European Franchise Newsletter n33

In-depth analysis

FRANCE

Franchise: another step in the Pizza Sprint / Domino’s Pizza case
Significant imbalance: clarification from the Paris Court of Appeal on the classification as overriding mandatory rule
Significant imbalance: how to assess the notion of "attempt to submit”?

GERMANY

Franchisor’s right to update/change the franchise system

THE NETHERLANDS

Strategic choice to stop franchise formula allows franchisor to terminate franchise agreement

UNITED KINGDOM

Green brands: what can be trade marked?

EUROPEAN UNION

EU makes progress on EU-US data adequacy and incoming data and cybersecurity legislation

FRANCE

Franchise: another step in the Pizza Sprint / Domino’s Pizza case

Paris Court of Appeal, February 8, 2023, No 20/04558, 20/04557, 20/01712, 20/04561,20/01748, 20/01691, 20/01706, 20/01756 and 20/06545

On February 8, 2023, the Paris Court of Appeal rendered a series of rulings sentencing Domino's Pizza, as franchisor, to pay damages to several former franchisees who were operating under the Pizza Sprint brand, purchased by Domino’s Pizza in 2015.

When Domino's Pizza purchased Pizza Sprint, most franchisees agreed to enter into new franchise agreements and operate under the Domino's Pizza brand, but others preferred to continue operating under the Pizza Sprint brand despite strained relations with the franchisor.

A few years later, Domino's Pizza eventually decided to terminate the franchise agreements of the Pizza Sprint franchisees for breach of the purchase clause.

The franchisees invoked the nullity of their franchise agreement, on the ground of vitiated consent, but also based on the alleged existence of a "significant imbalance between the rights and obligations of the parties, the nullity of which has the effect of emptying the agreement of its substance". They also requested the termination of the contract for breach by the franchisor and compensation for their loss.

The Paris Court of Appeal rejected the franchisees' request for annulment of the franchise agreement on the ground of vitiated consent. Indeed, some of the franchisees were time-barred. Others did not sufficiently demonstrate the alleged vitiated consent.

As for the claim based on significant imbalance, the franchisees considered that the entire contract should be annulled following the Paris Court of Appeal's decision of January 5, 2022 which had condemned Domino's Pizza on the basis of significant imbalance and cancelled the transfer and termination clauses of the Pizza Sprint franchise agreement. However, according to the Court, they did not demonstrate "in what way this clause was essential to the franchise agreement or that its deletion was likely to disrupt the balance of the agreement". The Court therefore also refused to annul the franchise agreements on that basis.

Nevertheless, the Court ordered the termination of the franchise agreements for breach by the franchisor on two grounds: (i) for wrongful implementation of the purchase obligation (the significant imbalance which had been identified at the request of the Minister of Economy in the ruling of January 5, 2022) and (ii) for lack of assistance of the Pizza Sprint franchisees and lack of evolution of the know-how following the takeover of the franchise agreement by Domino's Pizza.

As a reminder, the franchise agreements did not impose an exclusive purchase obligation on the franchisees (it was therefore not possible to impute a breach of this clause to the franchisees) but such exclusivity resulted, according to the ruling of January 5, 2022, from pressure from and coercion by the franchisor.

According to the Court, the franchisor had taken advantage of this imposed purchase exclusivity to make margins that were excessive.

Furthermore, the Court noted that "the franchisor had failed to fulfil its contractual obligations by no longer making any effort to update its know-how, by not complying with its obligation to provide training and assistance in relation to commercial methods and marketing of new products, and by contributing to the deterioration of the network's reputation”. According to the Court, in so doing the franchisor had unfairly performed its obligations and was liable for the early termination of the franchise agreements.

The Court of Appeal therefore ordered the franchisor to refund part of the royalties to its former franchisees (up to nearly € 280,000 in total), to pay damages to compensate the franchisees for the overpaid products (up to more than € 710,000), to compensate the legal representatives of the franchisees for their pretium doloris (up to € 230,000), but also for the loss of value of the franchisees' business (up to more than € 540,000).

