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Category Licence for Franchise Agreements [1994] IECA 372 (17th November, 1994)
COMPETITION
AUTHORITY
Category Licence for Franchise
Agreements
Price:£1.80
£2.50
incl. postage
FRANCHISE
AGREEMENTS CATEGORY LICENCE
Competition
Authority Decision of 17 November 1994 granting a licence under Section 4(2) of
the Competition Act, 1991, to categories of franchise agreements.
Decision
No. 372
Introduction
1. ´which
in the opinion of the Authority, having regard to all relevant market
conditions, contributes to improving the production or distribution of goods or
provision of services or to promoting technical or economic progress, while
allowing consumers a fair share of the resulting benefit and which does not -
(i)
impose on the undertakings concerned terms which are not indispensable
to the attainment of those objectives;
(ii)
afford undertakings the possibility of eliminating competition in respect of
a substantial part of the products or services in question.'
2. A
large number of notifications has been made to the Authority concerning
franchise agreements for the sale of products or the supply of services.
Having considered the notified agreements in detail, the Authority has decided
to grant a category licence under
Section 4(2) of
the Act. A draft of the
category licence was published on 8 July 1994. Several submissions were
received, and these have been taken into account by the Authority.
The
subject of the Decision
3. This
decision concerns arrangements whereby one of the parties supplies goods or
provides services to end users under a franchise agreement. A franchise
agreement consists essentially of a licence of industrial or intellectual
property rights relating to trade marks or signs and know-how, which can be
combined with restrictions relating to the supply or purchase of goods. The
licence usually includes restrictions in relation to the assignment or use of
industrial property rights, and the agreement usually involves also the
exclusive distribution or exclusive purchase of goods. According to Bellamy
& Child:
2. ´Each
franchisee remains an independent trader bearing his own financial risk, but
pays royalties to the franchisor. The franchisor's aim is to create a chain of
franchisees using a uniform presentation and selling products or services of
uniform quality; to the outside observer the outlets look like subsidiaries or
branches of the franchisor. To achieve that uniformity the franchisor normally
requires the franchisee to obtain his stock from the franchisor or from sources
nominated by him or to produce it in accordance with the franchisor's
specifications; the franchisor provides know-how and commercial assistance and
a marketing image which usually has proven market appeal. He usually retains
the right to supervise the location, layout and decor of the premises. In
general terms, the franchising relationship involves a greater degree of
co-operation and a greater involvement of the supplier in the licensed
enterprise than is found in other kinds of vertical agreement.' (1)
4. This
decision covers franchise agreements between two undertakings, the franchisor
and the franchisee, for the retailing of goods or the provision of services to
end users, or a combination of these activities, such as the processing or
adaptation of goods to fit specific needs of their customers. It also covers
cases where the relationship between franchisor and franchisees is made through
a third undertaking, the master franchisee. The decision does not cover
wholesale franchise agreements or industrial franchise agreements.
The
Products and the Market
5. Franchise
agreements operate in many lines of business. A very wide variety of goods and
services forms the subject matter of the notified agreements, there being more
than one notification of a particular agreement in some cases. These include
the selling of groceries, builders' materials, posters, jeans and babywear;
fast food and catering services; hotels; health and fitness; the cleaning of
vehicles, carpets and video display units; vehicle tuning; video rental; and
sharpening of knives and blades. Given the large number and the heterogeneous
nature of the products and services concerned, and of those which may also be
included in other agreements which have not been notified or which may be made
in future, it is not possible to describe the relevant market conditions which
prevail. It is not necessary to do so in the case of this category licence,
however, in particular because the benefit of the category licence may be
withdrawn in the case of an individual agreement if it is found that it does
not satisfy all the conditions prescribed in
Section 4(2), especially where
competitive conditions in the market are inadequate.
6. Most
of the notified agreements stipulate the territory concerned, this being either
the whole or a part of the State, though the territory sometimes includes
Northern Ireland. This decision covers agreements which relate to the State or
any part of the State.
