Franchising: the Court of Cassation reminds a franchisor that the information given to prospective franchisees must be serious and sincere

Cass. com, 12 May 2021, n°19-17701

Franchisors are required to disclose sincere information to prospective franchisees in their pre-contractual disclosure documents. And when a franchisor decides to establish or approve P&L forecasts, the figures provided or approved must be serious, considering both the state of the existing network and the project at stake (Cass. Com., 13 September 2017, n° 15-19740).

French courts admit that the mere fact of not reaching the forecasted objectives is not sufficient to prove a lack of seriousness of the P&L forecast, because of the margin of error that must be admitted in any forecast. However, the same courts rule that the forecasts must be based on serious studies and not on misleading elements. This is illustrated by the decision of the Court of Cassation of 12 May 2021.

In this case, the franchisee had achieved significantly lower results than those forecasted by the franchisor. However, the Paris Court of appeal had refused to consider that this sole fact may constitute proof of the lack of sincerity or realism of the figures provided by the franchisor.

Seized by the franchisee, the Court of Cassation first noted that the franchisee's results were indeed "very significantly lower than the forecasts" and then emphasized that the operating results observed in almost all of the points of sale network were "slightly positive, negative, or even heavily negative, despite higher turnover in some cases". According to the Court of cassation, it was therefore reasonably not possible to foresee results as positive as those provided by the franchisor for the first two years of operation of the new franchisee.

The Court of Cassation concluded that the P&L forecast provided by the franchisor lacked seriousness and were therefore likely to mislead the franchisee as to the profitability of the future store.

The Court of Cassation therefore overruled the decision of the Paris Court of appeal.

This decision is in line with an established case law and constitutes a useful reminder to franchisors that they should never try to make the bride more beautiful than she is.

The Paris Court of Appeal hesitates as to the classification of Article L.442-6, I, 5° of the Commercial Code (prohibition of the abrupt termination of established business relationships) as an overriding mandatory rule

CA Paris, Pôle 5, ch. 5, 11 March 2021, n°18/03112

This case raises the question of the classification of former Article L.442-6, I, 5° of the Commercial Code (new Article L.442-1, II), which prohibits the abrupt termination of established business relationships, as an overriding mandatory provision.

The facts were as follows: in 2001, a French family-owned wine production and distribution company had mandated a company from Quebec to promote sales of some of its products in Canada. The two companies maintained a business relationship for several years, without this relationship ever being formalized by signing a contract.

In a letter, after verbally informing its Canadian business partner, the French company terminated the relationship effective as from July 1, 2015, for alleged inexcusable misconduct and claimed compensation for the harm suffered.

The Canadian company then sued the French company before the Marseille Commercial Court, claiming damages for the abrupt termination of an established business relationship.

In first instance, considering that the law of Québec was applicable to the dispute, the Commercial Court dismissed the claims of the Canadian company.

The Canadian company appealed the ruling before the Paris Court of appeal. It requested the application of Article L.442-6, I, 5° and argued that this article constituted an overriding mandatory provision within the meaning of Article 9 of the Rome I Regulation.

It also argued that, if the Court were to reject the classification of Article L.442-6, I, 5° of the Commercial Code as an overriding mandatory rule, the dispute would still be governed by French law, under Article 4 of the Rome II Regulation applicable to torts, since the damage had occurred in France and the dispute had closer links with France.

The French company argued that the action grounded on Article L.442-6, I, 5° of the Commercial Code had been classified in French and European precedents as being of a contractual nature in international relationships. As a result, it stated that under Article 4 b) of the Rome I Regulation, which is applicable in contractual matters, the applicable law was the law of Quebec (i.e. the law of the country of residence of the service provider).

Therefore, the Paris Court of appeal had first to decide whether the action at stake was a tort action or a contract action and then whether it should be classified as an overriding mandatory rule.

First, the Court of appeal confirmed the contractual nature of the action considering that "the ECJ has ruled that an action for damages arising from the abrupt termination of a established business relationship revealing an implicit contractual relationship was a matter relating to a contract, regardless of its classification under national law (CJEU, 14 July 2016, C-196/15, Granarolo)".

