France – Franchise Networks and the employment act

19 Oktober 2017

  • Frankreich
  • Vertrieb
  • Beschäftigung
  • Franchising

It is not only since the days of the Internet that brand manufacturers have had to contend with the fact that original products are offered outside of their authorized sales channels. The problem has since been significantly exacerbated, however. The relevant products are also referred to as gray market products.

The internal market of the European Economic Area makes it possible to exploit certain price advantages – that is, purchasing in one Member State at a price that is lower than in other Member States and selling to the end customer while passing on (or not passing on) the purchasing advantage. This is made possible by the “exhaustion regime”, according to which the sale of products, which at one time were made available in the European Economic Area with the copyright holder’s consent, cannot be prohibited.

Brand manufacturers’ attempts to counter this issue by means of distribution systems may be an effective instrument, but only if all distribution partners adhere to it. If a distribution partner pulls out, trademark owners (at least in Germany) are initially required to contact their distribution partner who is acting contrary to the contract. That is difficult when the distribution channel of the products in question cannot be traced by security systems (such as SKU numbers) beyond any doubt. A right to information against a third party generally does not exist. Thus, neither the distribution system itself nor the suspicion that the products are not of EU origin may be used easily to justify a right to information in selective or exclusive distribution. The Federal Court of Justice, for example, sees no reason to deviate from the exhaustion doctrine when implementing a selective distribution system (Federal Court of Justice, 1 ZR 63/04). In the case of a selective or exclusive distribution system (Federal Court of Justice, I AR 52/10), the burden of proof is reversed. Accordingly, it is initially the brand manufacturer itself that is responsible for providing evidence for its allegation of a non-EU product.

Exceptions are only made where, for example, the SKU numbers were modified, since this makes clarification difficult. In such cases, trademark infringement and at the same time breach of competition law are given by way of exception and it is not possible for the dealer to invoke exhaustion (Federal Court of Justice I ZR 1/98). The deliberate misleading of the authorized dealer by a third party to breach the contract is also recognized as an exception (Federal Court of Justice I ZR 96/04), which regularly is not verifiable, however.

By the way, the sensational December 2017 Coty decision of the Court of Justice of the European Union (CJEU C-230/16) (here you can find more: https://www.legalmondo.com/2017/12/eu-court-justice-allows-online-sales-restrictions-coty-case/) has not changed this basic presumption, either. In its Coty decision, the CJEU in the end confirms the exhaustion priority also and particularly for luxury products by referring to existing case law (specifically ECJ C-59/08).

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There are, however, more options available. As confirmed by the ECJ (ECJ, C-337/95), an exemption from the exhaustion principle already applies when the type of sale may be designed to damage the reputation of the trademark. In the Court’s opinion, this applies to the sale of products at discounters, if such a sale damages the reputation of the products to an extent that their luxurious image and quality is called into question (ECJ, C-59/08). This applies, on the one hand, if other products are sold in the immediate “neighborhood” to the branded product, without meeting the same quality requirements (ECJ, C-337/95) or if the advertising methods are unsuitable (ECJ, C-63/97). Hamburg Regional Court, for example, found that the use of photographs that are unsuitable and detrimental to the luxury image of a brand justifies a prohibition claim (at least with respect to use of the photos) (Hamburg Regional Court, 315 O 339/13). The Federal Court of Justice saw improper handling of the brand in an erroneous and negligent labeling of products (Federal Court of Justice, I ZR 72/11).

Düsseldorf Higher Regional Court has now also followed these CJEU guidelines by prohibiting the sale of high-priced cosmetic products, which are distributed in the framework of a strictly regulated selective distribution system, at a discounter (Düsseldorf Higher Regional Court, I-20 U 113/17). The Court explicitly referenced the CJEU, by repeating its principles and then applying them in the case of the discounter:

“The permanent and extensive sale of the cosmetic products at issue on the online platform www…de is suitable to significantly impair the image of the application brands. The way in which the products are presented there draws the application brands into the mundane and ordinary. As the relevant public is used to from the multitude of Respondent’s conventional self-service department stores, the offering on www…de of everyday products is frequently dominated in the form of particularly low priced own labels, such as Z.’s own label “O.” Respondent’s motto applies here as well. The assortment ranges from food to electronics, household goods, clothing to cosmetics. Since Respondent’s online presence was merged with that of the company “B” that it had acquired, it is moreover not only Respondent that offers its goods for sale on the platform, but also third parties may market goods via the online platform. The portal is designed to be functional and oriented toward products that are on sale. Customers are able to collect PAYBACK points with each purchase and may make use of financing. In some cases, goods are advertised at “instead of prices” and red letters indicate in attention-getting manner what percentage customers will save compared to the original prices. Product consultation does not take place.”

By offering luxury products at random alongside every-day and mass products without any kind of prominent presentation and becoming affordable through financing options, the products would be placed on a level with the other items offered, thereby significantly affecting the prestige value of the products. For this reason, Düsseldorf Higher Regional Court pronounced a complete ban on distribution for the online platform and the department stores.