EU
Treatment of Franchise Agreements
7. In
1986, the European Court of Justice issued an important judgment on franchise
agreements in the Pronuptia case (2). The Court recognised that there were
different forms of franchise agreements and indicated that it was only
concerned with what it termed 'a distribution franchise'. The Court held that
franchise agreements, which brought benefits to both parties, were not as such
restrictive of competition. They often enabled a franchisor to exploit the
expertise he had acquired, without having to invest in a retail network. They
also gave inexperienced retailers access to trading methods which had already
proved successful while enabling them to remain independent. The Court held
that obligations in the agreement which were necessary to support the essential
ingredients of the franchising relationship did not fall within Article 85(1)
of the Treaty of Rome, but that certain other clauses could do so. One
essential ingredient for a franchise system to work was that the franchisor had
to be able to give the franchisee his know-how and assistance without fearing
that the information would benefit competitors. A second essential ingredient
was that the franchisor had to have sufficient control over the operation of
the retail outlet to enable him to protect the common identity and reputation
of the network trading under the franchisor's name. Clauses which were
necessary to achieve these objectives, according to the Court, fell outside
Article 85(1). The Court stated, however, that clauses which did not relate to
these essential ingredients might fall within Article 85(1), especially where
these concerned market-sharing or limitations on price competition. Some of
these restrictive clauses might be capable of exemption under Article 85(3).
8. Following
this judgment, and some individual decisions on franchise agreements, the EU
Commission, in 1988, made a block exemption regulation, Regulation 4087/88,
granting exemption under Article 85(3) to categories of franchise agreements
(3). The Regulation applies from 1 February 1989, and expires at the end of
1999. The Regulation exempts agreements to which only two firms are party and
whereby one firm, the franchisor, enters into an agreement with another firm,
the franchisee, under which the latter is granted the right to exploit a
franchise for the purposes of marketing specified types of goods and/or
services. It does not cover industrial or wholesale franchise agreements. The
Regulation specifies which clauses the franchise agreement can contain and
which must not be included if it is to benefit from the block exemption. The
obligations which are not normally restrictive of competition include those
which are essential either to preserve the common identity and reputation of
the network or to prevent the know-how made available and the assistance given
by the franchisor from benefiting competitors. It is necessary, however, that
parallel imports remain possible. The Regulation exempts the territorial
protection granted by the franchisor to the franchisee, the location clause
imposed on the franchisee and the obligation on the latter not to sell contract
products outside the franchise network. It also exempts an obligation for the
franchisee to resell exclusively the franchisor's goods which form the
essential subject of the franchise, and a post-term non-competition obligation
for a reasonable period not exceeding one year. Resale price maintenance is
specifically prohibited, but recommended prices are allowed. An accelerated
opposition procedure is provided for dealing with franchise agreements
containing clauses not specified among those expressly exempted or prohibited.
Benefit of the exemption may be withdrawn in any particular case where an
agreement has effects which are incompatible with the conditions laid down in
Article 85(3), particularly where competition is significantly restricted
because of the structure of the relevant market.
Assessment
(a)
Applicability of Section 4(1)
9.
Section
4(1) of the
Competition Act, 1991, prohibits and renders void all agreements
between undertakings which have as their object or effect the prevention,
restriction or distortion of competition in trade in any goods or services in
the State or in any part of the State.
10. The
franchisors, whether they are located outside or inside the State, are engaged
in the supply of goods and/or the provision of services for gain, and the same
applies to the franchisees, including master franchisees. Both franchisors and
franchisees are therefore undertakings within the meaning of
Section 3(1) of
the
Competition Act. The franchise agreements are agreements between
undertakings. The relevant product or service in each case is as specified in
the individual agreement. The relevant geographic market is the State or a
specific part of the State, depending on the agreements concerned. This
decision only applies to agreements to which only two undertakings are party -
the franchisor and the franchisee. Several undertakings forming one economic
unit (such as the franchisee and its owner acting as guarantor) count as one
undertaking for the purposes of this decision.
(i)
The franchise agreement as a whole
11. The
Authority considers that, for the purposes of this decision, it should adopt
the definitions of ´franchise' and ´franchise agreement' used in
Regulation 4087/88. There, a ´franchise' is defined to mean:
3. ´a
package of industrial or intellectual property rights relating to trade marks,
trade names, shop signs, utility models, designs, copyrights, know-how or
patents, to be exploited for the resale of goods or the provisions of services
to end users.'
4. A
´franchise agreement' is defined as:
5. ´an
agreement whereby one undertaking, the franchisor, grants the other the
franchisee, in exchange for direct or indirect financial consideration, the
right to exploit a franchise for the purposes of marketing specified types of
goods and/or services; it includes at least obligations relating to:
-the use of a common name or shop sign and a uniform
presentation of contract premises and/or means of
transport,
-the
communication by the franchisor to the franchisee of know-how,
-the
continuing provision by the franchisor to the
franchisee
of commercial or technical assistance
during
the life of the agreement.'
