France: Identifying the franchise agreement – definition and distinctions

Franchising is proving extremely popular in the business world. It enables the management of a distribution network based on the repetition of the franchisor's success by its franchisees, who benefit from the franchisor's know-how, assistance and distinctive signs. In practice, franchising enables retailers to exploit the concept developed by a franchisor, under the franchisor's brand and counting with the franchisor's assistance, while retaining their independence. In this article, we will look at what is meant by a “franchise contract” in France.

• What is a franchise? »

• A specific contract, to be distinguished from other distribution contracts »
  

In French law, the French legislator has never defined the franchise contract, leaving it to the courts to define its limits and its system. 

 

The Court of Justice of the European Union (“CJEU”), in its judgment of 28 January 1986, defined a franchise contract as one whereby “an undertaking which has established itself as a distributor on a given market and thus developed certain business methods grants independent traders, for a fee, the right to establish themselves in other markets using its business name and the business methods which have made it successful. Rather than a method of distribution, it is a way for an undertaking to derive financial benefit from its expertise without investing its own capital. Moreover, the system gives traders who do not have the necessary experience access to methods which they could not have learned without considerable effort and allows them to benefit from the reputation of the franchisor's business name”.

 

Following the same logic, the Guidelines of 30 June 2022, accompanying Regulation (EU) 2022/720 of 10 May 2022 (having replaced the former Regulation (EU) 330/2010 since 1 June 2022) specify that “Franchise agreements contain licences of IPRs (intellectual property rights) relating to trademarks or signs, and know-how for the use and distribution of goods or the provision of services. In addition to the licence of IPRs, the franchisor usually provides the franchisee with commercial or technical assistance for the duration of the agreement, such as procurement services, training, advice on real estate and financial planning. The licence and the assistance provided are integral components of the business method being franchised” (Points 85 et seq.).

 

The European Code of Ethics for Franchising, drawn up by the European Franchise Federation (an association of franchise federations located mainly in Europe) defines franchising as “a system of marketing goods and/or services and/or technology, which is based upon a close and ongoing collaboration between legally and financially separate and independent undertakings, the Franchisor and its individual Franchisees, whereby the Franchisor grants its individual Franchisee the right, and imposes the obligation, to conduct a business in accordance with the Franchisor’s concept. The right entitles and compels the individual Franchisee, in exchange for a direct or indirect financial consideration, to use the Franchisor’s trade name, and/or trade mark and /or service mark, know-how, business and technical methods, procedural system, and other industrial and /or intellectual property rights, supported by continuing provision of commercial and technical assistance, within the framework and for the term of a written franchise agreement, concluded between parties for this purpose”.

 

This definition of a franchise is widely accepted.

 

Under French law, a franchise agreement is characterised by the combination of the following three criteria: 

which should be examined in turn.

 

Regulation 2022/720 defines know-how, as a secret, substantial and identified body of non-patented practical information resulting from the franchisor's experience and tested by the franchisor. It constitutes an essential element of the franchise agreement.

Know-how is therefore: 

 

If one of these qualities is lacking, the franchise agreement would be deprived of consideration due to a lack of know-how. Moreover, it would be declared null and void in the event of a litigation, which would lead to the retroactive annulment of the agreement. The franchise contract would then be considered by legal fiction as never having existed, which would entail the obligation to restore the parties to their original state and, as far as the franchisor is concerned, to return the the royalties paid by the franchisee, as well as to compensate any loss suffered by the franchisee (for example, in respect of investments that are specific to the brand borne by the franchisee).

  

The term refers to all of the franchisor's distinctive signs, under which he has developed his concept, and which enable customers to identify the franchisee as belonging to the network (trademark, logo, trade name, sign, architectural charter, graphic charter, photographs, etc.). 

In the franchising context, the franchisor allows his franchisees to use his brand. It is therefore necessary to ensure beforehand that: 

Similar to the case of the absence of know-how, in the absence of a valid trademark and/or the franchisor's rights over the trademark made available to franchisees, the franchise agreement could be rendered null and void for lack of consideration, with all the consequences that this entails in terms of the return of entry fees and royalties. 