On this last issue, the decision appears particularly questionable. Indeed, a franchisee has no vested right to the transfer of his franchise agreement (the agreement being entered in consideration of the person of the franchisee and the franchisor retaining a veto right over the transferee) or to any perpetual renewal of its franchise agreement. Therefore, it is not consistent to include the goodwill deriving from the use of the franchise brand and system in the assessment of the value of the business for calculating the franchisee's damage.

In any event, these decisions remind us of the need to maintain a certain balance in the franchise relationship, to provide for clear clauses on the rights and obligations of each of the parties in the franchise agreement and to comply with the obligations imposed on the franchisor, when they are of the essence of the franchise, as defined by French law.

Significant imbalance: clarification from the Paris Court of Appeal on the classification as overriding mandatory rule

Paris Court of Appeal, January 20, 2023, No 22/13154

This case concerned an influencer with an Instagram account accessible from Facebook ("Meta Platforms") in which she promoted her hairdressing services.

The influencer had summoned Facebook France and Facebook Ireland Limited before the Paris Civil Court, after having noted the misappropriation of content on her account and the impossibility to access it.

Referring to the jurisdiction clause in the "Terms of Use of the Instagram platform’s service", Facebook Ireland Limited (now Meta Platforms Ireland) had argued that the Irish courts had exclusive jurisdiction, thus French courts lacked jurisdiction over this case.

This clause provides that disputes relating to the use of the Instagram service in a professional or commercial context shall be brought before the competent courts in Ireland and that applicable law was Irish law.

The pre-trial judge of the Paris Civil Court, seized by Meta Plateforms Ireland, declined jurisdiction.

The influencer and her company then appealed this decision before the Paris Court of Appeal, claiming that (i) as consumers, they should benefit from the special regime provided for in the Brussels 1 bis Regulation (EU Regulation 1215/2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters), (ii) that the right to a fair trial should be applied in this case, (iii) that Article 1171 of the French Civil Code, which prohibits significant imbalance, was an overriding mandatory rule that should apply to the dispute and finally (iv) that the jurisdiction clause in Instagram’s terms of use "creat[ed] a significant imbalance between the rights and obligations of the parties".

The Paris Court of Appeal upheld the decision of the pre-trial judge and rejected the plaintiffs’ claims.

When giving effect to the jurisdiction and governing law clauses in Instagram's terms and conditions, the Court of Appeal unsurprisingly underlined that the plaintiffs did not have the consumer status as the account was primarily used to promote a professional activity, and that the argument that the jurisdiction clause could violate the right to a fair trial could not be upheld, as there was no argument to support it and given that this was a dispute between professionals with a claim of more than € 1 million.

It added - and this is the interesting part of the decision - that the provisions of Articles 1171 of the Civil Code and L.442-6 of the Commercial Code could not be considered as overriding mandatory rules within the meaning of Regulation 593/2008 - Rome 1 (Article 9.1). According to the Court, "it is not clear from the general terms of Article 1171 of the Civil Code that this text is intended to protect the public interests of the State in a specific field of application" and "the same applies to the general terms of Article L.442-6, I, 2° of the Commercial Code, which cannot be classified as an overriding mandatory rule, except when, by virtue of the powers that Article L.442-4 of the same code reserved to them, the Public Prosecutor, the Minister of the Economy or the President of the Competition Authority identify a specific restrictive business practice likely to undermine the public economic order of the State which it is their responsibility to defend".

This statement calls for two remarks:

The first remark is that the Court of Appeal proposes here to classify the provisions of the Commercial Code on significant imbalance (Article L.442-6, I, 2° now Article L.442-1, I, 2° of the French Commercial Code) as an overriding mandatory rule only when public authorities are involved because there is then a presumption of infringement of economic public order. In our view, this position is very disputable;
The second remark is that the legislature, with the Descrozailles Act (Egalim 3) of March 30, 2023, has just taken an opposite position by imposing the application of these provisions (among others), regardless of the law chosen as soon as the products or services are marketed in France. This invalidates the Court of Appeal's very general statement.