6. The
Authority also adopts the definition of ´know-how' in the Regulation,
whereby ´know-how' means:
7. ´a
package of non-patented practical information, resulting from experience and
testing by the franchisor, which is secret, substantial and identified.'
8. It
also adopts the definitions of ´secret', ´substantial' and
´identified' contained in the Regulation, as well as the other definitions
therein.
12. The
Authority also agrees with the view of the Court of Justice that a franchise
agreement differs from an exclusive distribution agreement in that, for
example, it imposes obligations regarding the use of a business name and
methods and the provision of know-how. For this reason, the Court held that
franchise agreements did not come within the block exemption for exclusive
distribution agreements. Likewise, the Authority considers that franchise
agreements do not come within the scope of its category licence for exclusive
distribution agreements (4).
13. The
Authority agrees with the view of the Court that franchise agreements as such
are not restrictive of competition, nor are obligations in franchise agreements
which are necessary to support the essential ingredients of the franchising
relationship, namely clauses that:
(a) are essential to prevent the know-how made available and the assistance
given by the
franchisor
from benefiting competitors; or
(b) that provide for the control essential to preserve the common identity
and reputation of
the
network trading under the franchisors' name.
9. Franchise
agreements which contain only obligations of this nature do not, in the
Authority's opinion, have as their object or effect the prevention, restriction
or distortion of competition, and so they do not offend against Section 4(1) of
the Competition Act. Many franchise agreements, however, contain obligations
which go beyond these parameters, and they may therefore offend against Section
4(1). Individual obligations under each heading are described below.
(ii)
Clauses which do not offend against section 4(1)
14. The
Authority considers, in the first place, that certain obligations on the
franchisor do not offend against
Section 4(1), because they form part of the
basic services the franchisor provides to the franchisee. These include
obligations on the franchisor to assist the franchisee with selecting the site
and premises, shopfitting, promotion and advertising, training, news of
products, innovations, etc.
15. The
Authority considers that the following obligations on the franchisee are in
conformity with the two parameters described above:
(a) to
sell, or use in the course of the provision of services, exclusively goods
matching minimum objective quality specifications laid down by the franchisor;
(b) to
sell, or use in the course of the provision of services, goods which are
manufactured only by the franchisor or by third parties designated by it, where
it is impracticable, owing to the nature of the goods which are the subject
matter of the franchise, to apply objective quality specifications;
(c) not
to engage, directly or indirectly, in any similar business in a territory where
it would compete with a member of the franchised network, including the
franchisor; the franchisee may be held to this obligation after termination of
the agreement, for a reasonable period which may not exceed one year, in the
territory where it has exploited the franchise;
(d) not
to acquire financial interests in the capital of a competing undertaking, which
would give the franchisee the power to influence the economic conduct of such
undertaking;
(e) to
sell the goods which are the subject-matter of the franchise only to end users,
to other franchisees and to resellers within other channels of distribution
supplied by the manufacturer of these goods or with its consent;
(f) to
use its best endeavours to sell the goods or provide the services that are the
subject-matter of the franchise; to offer for sale a minimum range of goods,
achieve a minimum turnover, plan its orders in advance, keep minimum stocks and
provide customer and warranty services;
(g) to
pay to the franchisor a specified proportion of its revenue for advertising and
itself carry out advertising for the nature of which it shall obtain the
franchisor's approval.
10. Accordingly,
such obligations do not offend against Section 4(1).
16. The
Authority considers that the following obligations on the franchisee also do
not offend against
Section 4(1), that is obligations:
(a) not
to disclose to third parties the know-how provided by the franchisor; the
franchisee may be held to this obligation after termination of the agreement;
(b) to
communicate to the franchisor any experience gained in exploiting the franchise
and to grant it, and other franchisees, a non-exclusive licence for the
know-how resulting from that experience;
(c) to
inform the franchisor of infringements of licensed industrial or intellectual
property rights, to take legal action against infringers or to assist the
franchisor in any legal actions against infringers;
(d) not
to use know-how licensed by the franchisor for purposes other than the
exploitation of the franchise; the franchisee may be held to this obligation
after termination of the agreement;
(e) to
attend or have its staff attend training courses arranged by the franchisor;
(f) to
apply the commercial methods devised by the franchisor, including any
subsequent modification thereof, and use the licensed industrial or
intellectual property rights;
(g) to
comply with the franchisor's standards for the equipment and presentation of
the contract premises and/or means of transport;
(h) to
allow the franchisor to carry out checks of the contract premises and/or means
of transport, including the goods sold and the services provided, and the
inventory and accounts of the franchisee;
(i) not
without the franchisor's consent to change the location of the contract premises;
(j) not
without the franchisor's consent to assign the rights and obligations under the
franchise agreement.
