaction is concluded with a third party whom he has previously acquired as a customer for transactions of the same kind.”

The question now posed to the ECJ is: Is the entitlement to commission for repeat orders and follow-up business subject to derogation?

I.          The ECJ on the right to commission

The ECJ's answer: Yes, the entitlement to commission for repeat orders and follow-up transactions can be waived (para. 38). The ECJ justifies this not so much on the basis of the wording ("or" in Article 7 may indicate a choice, but is not unambiguous), but rather on the basis of a systematic comparison with other provisions of the Commercial Agency Directive that expressly regulate non-derogability (but not here, cf. para. 32 et seq.) as well as the origin of the provision (cf. para. 36 et seq. of the judgment) and its meaning and purpose (para. 34 et seq.).

The ECJ answered the question referred for a preliminary ruling even though the specific case concerns the distribution of financial services, which, according to Article 1 (2) of the Commercial Agency Directive, is outside the scope of application of EU commercial agency law. The reason for this is the uniform treatment in Polish law – as well as in German law – of commercial agency for the purchase/sale of goods and of services (for details: Rohrßen, ZVertriebsR 2019, 153 et seq.).

II.         How commission arrangements can be structured

determine the remuneration of the commercial agent, within the limits of Article 6 et seq. Commercial Agency Directive, as transposed into the respective applicable national laws on commercial agency. principle free to Principals and commercial agents are in

In principle, the parties to a commercial agency agreement are accordingly free to regulate the type (performance-related or fully or partially fixed remuneration) as well as the scope (transactions concerned) and amount of the commission. Limits may be set especially in standard form contracts, where, at least under German law, the standard form contract must not deviate too far from the otherwise applicable statutory / case law.

III.        Practical advice

designs:as considered In particular – also in combination – can be

• Success-based commissions (as provided for in Article 7(2) Commercial Agency Directive; with the respective mandatory regulations applying, i.e. in particular with regard to accrual and due date, advance payment, etc.),
• Fixed or lump-sum remuneration (whereby, in particular, attention must be paid to the independence of the commercial agent), and / or
• Participation in sales or profits ("royalties," "bonuses").

More details are to be found in the German Journal on Distribution Law (Rohrßen, ZVertriebsR 2023, 51 se seq.).

New European Court of Justice ruling on sub-agents goodwill indemnity

Multi-level distribution allows each level of distribution to specialize in the respective customer group and their needs, dedicated to the specific market level. Multi-level sales structures are often found in consumer products sold through retailers, as well as in the construction industry, and even in the automotive sector. Different structures area available, including installing commercial agents who, in turn, appoint sub-agents.

Sub-agents are in principle also entitled to goodwill indemnity at termination – provided they act as “genuine sub-agents”, i.e. as commercial agents themselves in relation to the so-called principal agent in the multi-level commercial agency relationship. Thus, commercial agents, for their part, can act as entrepreneurs and use sub-agents.

" within the meaning of Art. 17 of the Commercial Agency Directive (ECLI:EU:C:2022:784 = ECJ, Judgment of 13 October 2022, C-593/21 [NY v. Herios SARL]). At the same time, the ECJ established that the indemnity may be inequitable if the sub-agent takes over the position of the principal agent. significant advantageAccording to a new ruling of the European The ECJ ruled on 13.10.2022 on the compensation claim of the sub-agent, the indemnity that a principal agent receives from the principal "may" (i.e., does not have to) constitute a "

Pursuant to Article 17(2)(a), second indent of the Commercial Agency Directive, the right to indemnity requires that the principal – in this case the principal agent – “continues to derive substantial benefits from the business with such customers“ (in French: „le commettant a encore des avantages substantiels résultant des opérations avec ces clients“). As the principal's commercial agent, the genuine sub-agent is also entitled to compensation.

The ECJ interprets the term "still deriving significant benefits" broadly. Accordingly, the term includes any post-contractual ("still") advantage of certain significance ("substantial") that is connected with the services of the commercial agent (para. 23 of the judgment). Once again, the ECJ emphasizes the protection of the commercial agent intended by the HV Directive (para. 25 et seq.), which confirms the broad interpretation permitted by the wording.

pursuant to Article 17 (2)(a) Commercial Agency Directive so that the payment of indemnity is equitable, considering all circumstances of the case. ).", para. 32). Thus – as the ECJ rightly points out – the indemnity may have to be reducedIn order to give the referring court a complete answer ...Interestingly, the ECJ goes beyond answering answer the request for a preliminary ruling ("

Practical tips:

1. In general, multi-level distribution can be designed in many ways. For example, the supplier/principal may
   1. leave it to its distribution intermediary to regulate the next level(s) of distribution, or
   2. regulate the next stage(s) itself, e.g. by contractually binding the distribution intermediary(s) as well, whether separately, by a multi-party contract, or by the supplier/principal obligating a distributor to pass on certain sales specifications.
2. What suppliers must not to with regard to their distributors: RPM, i.e. resale price maintenance, cf. Article 101(1) TFEU and Article 4(a) VBER (more details: Rohrßen, ZVertriebsR 2021, 293, 296 at footnote 46; Rothermel/Rohrßen, IHR 2022, 221, 229). Instead, suppliers may install commercial agents, which, if not bearing any significant commercial or financial risk (so-called genuine agents), do not qualify as undertaking in terms of competition law – which allows suppliers/principals to fix the prices at which products are sold.
3. This new decision does not result in changes for the German legal practice. This is because the ECJ’s ruling now in is line with what the BGH has ruled for over five decades (albeit on the earlier version of Section 89b (1) German Commercial Code, cf. its judgment of 22 June 1972, Case No. VII ZR 36/71). Nevertheless, the decision demonstrates that multi-level distribution has additional regulatory aspects.
4. These and other special features of multi-level distribution should ideally be contractually regulated by the parties in advance. In addition to the indemnity claim, this includes in particular:
   1. which tasks the main distribution intermediary/principal agent assumes, in particular its supervision vis-à-vis the sub-representatives,
   2. when and in what amount the principal agent is entitled to commission for referrals of sub-agents ("super commission" for supervision; referral commission for which referral contributions),
   3. when the commission claims of the sub-agents arise and when they lapse, if applicable, as well as
   4. if necessary, also regulations for the case that the entrepreneur removes the main agent from the distribution chain and replaces it with the sub-agent(s).
5. For details on multi-level distribution, see Rohrßen in the German Journal on Distribution Law (Rohrßen, ZVertriebsR 2023, 55-58, Mehrstufiger Vertrieb = mehrstufiger Ausgleich der Handelsvertreter).

Non-competition and exclusivity clauses in distribution agreements

Non-compete clauses and exclusivities are allowed and enforceable subject to EU Competition law, specifically subject to the new EU Vertical Block Exemption Regulation (Commission Regulation (EU) 2022/720) and revised Guidelines on Vertical Restraints (2022/C 248/01) which were adopted in May 2022. The new Regulation replaces the former Vertical Block Exemption Regulation (Regulation 330/2010), which expired on 31 May 2022, along with the former version of the Vertical Guidelines.

These rules contain numerous exceptions and limitations when it comes to non-competition and Exclusivity, which need to be assessed in each individual case.

Some of the main limitations are that non-compete and exclusivity clauses are only permissible if:

• the market share held by the supplier does not exceed 30% of the relevant market on which it sells the contract goods or services and the market share held by the buyer does not exceed 30% of the relevant market on which it purchases the contract goods or services;
• the duration of the non-compete clause is neither indefinite nor exceeds five years (including tacit prolongation; however, the Regulation now allows for non-compete obligations to be tacitly renewable beyond the five-year period provided the distributor can effectively renegotiate or terminate the agreement at reasonable notice and at reasonable cost; the distributor should, therefore, be allowed to effectively switch supplier at the end of the five-year period à
  see par. 248 of the Guidelines);    
• they are executed in relation to the relevant contracted products, restricted to the contracted facility and indispensable to protect the know-how transferred to the counterparty for its work under the agreement.

The new Regulation does not materially change the principles relating to exclusive or selective distribution, but there are some modernizations.

For instance, under the old Regulation, it was not possible to have more than one exclusive distributor in a relevant territory or for an allocated customer group in the market. The Regulation now provides suppliers with the possibility to select up to five distributors for one territory or a particular group of consumers within the exclusive distribution system (see Article 4(b)(i) of the Regulation and par. 219 of the Guidelines).

In addition, the old Regulation limited the possibility of active sales restrictions to be imposed on the (direct) distributor of the supplier only and prohibited imposing an obligation on distributors to roll over this restriction to its own customers (the so-called “rolling over prohibition”). Under the new Regulation, suppliers may not only impose an active sales restriction on their direct distributors but also require them to prohibit their own customers from actively selling into territories or customer groups that the supplier has allocated exclusively to other distributors or reserved for itself (see Article 4(b)(i) of the Regulation and par. 220 of the Guidelines).

As previously, contractual provisions which require the distributor to source 80% or more of its demand in products solely from the principal are not allowed under EU Competition law.