Conclusion:

Even if the Düsseldorf Higher Regional Court’s decision is not to be considered revolutionary in light of existing CJEU case law, it certainly ensures some impetus in proceeding against gray market dealers, since national courts are now no longer facing the “uncomfortable” hurdle of applying CJEU case law, but rather in the customary fairway of national case law. In principle, Düsseldorf Higher Regional Court case law may not be understood as a blank check, however. Even Düsseldorf Higher Regional Court did not allow a general ban, but rather weighed individually whether the distribution in its concrete form could be prohibited. In the future, it will also be important to work out what in particular will determine the extent of the ban.

The author of this post is Ilja Czernik.

We have seen in a previous post the advantages of mediation as an alternative dispute resolution method in franchise agreements. From there, what recommendations could we give to make better use of mediation? Although we will have to adapt them to each specific case, the following points could be very useful:

  1. Specifically foresee in the contract a mediation clause as an alternative dispute resolution method. Although the franchisee and franchisor can agree to mediate once the conflict arises without having reflected it in the contract, it will surely be more complicated to do so when both have already initiated the discrepancies. It is preferable, therefore, to do it before: it places the parties in a better predisposition, they will be able to choose the procedure in a better way, as well as the institution, the mediator, the formalities, etc.
  2. If the parties have agreed on a mediation agreement, this may be initiated at the request of only one of them, without having to re-reach an agreement.
  3. The mediation clause is also recommended, because once an application for the initiation of mediation has been agreed upon, the limitations period of the legal actions will be suspended until the termination of the mediation.
  4. By virtue of this agreement and having initiated the mediation, the courts will not be able to hear such controversies during the time in which the mediation takes place, provided that the interested party invokes it.
  5. In the clause, it is convenient to foresee some elements, such as what issues may be the subject of mediation (all or only some of them), the need or not of a previous negotiation, adequate deadlines to avoid that this procedure can be used to delay other ways, the applicable law to mediation and to the agreement reached with it, the competent jurisdiction for the adoption of precautionary measures, where appropriate, or the jurisdiction or arbitration to settle the dispute in case of failure of mediation.
  6. It is true that one of the principles of mediation is its voluntary nature. However, the existence of the clause and being obliged to attend at least one informative session before initiating any judicial procedure can convince of its advantages even the most reticent party.
  7. Include the mediation as an alternative dispute resolution method within the pre-contractual information that the franchisor must deliver to potential franchisees. Although the Spanish norm does not seem to expressly demand that reference be made, this seems an optimal moment to show transparency and the will to solve possible problems in an agile manner. It also predisposes the good understanding, cooperation and good faith of the franchised brand before the beginning of relations.
  8. Appropriately select the mediation institution to which to refer in case of conflict or foreseeing the best way to choose the most appropriate mediator. Currently there are many institutions or professionals that offer guarantees of impartiality. It may be relevant that it is a mediator with specific training, who facilitates the communication and confidence of the parties and, insofar as possible, who can fully understand the nature of the franchise. There are institutions in Spain such as the Signum Foundation (http://fundacionsignum.org/) or MediaICAM of the Madrid Bar Association (https://mediacion.icam.es) that can be good choices.

On the topic of the importance of Mediation in Distribution Agreements, you can check out the recording our webinar “Mediation in International Conflicts”

It is recommended that franchise agreements clearly foresee how to solve and deal with potential conflicts. The relationship between franchisor and franchisee may have some difficulty due, for example, to the absence of specific regulation of its content (at least in Spain) and to the fact that its elements are contained in different pieces of legislation. What I will say in these posts could also be useful for other distribution contracts, or in general collaboration agreements, although I will focus on franchising due to its special characteristics.

Conflicts between franchisees and franchisors can cover multiple legal and commercial aspects: product supplies, brands, know-how, exclusivity and territory, non-competition, promotion and advertising, sales through the Internet … And all this, in a context in which, frequently, both parties want to maintain their collaboration and good relations.

How to face, then, these potential conflicts? A first step is usually the direct negotiation between the parties and their advisers who have the task of being useful to them in this purpose. But this does not always end with a positive result. And the almost natural step if this happens is usually the beginning of a judicial procedure often preceded by a series of previous formal requirements.

However, there is a way that, taking into account the characteristic elements of the franchise contract and the nature of possible conflicts, can be an excellent and privileged alternative method to solve them: mediation. Let’s see why:

  1. In mediation there is no third party that imposes its decision on the conflict. The franchisor and the franchisee solve it by themselves with the help of a professional (the mediator) who, in a neutral and independent way, uses their skills and specifically acquired knowledge (help in identifying the interests of the parties, active listening, legitimacy …) so that both can reach a consensus. The mediator does not advise (the parties can go with their respective advisors), it does not decide or sentence, but it helps that the parties find the solution that most satisfies both: they better than anyone else know the business, its evolution, the aspects perhaps not foreseen in the contract and the future that they want for themselves.
  2. Mediation is a harmonized mode of dispute resolution in the European Union through the Directive on certain aspects of mediation in civil and commercial matters. This allows the parties in different Member States to be familiar with it, therefore it is possible to foresee a unified system in contracts with international parties, and it will be easier to enforce the agreements reached.
  3. Mediation allows, therefore, to satisfy both parties better than the judicial alternative and with more creative solutions that a judge will never be able to apply. Unlike a legal proceeding where one usually wins and another loses, mediation can bring together the interests of franchisees and franchisors and, in this way, both obtain a better response. It allows a less belligerent and more friendly format that can be very useful since in many cases the disputes do not have too much entity to go to court, or refer to non-essential aspects of the relationship, or can be addressed from more global perspectives or with references to objective parameters. In addition, frequently, franchisees and franchisors want to continue maintaining their commercial relationship and, through mediation, resolved the conflict, this will be possible (unthinkable, however, if they had initiated a judicial confrontation).
  4. Mediation is, in principle, voluntary. At any time, the parties can abandon it even in those Member States or conflicts for which it may be mandatory to attend at least to the information session.
  5. It is a method that easily adapts to the characteristics of both parties: it is very flexible with the formalities, and the franchisor and the franchisee are who, with the help of the mediator, design a large part of the procedure to arrive at a solution being able to control its evolution. It also allows a solution that is much more adapted to their specific situation, provides more imaginative solution ideas, allows better dialogue, maintains the relationship, distinguishes facts from opinions or judgments, and allows the parties to return to their business saving energies that would otherwise be devoted to conflict management.
  6. It is a faster procedure than a trial, with a cost that can be assumed and controlled in advance.
  7. Mediation is confidential, so the publicity of the conflict is reduced, avoiding reputation costs or by extending to the rest of the network. What is treated in a mediation procedure cannot be disclosed even in a subsequent judicial proceeding.
  8. Both parties can arrive at a solution that will be binding for them. In addition, even if no agreement is reached, with the mediation the parties are in a better position to continue the relationship and resolve their problems: they have been able to present their points of view, they have been heard and have listened, they have opened dialogue channels, they have been able to show greater flexibility and, in short, they have improved their relations as a requirement to end the conflict and reach agreements.
  9. The degree of compliance with conflicts resolved through mediation is much higher than those imposed by a judge since the agreements are more satisfactory for them and it has been the parties themselves who have decided what to do.
  10. And finally, if the mediation has not worked, the possibility of claiming in the courts remains open.

If you want to develop your distribution network abroad, a network of commercial agents is the easiest way, and France is no exception. Before entering into an agency  contract ruled by French law, it is nevertheless advisable to know its main features, which will be discussed in this post. 

Definition

A commercial agent is a professional representative who negotiates and eventually concludes contracts in the name of and on behalf of his principal.

The French Commercial Code (Article L134-1) defines a commercial agent precisely as:

«L’agent commercial est défini comme un mandataire qui, à titre de profession indépendante, sans être lié par un contrat de louage de services, est chargé, de façon permanente, de négocier et, éventuellement, de conclure des contrats de vente, d’achat, de location ou de prestation de services, au nom et pour le compte de producteurs, d’industriels de commerçants ou d’autres agents commerciaux.»

«The commercial agent is an agent who, as an independent professional, without being bound by an employment contract, is in a permanent position to negotiate and eventually to enter into contracts for the sale, purchase, rent/hire or performance of service in the name and on behalf of manufacturers, industrialists, traders or other commercial agents.»

The definition shows that the agent is independent: he/she is free to organise his/her own employment activity and business (sole agency, limited company etc.). This notion is fundamental, because the more the agent will be present and active in the organisation of the principal activity, the more the contract will be at risk of being requalified as a VRP (employee contract of sales representative) contract by the courts.

In the spirit of the contractual relationship and in the drafting of the contract itself, one must be very careful not to confuse an agent with a VRP since, according to French law, the latter is considered an employee, with greater rights and compensation for termination of contract.

Requirements

The agent must be registered in the register of commercial agents at the Registry of the Commercial Court at his place of domicile. 

Contract form

The written form is not mandatory but strongly recommended. Article L134-2 of the Commercial Code provides that each party may request both the contract and addenda to be in writing.

Execution of the contract – important clauses

  • Duration: for a fixed period or indefinite.
  • Fee: a commission freely defined between the parties.
  • Territory: it is very important to define the territory with precision and avoid wide generic clauses such as “world”.
  • Exclusive: the clause must specify whether the exclusivity is in relation to the territory and/or on the clientele in a precise manner and if the principal reserves the right to intervene.
  • Notice of withdrawal (Article L134-11, paragraph 3 of the Commercial Code): 1 month for the first year, 2 months for the second year, 3 months thereafter.

Post-contract – important clauses

Post-contractual non-competition clauses (Article L134-14 of the Commercial Code) must be in written form and limited to a maximum of 2 years post-contract.

The non-competition clauses restriction (territory, customers, products) must not be so restrictive as to prohibit the agent from working after the end of the contract. Therefore customers and products included in the agreement must be competitors of the type of goods subject of the agency contract. Otherwise, the courts will consider the clause as null and non-existent, entitling the agent to claim compensation.

French law does not provide any compensation for compliance with this clause.

After termination of the contract, the agent is entitled to an indemnity for termination as compensation (Article L134-12 of the Commercial Code). It is a rule of public order, therefore, the clause that provides for an exemption of this entitlement will be considered null and non-existent.

The agent has one year to assert this right to severance indemnity.

There is no requirement of keeping it in writing, however, it is advisable to write a notice of receipt as proof of the termination.

The amount of the compensation is equal to two years of commissions (gross) received by the agent. This is to be seen as a maximum measure and it is up to the principal to prove the reason as to why the agent should be entitled to a lower compensation.

In the event of litigation, the courts will at their discretion evaluate the amount of the request of a maximum of two years.