(iii)
Clauses which offend against Section 4(1)
17. The
Authority considers that in certain circumstances the following obligations may
involve a restriction upon competition:
(a) an
obligation on the franchisor, in the State or in a defined area of the State,
the contract territory, not to:
-
grant the right to exploit all or part of the franchise to third parties,
-
itself exploit the franchise, or itself market the goods or services which are
the
subject-matter of the franchise under a similar formula,
-
itself supply the franchisor's goods to third parties;
(b) an
obligation on the franchisee to exploit the franchise only from the contract
premises;
(c) an
obligation on the franchisee to refrain, outside the contract territory, from
seeking customers for the goods or the services which are the subject-matter of
the franchise;
(d) an
obligation on the franchisee not to manufacture, sell or use in the course of
the provision of services, goods competing with the franchisor's goods which
are the subject-matter of the franchise.
11. The
first three of these obligations could involve market sharing between the
franchisor and the franchisee or between franchisees. The effect of these
obligations is to protect each franchisee from competition from the franchisor
or from other franchisees. The last obligation prevents the franchisee from
dealing in competing goods. Where such restrictions restrict competition, they
also, in the Authority's opinion, offend against Section 4(1).
18. Any
provisions in a franchise agreement which restrict the franchisee's freedom to
determine his own prices would always offend against
Section 4(1), in the
Authority's opinion. The franchisor is, however, entitled to recommend prices
to franchisees, provided there is no concerted practice whereby franchisees are
expected to abide by such prices.
(b)
Applicability of Section 4(2)
19. Under
Section 4(2), the Competition Authority may grant a licence in the case of any
agreement or category of agreements which satisfies all the requirements of the
Section, as quoted in para. 1 above.
20. In
the opinion of the Authority, franchise agreements, in general, are likely to
fulfil the conditions provided for in
Section 4(2) and qualify for the grant of
a category licence.
21. Franchise
agreements which are covered by this decision normally improve the distribution
of goods and/or the provision of services as they give franchisors the
possibility of establishing a uniform network with limited investments, which
may assist the entry of new competitors on the market, particularly in the case
of small and medium-sized undertakings, thus increasing interbrand competition.
They also allow independent traders to set up outlets more rapidly and with a
higher chance of success than if they had to do so without the franchisor's
experience and assistance. They have therefore the possibility of competing
more efficiently with large distribution undertakings.
22. As
a rule, franchise agreements also allow consumers and other end users a fair
share of the resulting benefit, as they combine the advantage of a uniform
network with the existence of traders personally interested in the efficient
operation of their business. The homogeneity of the network and the constant
cooperation between the franchisor and the franchisees ensures a constant
quality of the products and services. The favourable effect of franchising on
interbrand competition and the fact that consumers are free to deal with any
franchisee in the network guarantees that a reasonable part of the resulting
benefits will be passed on to the consumers.
23. In
order to satisfy the requirements of the category licence, only specific
obligations which are restrictive of competition may be included in franchise
agreements. This is the case in particular for the granting of an exclusive
territory to the franchisees combined with the prohibition on actively seeking
customers outside the territory, which allows them to concentrate their efforts
on their allotted territory. The same applies to the granting of an exclusive
territory to a master franchisee combined with the obligation not to conclude
franchise agreements with third parties outside that territory. Where the
franchisees sell, or use in the process of providing services, goods
manufactured by the franchisor or according to its instructions, and/or bearing
the franchisor's name or trade mark, an obligation on the franchisees not to
sell, or use in the process of the provision of services, competing goods,
makes it possible to establish a coherent network which is identified with the
franchised goods. However, this obligation should only be accepted with
respect to the goods which form the essential subject-matter of the franchise.
It should notably not relate to accessories or spare parts for these goods.
The obligations referred to above thus do not impose restrictions which are not
necessary for the attainment of the above mentioned objectives. In particular,
the limited territorial protection granted to the franchisees is indispensable
to protect their investment.
24. The
category licence must specify the conditions which must be satisfied for the
licence to apply. To guarantee that competition is not eliminated for a
substantial part of the goods which are the subject of the franchise, it is
necessary that there should not be absolute territorial protection for
franchisees. Therefore, cross deliveries between franchisees should always be
possible. Furthermore, where a franchise network is combined with another
distribution system, franchisees should be free to obtain supplies from
authorized distributors.