 

Particular care must therefore be taken on this point when drafting the franchise agreement, in order to protect the trademark and other distinctive signs of the franchise.

 

The franchisor has an obligation to assist the franchisee. The franchisor must provide practical assistance, not only for the business launch, but throughout the term of the contract. 

 

This assistance may take various forms (visits by the franchisor, meetings, creation of a hotline between franchisor and franchisees, commercial assistance, etc.) and varies according to the type of assistance that the franchisor wishes to provide to the franchisee, the details of which are set out in the franchise agreement. 

 

This assistance must not, however, result in the franchisor interfering in the franchisee's business, as this could threaten the franchisee's independence and lead to the franchise contract being reclassified as an employment contract.  

 

Lastly, for a franchise agreement to be complete, it must provide for the franchisee to have access to the distinctive signs developed by the franchisor, which make it possible to identify that the franchisees belong to a single network.

 

Although the term “franchise” is often used as a generic term, this distribution mode corresponds indeed to a specific contract, combining the three above-mentioned components, which differs from other types of distribution contracts, in particular trademark licensing contracts, commercial concession contracts and commission-affiliation contracts.

  

A trademark licence contract is a contract under which the owner of a trademark grants the licensee the right to use that trademark on its own products and/or to make commercial use of it, in particular as a store sign. 

 

While all franchise agreements include a trademark licence, unlike franchise agreements, trademark licence agreements do not include any transfer of know-how or any obligation on the part of the network head to provide assistance.

 

In this way, trademark licence contracts can be an alternative to franchising for developing a distribution network when the know-how is not sufficiently proven (test not long enough, for example). 

 

If the lack of availability of know-how limits the obligations of the network head, it also limits the control it can exercise over the network, as such control can only be justified in terms of respect for the brand image (and not in terms of protection of the know-how).

 

A concession contract is a contract under which the licensor grants a distributor, exclusive rights to supply and resell the licensor's products under the licensor's brand and trade name. 

 

In the case of a concession, this commercial right is therefore necessarily exclusive for a given territory, the contract providing a guarantee that the licensor will not carry on any competing activity in the same territory. 

 

Franchise agreements may provide for territorial exclusivity, but this remains optional and is not an essential element of the franchise agreement. 

 

Furthermore, while an exclusive supply commitment is an essential element of a concession agreement, this type of commitment is only lawful in a franchise agreement if it meets conditions of usefulness and proportionality.

 

Finally, although know-how may be transferred in a commercial concession, this is not an essential element of the concession contract, unlike the franchise contract. Once again, the transmission of actual know-how will be a decisive distinguishing criterion.

 

The commission-affiliation contract is a contract under which the principal, who owns a stock of goods, places this stock on deposit with the commission-affiliate, who is responsible for reselling them in a shop under the principal's name, in return for a commission on the sale of these goods. 

 

Commission-affiliation is therefore a distribution model that combines two types of contracts: a commission contract, under which the commission agent acts in the name and on behalf of the principal, and an affiliation contract, under which the affiliate joins a distribution network. 

 

Unlike franchising, in commission-affiliation the head of the network retains ownership of the goods, which means in particular that 

It is mainly because of these advantages that this method of distribution, which is mainly used in the distribution of ready-to-wear clothing and in food retailing, has developed considerably.

 

However, this distribution scheme is not exempt of risk because of the possibility of applying the status of branch manager to the affiliated commission agent, in application of article L. 7321-2 of the French Labour Code, in the event of the provision or approval of the affiliated commission agent's premises by the head of the network. When the conditions for implementing this article are met, the commissionaire-affiliate is subject to the legal provisions applicable to employees, such as the application of the minimum growth wage and the payment of redundancy pay in the event of termination of the contract.

 

Since the status of branch manager can also be applied to a franchisee, particular care should be taken when drafting the clauses of the franchise contract.