Cases in which compensation is not due:

  • Assignment of the contract to another agent;
  • Termination of the contract by the agent;
  • Serious non-fulfilment of the contract by the agent.

Serious breach of contract can result from the non-fulfilment of clauses that are defined in the contract as important or must be assessed from time to time with the advice of your lawyer.

Focus: the termination of contract due to retirement

The agent is entitled to the indemnity for termination as compensation also when he/she ceases the activity and retires.

French jurisprudence (in particular the jurisprudence of the Court of Cassation), however, requires a more specific check of the reason for the termination of the contract: the agent must not only claim to be entitled to the retirement pension, he should also assert he is not in physical conditions to be able to work anymore.

Which is the competent French court?

Even if the agent is a trading company, the nature of the contract is still civil. By virtue of this, the competent court varies according to the person who brings the claim.

If the agent is the claimant, he can choose between “tribunal de grande instance” and “tribunal de commerce”.

If, on the other hand, the principal is the claimant, he must also begin the claim before the “tribunal de grande instance”.

Long expected by manufacturers of brand-name products, brick-and-mortar-distributors, internet retailers and online platform providers as Amazon, eBay, Zalando, the Court of Justice of the European Union (CJEU) just decided yesterday on 6 December 2017 – its “Santa Claus decision” – that manufacturers may lawfully ban sales via third party platforms.

In a previous Legalmondo post we analysed this dispute (“the Coty case”) just resolved by the CJEU. According to its decision, such platform ban is not necessarily an unlawful restriction of competition under article 101 Treaty on the Functioning of the European Union (“TFEU”): The court has confirmed that selective distribution systems for luxury goods, which shall primarily preserve the goods’ luxury image may comply with European antitrust law.

More specifically, the court decided that platforms bans are lawful, namely that EU law allows restricting online sales in

“a contractual clause, such as that at issue in the present case, which prohibits authorised distributors of a selective distribution network of luxury goods designed, primarily, to preserve the luxury image of those goods from using, in a discernible manner, third-party platforms for internet sales of the goods in question, provided that the following conditions are met: (i) that clause has the objective of preserving the luxury image of the goods in question; (ii) it is laid down uniformly and not applied in a discriminatory fashion; and (iii) it is proportionate in the light of the objective pursued. It will be for the Oberlandesgericht to determine whether those conditions are met.”

(cf. the CJEU’s press release No. 132/2017).

This is the intermediary result of the Coty case as it is now up to the Higher Regional Court of Frankfurt to apply these requirements in the Coty case. Simply put, the question in that case is whether owners of luxury brands may generally or at least partially ban the resale via internet on third-party platforms. The Coty case’s history is quite interesting: The luxury perfume manufacturer Coty’s German subsidiary Coty Germany GmbH (“Coty”) set up a selective distribution network and its distributors may sell via the Internet – but banned to sell via third party platforms which are externally visible as such, i.e. Amazon, eBay, Zalando & Co. The court of first instance decided that such ban of sales via third party platforms was an unlawful restriction of competition. The court of second instance, however, did not see the answer that clear. Instead, the court requested the CJEU to give a preliminary ruling on how European antitrust rules have to be interpreted, namely article 101 TFEU and article 4 lit. b and c of the Vertical Block Exemptions Regulation or “VBER” (decision of 19.04.2016, for details, see the previous post “eCommerce: restrictions on distributors in Germany”). On 30 March 2017, the hearing took place before the CJEU. Coty defended its platform ban, arguing it aimed at protecting the luxury image of brands such as Marc Jacobs, Calvin Klein or Chloe. The distributor Parfümerie Akzente GmbH instead argued that established platforms such as Amazon and eBay already sold various brand-name products, e.g. of L’Oréal. Accordingly, there was no reason for Coty to ban the resale via these marketplaces. Another argument brought forward against the platform ban was that online platforms were important for small and medium-sized enterprises. Indications on how the court could decide appeared on 26 July 2017, with the Advocate General giving his opinion, concluding that platform bans appear possible, provided that the platform ban depends “on the nature of the product, whether it is determined in a uniform fashion and applied without distinction and whether it goes beyond what is necessary” (see the previous post “Distribution online – Platform bans in selective distribution (The Coty case continues)”).

 

Practical Conclusions:

  1. This “Santa Claus decision” of 6 December 2017 is highly important for all manufacturers of brand-name products, brick-and-mortar-distributors, internet retailers and online platform providers – because it clarifies that manufacturers of brand-name products may ban sales via third party platforms (Amazon, eBay, Zalando and Co.) to ensure the same level of quality of distribution throughout all distribution channels, offline and online.
  2. As a glimpse back in advance: the district court of Amsterdam already on 4 October 2017 decided that Nike’s ban on its selective distributors not to use online platforms as Amazon was a lawful distribution criterion to safeguard Nike’s luxury brand image (case of Nike European Operations Netherlands B.V. vs. the Italy-based retailer Action Sport Soc. Coop, A.R.L., ref. no. C/13/615474 / HA ZA 16-959). More details soon!
  3. The general ban to use price comparison tools as stipulated by the sporting goods manufacturer Asics in its “Distribution System 1.0“ shall be anti-competitive – according to the Bundeskartellamt, as confirmed by the Higher Regional Court of Düsseldorf on 5 April 2017. The last word is, however, still far from being said – see the post “Ban of Price Comparison Tools anti-competitive & void?”. It will be interesting to see how the Coty case’s outcome will influence how to see such bans on price comparison tools.
  4. For further trends in distribution online, see the EU Commission’s Final report on the E-commerce Sector Inquiry and details in the Staff Working Document, „Final report on the E-commerce Sector Inquiry“.
  5. For details on distribution networks and distribution online, please see my articles

 

The Coty case is extremely relevant to distribution in Europe because more than 70% of the world’s luxury items are sold here, many of them online now. For further implications on existing and future distribution networks and the respective agreements, stay tuned: we will elaborate this argument on Legalmondo!