25. The
category licence must also specify restrictions which may not be included in
franchise agreements if these are to benefit from the exemption granted by the
licence, by virtue of the fact that such provisions are restrictions falling
under
Section 4(1) for which there is no general presumption that they will
lead to the positive effects required by
Section 4(2). This applies in
particular to market sharing between competing manufacturers, to clauses unduly
limiting the franchisee's choice of suppliers or customers, and to cases where
the franchisee is restricted in determining its prices. However, the
franchisor should be free to recommend prices to the franchisees to the extent
that it does not lead to concerted practices for the effective application of
these prices.
(c)
Miscellaneous considerations
Withdrawal
of the category licence
12. ´Where
the Authority is of the opinion that, having regard to the requirements of
Section 4(2) and to the basis upon which a licence under that subsection was
granted:-
(a)
there has been a material change in any of the circumstances on which the
decision was based,
(b)
any party commits a breach of any obligation attached to the decision,
(c)
the licence was based on materially incorrect or misleading information, or
(d)
any party abuses the permission granted to it by the licence,
the
Authority may revoke or amend the licence and, without prejudice to the
generality of this subsection, may in particular insert in a licence conditions
the effect of which is to prohibit specific acts by any party thereto which
would otherwise be authorised pursuant to such a licence.'
13. The
Authority considers that it also has the power, in accordance with Section
8(3), to withdraw the benefit of the category licence in individual cases.
This would be the case where an individual agreement had effects incompatible
with Section 4(2).
Duration
of the Category Licence
27. As
in the case of exclusive distribution agreements, the Authority considers that
the specified period for the licence should be five years, so as to allow the
possibility for early review. At the end of this period, the period of the
category licence may be extended, with or without amendments to the licence, if
it is considered by the Authority that the requirements of
Section 4(2)
continue to be fulfilled. The Authority considers that the category licence
should expire on the same date as Regulation No. 4087/88. The category licence
shall enter into force on 17 November 1994. It shall expire on 31 December
1999. The category licence is at the end of this Decision.
Notification
28. In
accordance with
Section 4(3)(b) of the
Competition Act, where a licence covers
a category of agreements, agreements within that category which comply with the
terms of the licence need not be notified under
Section 7 to benefit from the
licence while it is in force. Nevertheless, where there is a real doubt, in a
particular case, an undertaking may request the Authority to declare whether
its agreements comply with this category licence. This would have to be done
by way of full notification under
Section 7.
29. It
is expected that franchisors and franchisees who wish to benefit from this
category licence in future will ensure that new franchise agreements satisfy
the conditions specified in the licence. Parties to agreements which have been
made prior to the coming into force of the category licence will also
presumably seek to amend these agreements if necessary so as to satisfy the
conditions of the licence, especially in the case of agreements which were in
existence on the date of commencement of
the Act, that is agreements which were
entered into prior to 1 October 1991. Appropriate provisions are necessary in
the circumstances.
Agreements
already notified
30. In
the case of franchise agreements which were in existence on 1 October 1991, and
which have been notified to the Authority before 1 October 1992, this licence
shall have effect from 17 November 1994 where the agreements already fulfil the
conditions of that licence. Where such notified agreements do not fulfil the
conditions of the licence, they do not qualify for the benefit of the licence.
The Authority will inform notifying parties whether their agreement fulfils the
conditions of the licence, and, if it does not, the reasons for this. Where
such notified agreements are amended to fulfil the conditions of the licence,
the licence shall have effect from the date when the conditions of the licence
are fulfilled.
31. In
the case of franchise agreements which came into existence after 1 October
1991, and which have been notified to the Authority before 17 November 1994,
this licence shall have retroactive effect from the date of notification, if
the agreements already fulfilled the conditions of the licence, or from the
date, being not earlier than the date of notification, when the conditions of
the licence were fulfilled. The Authority will inform the parties whether
their agreement fulfils the conditions of the licence or not. For other
agreements which came into existence after 1 October 1991, and which have not
been notified, or those which come into existence in the future, this licence
shall have effect from the date, at or after the date of grant of the licence,
upon which its conditions are fulfilled.
Other
category licences
32. Agreements
may benefit from the provisions either of this category licence or of another
category licence, according to their particular nature and provided that they
fulfil the necessary conditions of application. They may not benefit from a
combination of the provisions of this category licence with those of another
category licence.
Divergences
from EU Regulation 4087/88
33. This
Decision and the category licence itself are based to a very large extent upon
EU Regulation 4087/88, which grants a block exemption from the prohibition of
Article 85(1) of the Treaty of Rome to certain categories of franchise
agreements. One difference between the category licence and the Regulation,
however, is that references to the common market or to a defined area of the
common market in the Regulation are altered to the State or to a defined area
of the State in the category licence. In addition, references to exemption and
the Regulation are altered to references to the category licence.