THE NETHERLANDS

The relationship between know-how and non-competition clauses 

If a franchisor wants to introduce a non-competition clause in a relation with a franchisee, article 7:920 paragraph 2 DCC, stipulates several cumulative requirements for a non-competition clause to be valid. According to the provision and recent case law, the non-competition clauses must:

1. be agreed to in writing;
2. relate to goods or services that compete with those covered by the franchising relationship;
3. be indispensable to protect transferred know-how;
4. be agreed for a maximum period of 1 year after the end of the franchise agreement; and
5. be limited to the territory within which the franchisee operated the franchise formula.

According to the Act know-how is a body of practical information not protected by an intellectual property right, resulting from the experience of the franchisor and from the research carried out by it, which information is confidential, substantial and identifiable.

In a dispute, brought before the Court of Amsterdam, the franchisee argued that the franchisor did not provide any relevant and protectable know-how and therefore the franchisee could not be held to obligations of the non-compete clause. In the franchisee’s view, the non-compete clause was an anti-competitive agreement and therefore void.

When is know-how transferred relevant and protectable?

With reference to the Court of Justice's Pronuptia judgment of 28 January 1986 (C161/84), the Court of Amsterdam held, inter alia, that, from a competition law perspective, a franchisor may use a post-contractual non-compete clause to prevent benefiting competitors. A franchisor must be able to transfer know-how and provide a franchisee with the necessary assistance and application of its methods without the risk that such know-how and assistance will benefit competitors.

In this context, the dispute focused on whether franchisor transferred protectable know-how and provided assistance to franchisee. On the question of what constitutes protectable know-how, the court followed the definition in the Franchise Act, which came into force on 1 January 2021. While this Act did not apply to the franchise agreement between the parties, it does provide an important point of view in interpreting the concept of know-how. The Franchise Act stipulates in Article 7:911(2)(a)(2) of the Dutch Civil Code that know-how is a body of practical information, not protected by an intellectual property right, arising from the experience of the franchisor and from the investigations conducted by it, which information is confidential, substantial and identifiable.

In support of its position that it has transferred know-how to franchisee, franchisor submitted four folders containing documents which, according to franchisor, documented the transferred know-how. These included its Franchise Support Guide, quarterly reports, franchisor's internal magazines and manuals, for example for preparing a business plan or using social media. The handbook included a description of how the formula worked. Furthermore, franchisee evidenced various tailor-made courses and training programs. According to franchisor the documentation contained information on a variety of subjects, e.g. the provision of services and the supply of goods under the franchise, purchasing techniques, the method of contact with customers, commercial methods, the layout of the branch and the (method of) administration. Franchisor also states that it has provided marketing terms, house style rules, purchasing regulations, sales strategies and basic agreements and that its formula consists of a strategic vision, a marketing campaign plan, ICT utilities, order and customer management systems and franchise fees. All this information, franchisor argued, was provided only after the franchise agreement was concluded and confidential.

Franchisee took the position that this information could not qualify as protectable know-how. Franchisee substantiated its defense by referring to the report of a business economics consultant, who reviewed some of the documentation submitted, including the handbook. The report stated, among other things, that franchisor provided general information, largely from public sources, that the training courses and webinars offered did not contain any knowledge specific to the printing business but more general entrepreneurial information at a basic level, that the handbook contained a description of franchisors organization but no know-how, as well as that the strategic visions are formulated in a very general way and do not contain any secret or substantial information.

In the opinion of the Court however and, based on franchisors explanation in the pleadings and the documentation submitted, it has been sufficiently established that the franchisor provided the franchisee with confidential, substantial and identifiable information that met the requirements of Section 7:911 paragraph 2 under a subsection 2 of the Dutch Civil Code. Although the Court recognized that some of the documents in the folders concerned more general subjects, such as the manual for drawing up a business plan, but that did not alter the fact that, when the documentation is viewed in context, the information is focused on franchisors strategy and the specific branch in which franchisor and franchisee operate that the information transferred constitutes protectable know-how. The information as a whole represents an elaborate and specialized shop concept for a graphic services company. The fact that an independent entrepreneur in the sector can also obtain individual parts of the information provided by other means does not mean that the whole of the information provided by franchisor cannot be regarded as confidential and substantial. The Court does not share the conclusion of the report of franchisees consultant, because that report zoomed in on a number of parts of the information, sometimes quoting selectively, and the information did not seem to have been viewed sufficiently as a whole and in mutual coherence, especially where the franchisors manual is concerned.

All in all, in the Court's opinion, franchisors reliance on the non-compete clause, included in the franchise agreement, is acceptable. 

Should you have any questions concerning the Act, or seek advice concerning the drafting of a franchise agreement, an addendum or a pre-contractual information document or should you become involved in disputes concerning franchise agreements, please contact us by sending an email to v.jurgens@taylorwessing.com or l.vandaele@taylorwessing.comWe are more than happy to help you with all of your questions.