Based on our experience in many years advising and representing companies in the commercial distribution (in Spanish jurisdiction but with foreign manufacturers or distributors), the following are the six key essential elements for manufacturers (suppliers) and retailers (distributors) when establishing a distribution relationship.

These ideas are relevant when companies intend to start their commercial relationship but they should not be neglected and verified even when there are already existing contacts.

The signature of the contract

Although it could seem obvious, the signature of a distribution agreement is less common than it might seem. It often happens that along the extended relationship, the corporate structures change and what once was signed with an entity, has not been renewed, adapted, modified or replaced when the situation has been transformed. It is very convenient to have well documented the relationship at every moment of its existence and to be sure that what has been covered legally is also enforceable y the day-to-day commercial relationship. It is advisable this work to be carried out by legal specialists closely with the commercial department of the company. Perfectly drafted clauses from a legal standpoint will be useless if overtaken or not understood by the day-to-day activity. And, of course, no contract is signed as a “mere formality” and then modified by verbal agreements or practices.

The proper choice of contract

If the signature of the distribution contract is important, the choice of the correct type is essential. Many of the conflicts that occur, especially in long-term relationships, begin with the interpretation of the type of relationship that has been signed. Even with a written text (and with an express title), the intention of the parties remains often unclear (and so the agreement). Is the “distributor” really so? Does he buy and resell or there are only sporadic supply relationships? Is there just a representative activity (ie, the distributor is actually an “agent“)? Is there a mixed relationship (sometimes represents, sometimes buys and resells)? The list could continue indefinitely. Even in many of the relationships that currently exist I am sure that the interpretation given by the Supplier and the Distributor could be different.

Monitoring of legal and business relations

If it is quite frequent not to have a clear written contract, it happens in almost all the distribution relationships than once the agreement has been signed, the day-to-day commercial activity modifies what has been agreed. Why commercial relations seem to neglect what has been written in an agreement? It is quite frequent contracts in which certain obligations for distributors are included (reporting on the market, customers, minimum purchases), but which in practice are not respected (it seems complicated, there is a good relationship between the parties, and nobody remembers what was agreed by people no longer working at the company…). However, it is also quite frequent to try to use these (real?) defaults later on when the relationship starts having problems. At that moment, parties try to hide behind these violations to terminate the contracts although these practices were, in a sort of way, accepted as a new procedure. Of course no agreement can last forever and for that reason is highly recommendable a joint and periodical monitoring between the legal adviser (preferably an independent one with the support of the general managers) and the commercial department to take into account new practices and to have a provision in the contractual documents.

Evidences about customers

In distribution contracts, evidences about customers will be essential in case of termination. Parties (mainly the supplier) are quite interested in showing evidences on who (supplier or distributor) procured the customers. Are they a result of the distributor activity or are they obtained as a consequence of the reputation of the trademark? Evidences on customers could simplify or even avoid future conflicts. The importance of the clientele and its possible future activity will be a key element to define the compensation to which the distributor will pretend to be eligible.

Evidences on purchases and sales

Another essential element and quite often forgotten is the justification of purchases to the supplier and subsequent sales by distributors. In any distribution agreement distributors acquire the products and resell them to the final customers. A future compensation to the distributor will consider the difference between the purchase prices and resale prices (the margin). It is therefore advisable to be able to establish the correspondent evidence on such information in order to better prepare a possible claim.

Damages in case of termination of contracts

Similarly, it would be convenient to justify what damages have been suffered as a result of the termination of a contract: has the distributor made investments by indication of the supplier that are still to be amortized? Has the distributor hired new employees for a line of business that have to be dismissed because of the termination of the contract (costs of compensation)? Has the distributor rented new premises signing long-term contracts due to the expectations on the agreement? Please, take into account that the Distributor is an independent trader and, as such, he assumes the risks of his activity. But to the extent he is acting on a distribution network he shall be subject to the directions, suggestions and expectations created by the supplier. These may be relevant to later determine the damages caused by the termination of the contract.

France is a great market for franchise networks where almost 2,000 networks are operated. It is one of the most successful scheme of developing business.

Franchisor must mainly respect French regulations on pre-disclosure information and French and EU competition regulations, among others rules. Although the control of the quality of its network and of its brand image is a very important and legitimate issue for franchisor, the latter cannot interfere too much in the day-to-day activity of the franchisees, since franchisees are independent businesses. Therefore relations between franchisors and franchisees are only based on commercial law and not on employment law. However, recent French rules will lead franchisors to implement some employment law rules with their franchisees and franchisees’ employees.

Foreign franchisors operating franchise networks in France must indeed know how to deal with the constraints incurred by the Employment Act (dated 08 August 2016) and its Decree (dated 04 May 2017), and effective as from May 07 2017, relating to the creation of an employee forum for the whole franchise network. Indeed this Social Dialogue Committee can impact deeply the organization of franchise networks.