34. The
main difference is that the category licence omits Article 6 of the Regulation
which provides for an accelerated opposition procedure. This allows for
agreements which contain clauses not specifically covered by the Regulation to
be notified to the EU Commission and for exemption to follow provided that the
Commission does not oppose the application for exemption within a specified
period of time (six months). The Authority does not consider that there is a
need for such a procedure in the case of this category licence. The procedure
appears to have been of little practical use, and it is significant that the
Commission is proposing to eliminate similar procedures from revised block
exemption Regulations for intellectual property licences. Consequently,
Article 7 of the Regulation, which imposes an obligation of secrecy upon the
Commission and the authorities of the Member States in connection with this
procedure, is also omitted from the category licence.
35. In
addition, unlike the Regulation, which contains no transition provisions, the
category licence has to make provision for agreements which have been notified
to the Authority, which are contained in Article 7 of the category licence.
Finally, the Authority does not consider it necessary to include the following
parts of the Regulation in the category licence:
(i)
Article 2(b), which permits an obligation on the master franchisee not to
conclude franchise agreements outside its contract territory (because in
general the contract territory in such agreements covers the whole State);
(ii)
Article 4(b) and (c), which impose conditions for the application of the
exemption, namely concerning the honouring of guarantees by franchisees and the
indication by a franchisee of its status as an independent undertaking; and
(iii)
Article 8 where specific examples are given of the circumstances in which the
benefit of the Regulation may be withdrawn in a particular case.
14. Any
franchise agreement, however, which comes within the scope of Article 85(1) of
the Treaty would have to satisfy the conditions of the Regulation in order to
benefit from the block exemption afforded by the Regulation, irrespective of
whether it satisifies the conditions for this category licence.
The
Decision
36. The
Competition Authority considers that franchise agreements, which contain
certain clauses which restrict competition, constitute agreements between
undertakings which have the object and effect of preventing, restricting or
distorting competition in goods and/or services in the State, and thus they
offend against
Section 4(1) of the
Competition Act, 1991. In the opinion of
the Authority, having regard to all relevant market conditions, such agreements
generally satisfy all the conditions required for the grant of a category
licence under
Section 4(2) of the
Competition Act. Accordingly, the
Competition Authority grants a licence to the specified category of agreements,
subject to the specified period and specified conditions as required under
Section 8(1) of the
Competition Act, as follows:
The
Category Licence
Article
1
1. Pursuant
to
Section 4(2) of the
Competition Act, 1991, and subject to the provisions of
this licence, the Competition Authority grants a category licence to franchise
agreements to which two undertakings are party, which include one or more of
the restrictions listed in Article 2.
2. The
category licence provided for in paragraph 1 shall also apply to master
franchise agreements to which two undertakings are party. Where applicable,
the provisions of this category licence concerning the relationship between
franchisor and franchisee shall apply
mutatis
mutandis
to the relationship between franchisor and master franchisee and between master
franchisee and franchisee.
3. For
the purposes of this category licence:
(a) ´franchise'
means a package of industrial or intellectual property rights relating to trade
marks, trade names, shop signs, utility models, designs, copyrights, know-how
or patents, to be exploited for the resale of goods or the provision of
services to end users;
(b) ´franchise
agreement' means an agreement whereby one undertaking, the franchisor, grants
the other, the franchisee, in exchange for direct or indirect financial
consideration, the right to exploit a franchise for the purposes of marketing
specified types of goods and/or services; it includes at least obligations
relating to:
-
the use of a common name or shop sign and a uniform presentation of contract
premises
and/or means of transport,
-
the communication by the franchisor to the franchisee of know-how,
-
the continuing provision by the franchisor to the franchisee of commercial or
technical
assistance during the life of the agreement;
(c) ´master
franchise agreement' means an agreement whereby one undertaking, the
franchisor, grants the other, the master franchisee, in exchange for direct or
indirect financial consideration, the right to exploit a franchise for the
purposes of concluding franchise agreements with third parties, the franchisees;
(d) ´franchisor's
goods' means goods produced by the franchisor or according to its instructions,
and/or bearing the franchisor's name or trade mark;
(e) ´contract
premises' means the premises used for the exploitation of the franchise or,
when the franchise is exploited outside those premises, the base from which the
franchisee operates the means of transport used for the exploitation of the
franchise (contract means of transport);
(f) ´know-how'
means a package of non-patented practical information, resulting from
experience and testing by the franchisor, which is secret, substantial and
identified;
(g) ´secret'
means that the know-how, as a body or in the precise configuration and assembly
of its components, is not generally known or easily accessible; it is not
limited in the narrow sense that each individual component of the know-how
should be totally unknown or unobtainable outside the franchisor's business;
(h) ´substantial'
means that the know-how includes information which is of importance for the
sale of goods or the provision of services to end users, and in particular for
the presentation of goods for sale, the processing of goods in connection with
the provision of services, methods of dealing with customers, and
administration and financial management; the know-how must be useful for the
franchisee by being capable, at the date of conclusion of the agreement, of
improving the competitive position of the franchisee, in particular by
improving the franchisee's performance or helping it to enter a new market;
(i) ´identified'
means that the know-how must be described in a sufficiently comprehensive
manner so as to make it possible to verify that it fulfils the criteria of
secrecy and substantiality; the description of the know-how can either be set
out in the franchise agreement or in a separate document or recorded in any
other appropriate form.