According to the Rome I Regulation, failing a choice of law by the parties, contracts for the provision of services are governed by the law of the country of residence of the service provider (here, the law of Québec).

Second, the Court of appeal recalled the terms of the first paragraph of Article 9 of the Rome I Regulation, which defines overriding mandatory rules as “overriding mandatory provisions are provisions the respect for which is regarded as crucial by a country for safeguarding its public interests, such as its political, social or economic organization, to such an extent that they are applicable to any situation falling within their scope, irrespective of the law otherwise applicable to the contract under this Regulation.”

In that respect, the Paris Court of Appeal considered that even if the provisions of former Article L. 442-6, I, 5° of the Commercial Code may contribute to a public interest in the moralization of business life, they were mainly aimed at safeguarding the private interests of the victim of an abrupt termination, by giving it sufficient time to find alternative solutions. The Court therefore considers that the provisions of former Article L.442-6, I, 5° of the Commercial Code could not be considered as crucial for the safeguarding of the economic organization of the country to the extent of requiring its application to any situation falling within its scope, whatever the law applicable to the contract.

Consequently, the Paris Court of appeal ruled out the classification of Article L.442-6, I, 5° of the Commercial Code as an overriding mandatory provision.

The Court of appeal thus confirmed that the law of Quebec was applicable to the dispute.

By doing so, the 5th Chamber of Pôle 5 of the Paris Court of Appeal confirms a position that it had already adopted in 2019 (CA Paris, 28 February 2019, n° 17/16475).

However, the issue is not entirely settled. Indeed, this position diverges from that adopted by the 4th Chamber of the 5^th Division of the same Court, which ruled on several occasions that these provisions were overriding mandatory rules within the meaning of Article 9 of the Rome I Regulation (Paris Court of appeal, 9 January 2019, No. 18/09522) that applied also to foreign companies (Paris Court of appeal, 19 September 2018, No. 16/05579).

The Court of Cassation has not yet taken position on the classification of these provisions although it had the opportunity to do so on several occasions (e.g. Cass. com., 6 September 2011, No. 10-11975; Cass. com., 7 May 2019, No. 17-15340).

Noteworthy, the Court of Cassation ruled, last summer, that the provisions prohibiting the submission or attempted submission of a business partner to a significant imbalance were overriding mandatory rules in the meaning of article 9 of the Rome I Regulation (Cass. Com., 8 July 2020, n°17-31536).

As these provisions are in the same article of the Commercial Code (Article L.442-1, ex-Article L.442-6) as those prohibiting the abrupt termination of established business relationships, and are subject to the same sanctions (in particular a civil fine that may be requested by the Minister of the economy), it would make sense to give the same classification to Article L.442-6, I, 5° of the Commercial Code (new Article L.442-1, II).

Hopefully, the Court of Cassation will quickly settle this issue to put an end to the legal uncertainty caused by the hesitant case law of the Paris Court of Appeal.

The interim relief judge may order the continuation of an established business relationship that has been abruptly terminated

CA Paris, 28 April 2021, RG n°20/12496

The interim proceedings constitute a remedy available to victims of abrupt termination of established business relationships in order to obtain the temporary continuation of the abruptly terminated relationship (for a recent example: Cass. Com., 24 June 2020, n°19-12261).

The case commented here, which led to ruling of the Paris Court of Appeal of 28 April 2021, provides an example of the interim relief judge’s power, this time in an international context.

Two companies had been in a business relationship for 6 years for the supply of spare parts. The supplier was the French subsidiary of an American group and the customer was the Spanish subsidiary of another American group. The two groups were bound by a framework supply agreement.

The Spanish company believed that it could terminate the agreement unilaterally and without notice, relying on the provisions of the general terms and conditions of the framework agreement, which were subject to the laws of the State of Michigan (USA) and allowed for such termination.