First of all, only networks in which operators are bound by franchise agreements are concerned by the new social dialogue committee. Accordingly, trademark licensing and distribution contracts appear not to be included. Franchise agreements should be understood as sui generis contracts that are the sum of three separate agreements: a trademark licensing agreement, a know-how licensing agreement, and a commercial or technical assistance agreement. However, the Act of 08 august 2016 creates some confusion by stating that the franchise agreements concerned by this Social Dialogue Committee are the agreements “referred to in article L330-3 of the French Commercial Code”, although not only does that article not define what a franchise contract is, it may also apply to other contracts (exclusive distribution agreements) to determine whether the network fall into the scope of this Act.

Furthermore, according to the Act, only specific franchise agreements including “clauses that have an impact on work organisation and conditions in franchisee businesses” are concerned. The Act does not define such clauses although, on the one hand, whether a social dialogue committee is called for depends on identifying such clauses, and on the other hand, franchisees are in essence independent of the franchisor when organising and managing their business, including in employment matters. It will therefore be necessary to conduct an employment audit of all franchise agreements (for instance, what happens if a clause sets opening hours or defines a dress code?) to determine whether the network fall into the scope of this Act.

Finally, a Social Dialogue Committee is only called for in franchise networks employing at least 300 staff working (full-time) in France. It would seem that this does not include the franchisor’s employees or the employees of operators that are not bound to the network’s head by a franchise agreement (e.g., operators bound by a trademark licensing contract).

An implementation implying a long negotiation

Even where the legal requirements are met, franchisors are under no obligation to set up a Social Dialogue Committee spontaneously. However, once a trade union has called for an Social Dialogue Committee to be set up, the franchisor does have an obligation to take part actively in the negotiations initiated by that trade, to check with all the franchisees whether the number of employees in its network reaches the 300 threshold, and then to set up a “negotiation forum” made of representatives of employees (trade unions) and of employers (franchisor and franchisees) to negotiate an agreement creating and organizing the future Social Dialogue Committee.

The negotiations with trade unions and franchisees will end, within six months, in an agreement subject to the consent of franchisor, trade union(s) and at least of 30% of the franchisees (representing 30 % of the employees of the network). This agreement shall define the Social Dialogue Committee’s composition, how its members are designated, their term of office, the frequency of meetings, if and how many hours employees may dedicate to the committee, the material or financial means required for the committee to fulfill its purpose, and how running and meeting costs and representatives’ travel and subsistence expenses are handled, among other things. This last issue could be a major concern not only for franchisor but also for franchisees-employers. Failing to reach such agreement, the Decree imposes the creation of the Social Dialogue Committee with several strict and minimum provisions which could create unreasonable burden for the franchisor.

Once set up, internal rules define precisely how the Social Dialogue Committee is to function (required majorities, notices of meeting and referral, publication of debates, etc.).

Much ado about nothing?

The Social Dialogue Committee does not have the authority to investigate cases or to issue binding rulings, but the Social Dialogue Committee must be kept informed of franchisees joining or leaving the network and “of the franchisor’s decisions liable to impact the volume and structure of staff, working time, or the employment, work, and vocational training conditions of the franchisees’ employees”.

The Social Dialogue Committee may also make suggestions for improving such conditions throughout the network.

The impact of the Social Dialogue Committee is eventually rather limited, but franchisors have to master and control seriously the implementation of the rules in order to avoid loss of times and energy by their own franchisees and a disorganisation of its network.

If your business is related to France or you wish to develop your business in this direction, you need to be aware of one very specific provision with regards to the termination of a business relationship.

Article L. 442-6, I, 5° of the French Commercial Code protects a party to a contract who considers that the other party has terminated the existing business relationship in a sudden and abrupt way, thus causing her a damage.

This is a ‘public policy’ provision and therefore any contractual provision to the contrary will be unenforceable.

Initially, the lawmaker aimed to protect any business relationship between suppliers and major large-scale retailers delisting (ie, removing a supplier’s products that were referenced by a distributor) at the moment of contracts renegotiations or renewals.

Eventually, the article has been drafted in order to extend its scope to any business relationship, regardless of the status of the professionals involved and the nature of the commercial relationship.

The party who wishes to terminate the business relationship does not need to provide any justification for her actions but must send a sufficient prior notice to the other party.

The purpose is to allow the parties, and in particular the abandoned party, to anticipate the discharge of the contract, in particular in cases of economic dependency.

It is an accentuated obligation of loyalty.

There are only two cases strictly interpreted by case law in which the partner is exempted from sending a prior notice:

  • an aggravated breach of a contractual obligation;
  • a frustration or a force majeure.

There are two main requirements to be fulfilled in order to be able to invoke this provision in front of a judge – an established business relationship and an abrupt termination.

The judge will assess whether the requirements have been fulfilled on a case by case basis.

What does the term ‘established business relationship’ mean?

The most important criterion is the duration, whether a written contract exists or not.

A relationship may be considered as long-term whether there is a single contract or a few consecutive contracts.

If there is no contract in place, the judge will take into account the following criteria:

  • the existence of a long-term established business relationship;
  • the good faith of the parties;
  • the frequency of the transactions and the importance and evolving of the turnover;
  • any agreement on the prices applied and/or the discounts granted to the other party;
  • any correspondence exchanged between the parties.