Article
2
15. The
category licence provided for in Article 1 shall apply to franchise agreements
which include some or all of the following restrictions, notwithstanding the
fact that, in some circumstances, these may not constitute restrictions of
competition:
(a) an
obligation on the franchisor, in the State or in a defined area of the State,
the contract territory, not to:
-
grant the right to exploit all or part of the franchise to third parties,
-
itself exploit the franchise, or itself market the goods or services which are
the subject-matter of the franchise under a similar formula,
-
itself supply the franchisor's goods to third parties;
(b) an
obligation on the franchisee to exploit the franchise only from the contract
premises;
(c) an
obligation on the franchisee to refrain, outside the contract territory, from
seeking customers for the goods or the services which are the subject-matter of
the franchise;
(d) an
obligation on the franchisee not to manufacture, sell or use in the course of
the provision of services, goods competing with the franchisor's goods which
are the subject-matter of the franchise; where the subject-matter of the
franchise is the sale or use in the course of the provision of services both
certain types of goods and spare parts or accessories therefor, that obligation
may not be imposed in respect of these spare parts or accessories.
Article
3
1. The
category licence provided for in Article 1 shall apply notwithstanding the
presence of any of the following obligations on the franchisee, in so far as
they are necessary to protect the franchisor's industrial or intellectual
property rights or to maintain the common identity and reputation of the
franchised network, since these are not deemed to constitute restrictions of
competition in such circumstances:
(a) to
sell, or use in the course of the provision of services, exclusively goods
matching minimum objective quality specifications laid down by the franchisor;
(b) to
sell, or use in the course of the provision of services, goods which are
manufactured only by the franchisor or by third parties designated by it, where
it is impracticable, owing to the nature of the goods which are the subject
matter of the franchise, to apply objective quality specifications;
(c) not
to engage, directly or indirectly, in any similar business in a territory where
it would compete with a member of the franchised network, including the
franchisor; the franchisee may be held to this obligation after termination of
the agreement, for a reasonable period which may not exceed one year, in the
territory where it has exploited the franchise;
(d) not
to acquire financial interests in the capital of a competing undertaking, which
would give the franchisee the power to influence the economic conduct of such
undertaking;
(e) to
sell the goods which are the subject-matter of the franchise only to end users,
to other franchisees and to resellers within other channels of distribution
supplied by the manufacturer of these goods or with its consent;
(f) to
use its best endeavours to sell the goods or provide the services that are the
subject-matter of the franchise; to offer for sale a minimum range of goods,
achieve a minimum turnover, plan its orders in advance, keep minimum stocks and
provide customer and warranty services;
(g) to
pay to the franchisor a specified proportion of its revenue for advertising and
itself carry out advertising for the nature of which it shall obtain the
franchisor's approval.