The French supplier immediately filed an action for interim relief against its customer, seeking an order to maintain the deliveries.

The President of the Commercial Court of Lyon, and then the Paris Court of appeal (which has exclusive jurisdiction in matters of practices that restrict competition), successively granted this request based on Article 873§1 of the Code of Civil Procedure, which provides that:

"The president [of the court] may (…) even in if the request is seriously disputed, order in summary proceedings the interim or remedial measures that are necessary, either to prevent an imminent damage or to put an end to a manifestly unlawful disorder."

In this case, the Court noted that French law, and not Michigan law, was applicable to the dispute in accordance with the contractual terms.

Identifying the law applicable to the relationship was crucial since the same Court seems to be hesitating on the overriding mandatory nature of the provisions of article L.442-6, I, 5° of the Commercial Code (now article L.442-1, I, 2° of the French Commercial Code) which prohibit the abrupt termination of an established business relationship (cf. CA Paris, 11 March 2021, n°18/03112 commented above).

The Court then noted that the termination had occurred without any notice, which meant that the abrupt nature of the termination was obvious. Combined with the serious harmful consequences that this termination had caused for the French supplier (loss of 80% of its turnover and immediate placement of its workforce in partial activity), the existence of a manifestly unlawful disorder was sufficiently characterized, according to the Court of Appeal, to justify that the forced continuation of the terminated relationship be ordered.

The continuation of the relationship may not, however, be ordered for an unlimited period of time.

In that respect, the Court of Cassation allows the interim relief judge to set the duration of a reasonable notice period and to order the continuation of the relationship for that period of time (Cass. Com., 23 June 2015, n°14-14687).

In the present case, the Court of appeal confirmed the decision of the President of the Commercial Court of Lyon who had ordered the continuation of the contractual relationship for a period of 9 months.

Selective distribution: assessment of the state of economic dependence in case of termination of the distribution agreement and lawfulness of the refusal of authorization

Cass. com, 12 May 2021, n°19-17580

The establishment of a selective distribution network implies a selection of approved distributors according to criteria that may be qualitative (for example, the advice given to customers) or quantitative (for example, limiting the number of distributors in a given geographical area), or both.

The termination of selective distribution agreements as well as the refusal and non-renewal of a distributor's authorization by a supplier is likely to lead to a dispute.

In the case at stake, the Court of Cassation had to deal with such a dispute. A company called SIAC had been running a Renault car dealership since 1964. Over the years, the contractual relationship between SIAC and Renault evolved. In 2003, the parties agreed to enter into two selective distribution agreements, one relating to the repair and sale of spare parts and the other to the sale of new Renault vehicles.

In December 2007, Renault terminated the existing agreements with a two-year notice on the grounds that SIAC's commercial achievements were unsatisfactory. SIAC made a new request for authorization, which was refused by Renault in June 2009.

SIAC opposed this termination and the subsequent refusal of authorization. Before the Court, SIAC claimed for damages based on (i) the insufficient notice period granted by Renault, in particular due to the duration of the business relationship and the economic dependence of SIAC on Renault, and (ii) the discriminatory and unjustified nature of SIAC's exclusion from the selective distribution network.

Firstly, regarding the claim for termination of the business relationship, the Paris Court of Appeal noted that Renault had proposed SIAC to keep the vehicle repair business, which was generating most of its income, but this proposal had been refused by SIAC. It also noted that SIAC had continued to distribute vehicles of another brand of the Renault group and that there was indeed nothing to prevent SIAC from distributing vehicles of other brands, whether new or used.

The Paris Court of Appeal therefore refused to acknowledge the existence of the state of economic dependence alleged by SIAC and ruled that the notice period was sufficient.

The Court of Cassation approved this analysis.

It should be noted here that the state of economic dependence, which is a circumstance that can lead to extend the duration of the notice period required before the effective termination of the relationship, can be set aside if the termination only very partially affects the distributor's business and/or if the distributor had alternative options. Such decision is in line with an already well-established case law (e.g. Cass. Com., 6 December 2016, n°15-12320).