What does the term ‘abrupt termination’ mean?

The Courts consider the application of Article L442-6-I 5° if the termination is “unforeseeable, sudden and harsh”.

The termination must comply with the following three conditions in order to be considered as abrupt:

  • with no prior notice or with insufficient prior notice;
  • sudden;
  • unpredictable.

To consider whether a prior notice is sufficient, a judge may consider the following criteria:

  • the investments made by the victim of the termination;
  • the business involved (eg seasonal fashion collections);
  • a constant increase in turnover;
  • the market recognition of the products sold by the victim and the difficulty of finding replacement products;
  • the existence of a post-contractual non-compete undertaking ;
  • the existence of exclusivity between the parties;
  • the time period required for the victim to find other openings or refocus the business activity;
  • the existence of any economic dependency for the victim.

The courts have decided that a partial termination may also be considered as abrupt in the following cases:

  • an organisational change in the distribution structure of the supplier;
  • a substantial decrease in trade flows;
  • a change in pricing terms or an increase in prices without any prior notice sent by a supplier granting special prices to the buyers, or in general any unilateral and substantial change in the contract terms.

Whatever the justification for the termination, it is necessary to send a registered letter with an acknowledgment of receipt and ensure that the prior notice is sent sufficienlty in advance (some businesses have specific time periods applicable to them by law).

Compensation for a damage

The French Commercial Code provides for the award of damages in order to compensate a party for an abrupt termination of a business relationship.

The damages are calculated by multiplying the notice period which should have been applied by the average profit achieved prior to the termination. Such profit is evaluated based on the pre-tax gross margin that would have been achieved during the required notice period, had sufficient notice been given.

The courts may also award damages for incidental and consequential losses such as redundancy costs, losses of scheduled stocks, operational costs, certain unamortised investments and restructuring costs, indemnities paid to third parties or even image or reputational damage.

International law

The French supreme court competent in civil law (‘Cour de cassation’) considers that in cases where the decision to terminate the business relationship and the resulting damage take place in two different countries, it is a matter of torts and the applicable law will be the one of the country where the triggering event the most closely connected with the tort took place. Therefore the abrupt termination will be subject to French law if the business of the supplier is located in France.

However, the Court of Justice of the European Union (CJEU) has issued a preliminary ruling dated 14 July 2016 answering two questions submitted by the Paris Court of Appeal in a judgment dated 17 April 2015. A French company had been distributing in France the food products of an Italian company for the last 25 years, with no framework agreement or any exclusivity provision in place. The Italian company had terminated the business relationship with no prior notice. The French company issued proceedings against the Italian company in front of the French courts and invoked the abrupt termination of an established business relationship.

The Italian company opposed both the jurisdiction of the French courts and the legal ground for the action arguing that the Italian courts had jurisdiction as the action involved contract law and was therefore subject to the laws of the country where the commodities had been or should have been delivered, in this case Incoterm Ex-works departing from the plant in Italy.

The CJEU has considered that in case of a tacit contractual relationship and pursuant to European law, the liability will be based on contract law (in the same case, pursuant to French law, the liability will be based on torts). As a consequence, Article 5, 3° of the Regulation (EC) 44/2001, also known as Brussels I (which has been replaced by Regulation (EC) 1215/2012, also known as Brussels I bis) will not apply. Therefore, the competent judge will not be the one of the country where the damage occurred but the one of the country where the contractual obligation was being performed.

In addition and answering the second question submitted to it, the CJEU has considered that the contract is:

  • a contract for the sale of goods if its purpose is the delivery of goods, in which case the competent jurisdiction will be the one of the country where the goods have been or should have been delivered; and
  • a contract for services if its purpose is the provision of services, in which case the competent jurisdiction will be the one of the country where the services have been or should have been provided.

In this case, the Paris Court of Appeal will have to recharacherise the contractual relationship either as consecutive contracts for the sale of goods and deduct the jurisdiction of the Italian courts, or as a contract for services implying the participation of the distributor in the development and the distribution of the supplier’s goods and business strategy and deduct the jurisdiction of the French courts.

In summary, in case of an intra-Community dispute, the distributor who is the victim of an abrupt termination of an established business relationship cannot issue proceedings based on torts in front of a court in the country where the damage occurred if there is a tacit contractual relationship with the supplier. In order to determine the competent jurisdiction in such case, it is necessary to determine whether such tacit contractual relationship consists of a supply of goods or a provision of services.

The next judgment of the Paris Court of Appeal and those of the Cour de cassation to come need to be followed very closely.

Christophe Hery

Practice areas

  • Agentur
  • Kartellrechtlichen
  • Schiedsgerichtsbarkeit
  • Vertrieb
  • e-Commerce
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    France – Abrupt termination of contract

    26 September 2017

    • Frankreich
    • Verträge
    • Vertrieb
    • Rechtsstreitigkeiten

    It is not only since the days of the Internet that brand manufacturers have had to contend with the fact that original products are offered outside of their authorized sales channels. The problem has since been significantly exacerbated, however. The relevant products are also referred to as gray market products.