Significant imbalance: how to assess the notion of "attempt to submit”?

Paris Court of Appeal, March 15, 2023, No 21/13227 and No 21/13481

Article L.442-1, I, 2° of the French Commercial Code (formerly Article L.442-6, I, 2°) prohibits not only the act of subjecting one's business partner to a significant imbalance, but also the mere attempt to subject him.

It is on the notion of “attempt to submit” that the Paris Court of Appeal was asked to rule in the two cases of March 15, 2023.

In May 2015, several distributors in the food retail sector had put pressure, through their central purchasing entity, on thirteen of their suppliers in the perfumery/hygiene sector to obtain financial contributions and investments, even though the agreements had just been finalized and executed a few weeks ago and these additional requests were not, according to the General Directorate for Competition, Consumer Affairs and Fraud Control (“DGCCRF”), had no justification.

Furthermore, the requests for financial contributions and investment were not accompanied by any precise and quantified consideration.

The Minister of the Economy therefore brought a claim against the central purchasing entity and its principals before the Paris Commercial Court, which sentenced them to pay damages to eight of the thirteen suppliers, on the ground of the attempt to submit them to significantly imbalanced obligations.

In two rulings dated March 15, 2023, the Paris Court of Appeal overturned the Paris Commercial Court's decisions in five of the eight cases and confirmed the existence of an attempt to submit in only three cases.

The Court first recalled that to characterize the existence of a submission or of an attempt to submit, "the absence of effective negotiation, or of the possibility thereof, of the offending clauses or obligations" must be demonstrated. This can be characterized by the existence of " threats or retaliatory measures aimed at forcing acceptance".

The Court added that "the insertion of clauses in a standard agreement or a contract of adhesion or the conditions of subscription (in this sense, Court of Cassation, Commercial Chamber, April 6, 2022, No. 20-20.887) may constitute relevant criteria of the existence of a submission or its attempt”.

It goes without saying that the “attempt to submit” must be distinguished from the notion of “submission”.

For the Court, the attempt to submit is "the action by which one vainly strives to obtain a result" and "thus implies an analysis that pays particular attention to the entry into negotiations".

In this case, the Court noted that it was abnormal for the central purchasing entity and its principals to attempt to renegotiate the annual agreements signed only a few weeks before, on March 1st.

Besides, it noted that the central purchasing entity had asked its suppliers to make financial efforts without considering, at least initially, any consideration in return. However, for the Court, "a negotiation presupposes from the outset that the needs of the other party are taken into account and that identifiable and quantifiable consideration is determined, be it provisionally and briefly, as soon as the talks begin. In this sense, the absence of consideration is a relevant indication of a submission or attempt to submit".

The Court added, nonetheless, that "the examination cannot be confined to this early phase, which is too narrow to determine the negotiability of the proposals made in the context of usually tense discussions."

In other words, an initial aggressive stance, reflecting the intention to establish a position of strength at the beginning of the negotiation, is not enough in itself to characterize an attempt to submit: the pressure must be maintained invariably until the contract is concluded or rejected by the other party.

In this context, and after confirming that the balance of power was not in favor of the suppliers, despite their size, given the structure of the market, the Court examined how the discussion between the parties evolved following the initial exchanges.

When the distributor maintained constant pressure to obtain financial advantages, without ever proposing anything in return, the Court considered that there was an attempt to submit. For the Court of Appeal, "it is irrelevant that the supplier did not finally accept the investment requested, since the attempt is by definition made without any concrete result and the supplier suffered retaliatory measures as a result of its refusal”.

When the Court found that there were no retaliatory measures and that the discussion finally led to a quid pro quo for the investment requested, the Court noted that there eventually was "effective negotiation" and that, consequently, the attempt to submit could not be retained.

In conclusion, for the Court of Appeal, the attempt to submit a business partner cannot be sanctioned on the basis of Article L.442-1, I, 2° of the Commercial Code if the parties have finally negotiated the terms of their contract.