Secondly, regarding the claim based on discrimination and unjustified eviction from the selective distribution network, the Paris Court of appeal noted that former Regulation No 1400/2002 (applicable to car distribution agreements until 2010) was applicable to the refusal of authorization opposed by Renault to SIAC. After recalling that the quantitative selective distribution agreement in question benefited from an exemption if the supplier's market share was below 40% (Article 3, 1, paragraph 2 of ex-Regulation 1400/2002) and noting that Renault's market share on the market concerned was well below 40%, the Court of appeal deduced that the refusal to grant authorization to SIAC was exempted by right and was lawful under applicable competition rules.

Here again, the Court of Cassation approved the decision.

It should be noted that the benefit of the exemption set out in Regulation (EU) No 330/2010 applicable to vertical agreements (including, today, relationships between suppliers and distributors of new motor vehicles) is subject to the dual condition that (i) the supplier's market share does not exceed 30% on the market on which it sells the contract goods or services and the buyer's market share does not exceed 30% on the market on which it purchases the same goods or services (Article 3(1) of Regulation No 330/2010) and (ii) the agreement does not contain a hardcore restriction (Article 4 of the same Regulation). If these conditions are fulfilled, a refusal of authorization or a non-renewal of authorization by a supplier should therefore be exempted by right and considered as lawful under applicable competition rules. This position is regularly recalled by the Paris Court of appeal (e.g. Paris Court of appeal, 30 September 2015, No. 13/07915; Paris Court of appeal, 24 June 2020, No. 18/23867).  

Recent case law relating to parasitism

Cass. com, 27 January 2021, n° 18-20702; Cass. com, 3 March 2021, n° 18-22804; Cass. com, 17 March 2021, n° 19-10414

Parasitism is defined under French law as the behaviour of an economic stakeholder which rides on the coattails of the reputation of another economic stakeholder and takes undue advantage of the notoriety acquired or the investments made by the latter (Cass. Com., 21 March 2018, n° 16-17660). Such behaviour triggers tort liability under Article 1240 of the Civil Code.

In its decision of 27 January 2021, the Court of Cassation recalled that "the success of the tort action for parasitic acts, open to those who cannot rely on private rights, is not subject to the existence of a risk of confusion" (Cass. Com., 27 January 2021, No. 18-20702). This position is constant in case law (Cass. Com., 30 January 2001, n° 99-10654; Cass. Com., 8 July 2003, n° 01-13293 and 01-13327; Cass. Com., 11 March 2014, n° 13-13704; Cass. Com., 20 May 2014, n° 13-16943; Cass. Com., 22 June 2017, n° 16-16799).

In its decision of 3 March 2021, the Court of cassation also recalled that the disorganization of the victim's distribution network is not a condition for an action based on parasitism either: "the display of goods at an international trade fair and the distribution of a catalogue presenting these goods are, despite the absence of commercialization or of an offer to commercialize them, likely to be considered as acts of parasitism if these goods reproduce the characteristic elements of presentation of well-known products.” (Cass. Com., 3 March 2021, n° 18-22804).

Finally, the Court of cassation recalled, in its decision of 17 March 2021, that in matters of parasitism, as in matters of unfair competition, the victim's prejudice was presumed: "since economic parasitism consists of riding on the coattails of the reputation of others in order to take advantage, without spending anything, of their efforts and know-how, the damage, even if only moral, is necessarily inferred from such acts, even if limited in time" (Cass. Com, 17 March 2021, n° 19-10414; see also Cass. Com., 12 February 2020, n° 17-31614). However, the presumption of the existence of a damage does not exempt the claimant from establishing the extent of the damage in order to obtain full compensation. According to the Court of Cassation, it is admissible that the compensation of the damage be evaluated by taking into consideration the undue advantage that the company competing unfairly has obtained to the detriment of its competitors, adjusted in proportion to the parties' respective business volumes affected by these acts (Cass. Com., 12 February 2020, n° 17-31614).