2. The
category licence provided for in Article 1 shall apply notwithstanding the
presence of any of the following obligations on the franchisee:
(a) not
to disclose to third parties the know-how provided by the franchisor; the
franchisee may be held to this obligation after termination of the agreement;
(b) to
communicate to the franchisor any experience gained in exploiting the franchise
and to grant it and other franchisees a non-exclusive licence for the know-how
resulting from that experience;
(c) to
inform the franchisor of infringements of licensed industrial or intellectual
property rights, to take legal action against infringers or to assist the
franchisor in any legal actions against infringers;
(d) not
to use know-how licensed by the franchisor for purposes other than the
exploitation of the franchise; the franchisee may be held to this obligation
after termination of the agreement;
(e) to
attend or have its staff attend training courses arranged by the franchisor;
(f) to
apply the commercial methods devised by the franchisor, including any
subsequent modification thereof, and use the licensed industrial or
intellectual property rights;
(g) to
comply with the franchisor's standards for the equipment and presentation of
the contract premises and/or means of transport;
(h) to
allow the franchisor to carry out checks of the contract premises and/or means
of transport, including the goods sold and the services provided, and the
inventory and accounts of the franchisee;
(i) not
without the franchisor's consent to change the location of the contract premises;
(j) not
without the franchisor's consent to assign the rights and obligations under the
franchise agreement.
3. In
the event that, because of particular circumstances, obligations referred to in
paragraph 2 fall within the scope of
Section 4(1), they shall also be licensed
even if they are not accompanied by any of the obligations licensed by Article 1.
Article
4
16. The
category licence provided for in Article 1 shall apply on condition that the
franchisee is free to obtain the goods that are the subject-matter of the
franchise from other franchisees; where such goods are also distributed through
another network of authorized distributors, the franchisee must be free to
obtain the goods from the latter.
Article
5
17. The
category licence provided for in Article 1 shall not apply where:
(a) undertakings
producing goods or providing services which are identical or are considered by
users as equivalent in view of their characteristics, price and intended use,
enter into franchise agreements in respect of such goods or services;
(b)
without
prejudice to Article 2 (d) and Article 3 (1)(b), the franchisee is prevented
from obtaining supplies of goods of a quality equivalent to those offered by
the franchisor;
(c) without
prejudice to Article 2 (d), the franchisee is obliged to sell, or use in the
process of providing services, goods manufactured by the franchisor or third
parties designated by the franchisor and the franchisor refuses, for reasons
other than protecting the franchisor's industrial or intellectual property
rights, or maintaining the common identity and reputation of the franchised
network, to designate as authorized manufacturers third parties proposed by the
franchisee;
(d) the
franchisee is prevented from continuing to use the licensed know-how after
termination of the agreement where the know-how has become generally known or
easily accessible, other than by breach of an obligation by the franchisee;
(e) the
franchisee is restricted by the franchisor, directly or indirectly, in the
determination of sale prices for the goods or services which are the
subject-matter of the franchise, without prejudice to the possibility for the
franchisor of recommending sale prices;
(f) the
franchisor prohibits the franchisee from challenging the validity of the
industrial or intellectual property rights which form part of the franchise,
without prejudice to the possibility for the franchisor of terminating the
agreement in such a case;
(g) franchisees
are obliged not to supply within the State the goods or services which are the
subject-matter of the franchise to end users because of their place of residence.
Article
6
18. The
Competition Authority may withdraw the benefit of this category licence where
it finds in a particular case that an agreement nevertheless has certain
effects which are incompatible with the conditions laid down in Section 4(2) of
the Competition Act.
Article
7
1.(a) As
regards agreements which were in existence on 1 October, 1991, and were
notified before 1 October 1992, this category licence shall have effect from 17
November 1994, where the agreements already fulfil the conditions of the licence.
(b)
As
regards agreements which were in existence on 1 October 1991, and were notified
before 1 October 1992, and which do not fulfil the conditions of the licence,
but which are later amended to fulfil the conditions of the licence, this
category licence shall have effect from the date when those conditions were
fulfilled.
2. As
regards agreements which came into existence after 1 October 1991, and which
were notified before 17 November 1994, this category licence shall have
retroactive effect from the date of notification where the agreements already
fulfil the conditions of the licence, or from the date, being not earlier than
the date of notification, when the agreements were amended so as to fulfil
those conditions.
Article
8
19. This
category licence shall enter into force on 17 November 1994. It shall expire
on 31 December 1999.
For
the Competition Authority
Patrick
M. Lyons
Chairman
17
November 1994
Notes
1.
Bellamy & Child, Common Market Law of Competition, 4th
edition, Sweet & Maxwell 1993, para 7-163.
2.
Judgment of the Court of Justice of 28 January 1986 in the
case of Pronuptia de Paris GmbH v Pronuptia de Paris Irmgard
3.
Commission Regulation (EEC) No. 4087/88 of 30 November 1988
on the application of Article 85(3) of the Treaty to
categories of franchise agreements. OJ L359, 28.12.88, p.46.
4.
Licence for Categories of Exclusive Distribution Agreements,
20.
Decision No. 144, 5 November 1993.
© 1994 Irish Competition Authority
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