    The internal market of the European Economic Area makes it possible to exploit certain price advantages – that is, purchasing in one Member State at a price that is lower than in other Member States and selling to the end customer while passing on (or not passing on) the purchasing advantage. This is made possible by the “exhaustion regime”, according to which the sale of products, which at one time were made available in the European Economic Area with the copyright holder’s consent, cannot be prohibited.

    Brand manufacturers’ attempts to counter this issue by means of distribution systems may be an effective instrument, but only if all distribution partners adhere to it. If a distribution partner pulls out, trademark owners (at least in Germany) are initially required to contact their distribution partner who is acting contrary to the contract. That is difficult when the distribution channel of the products in question cannot be traced by security systems (such as SKU numbers) beyond any doubt. A right to information against a third party generally does not exist. Thus, neither the distribution system itself nor the suspicion that the products are not of EU origin may be used easily to justify a right to information in selective or exclusive distribution. The Federal Court of Justice, for example, sees no reason to deviate from the exhaustion doctrine when implementing a selective distribution system (Federal Court of Justice, 1 ZR 63/04). In the case of a selective or exclusive distribution system (Federal Court of Justice, I AR 52/10), the burden of proof is reversed. Accordingly, it is initially the brand manufacturer itself that is responsible for providing evidence for its allegation of a non-EU product.

    Exceptions are only made where, for example, the SKU numbers were modified, since this makes clarification difficult. In such cases, trademark infringement and at the same time breach of competition law are given by way of exception and it is not possible for the dealer to invoke exhaustion (Federal Court of Justice I ZR 1/98). The deliberate misleading of the authorized dealer by a third party to breach the contract is also recognized as an exception (Federal Court of Justice I ZR 96/04), which regularly is not verifiable, however.

    By the way, the sensational December 2017 Coty decision of the Court of Justice of the European Union (CJEU C-230/16) (here you can find more: https://www.legalmondo.com/2017/12/eu-court-justice-allows-online-sales-restrictions-coty-case/) has not changed this basic presumption, either. In its Coty decision, the CJEU in the end confirms the exhaustion priority also and particularly for luxury products by referring to existing case law (specifically ECJ C-59/08).

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    There are, however, more options available. As confirmed by the ECJ (ECJ, C-337/95), an exemption from the exhaustion principle already applies when the type of sale may be designed to damage the reputation of the trademark. In the Court’s opinion, this applies to the sale of products at discounters, if such a sale damages the reputation of the products to an extent that their luxurious image and quality is called into question (ECJ, C-59/08). This applies, on the one hand, if other products are sold in the immediate “neighborhood” to the branded product, without meeting the same quality requirements (ECJ, C-337/95) or if the advertising methods are unsuitable (ECJ, C-63/97). Hamburg Regional Court, for example, found that the use of photographs that are unsuitable and detrimental to the luxury image of a brand justifies a prohibition claim (at least with respect to use of the photos) (Hamburg Regional Court, 315 O 339/13). The Federal Court of Justice saw improper handling of the brand in an erroneous and negligent labeling of products (Federal Court of Justice, I ZR 72/11).

    Düsseldorf Higher Regional Court has now also followed these CJEU guidelines by prohibiting the sale of high-priced cosmetic products, which are distributed in the framework of a strictly regulated selective distribution system, at a discounter (Düsseldorf Higher Regional Court, I-20 U 113/17). The Court explicitly referenced the CJEU, by repeating its principles and then applying them in the case of the discounter:

    “The permanent and extensive sale of the cosmetic products at issue on the online platform www…de is suitable to significantly impair the image of the application brands. The way in which the products are presented there draws the application brands into the mundane and ordinary. As the relevant public is used to from the multitude of Respondent’s conventional self-service department stores, the offering on www…de of everyday products is frequently dominated in the form of particularly low priced own labels, such as Z.’s own label “O.” Respondent’s motto applies here as well. The assortment ranges from food to electronics, household goods, clothing to cosmetics. Since Respondent’s online presence was merged with that of the company “B” that it had acquired, it is moreover not only Respondent that offers its goods for sale on the platform, but also third parties may market goods via the online platform. The portal is designed to be functional and oriented toward products that are on sale. Customers are able to collect PAYBACK points with each purchase and may make use of financing. In some cases, goods are advertised at “instead of prices” and red letters indicate in attention-getting manner what percentage customers will save compared to the original prices. Product consultation does not take place.”

    By offering luxury products at random alongside every-day and mass products without any kind of prominent presentation and becoming affordable through financing options, the products would be placed on a level with the other items offered, thereby significantly affecting the prestige value of the products. For this reason, Düsseldorf Higher Regional Court pronounced a complete ban on distribution for the online platform and the department stores.

    Conclusion:

    Even if the Düsseldorf Higher Regional Court’s decision is not to be considered revolutionary in light of existing CJEU case law, it certainly ensures some impetus in proceeding against gray market dealers, since national courts are now no longer facing the “uncomfortable” hurdle of applying CJEU case law, but rather in the customary fairway of national case law. In principle, Düsseldorf Higher Regional Court case law may not be understood as a blank check, however. Even Düsseldorf Higher Regional Court did not allow a general ban, but rather weighed individually whether the distribution in its concrete form could be prohibited. In the future, it will also be important to work out what in particular will determine the extent of the ban.

    The author of this post is Ilja Czernik.

    We have seen in a previous post the advantages of mediation as an alternative dispute resolution method in franchise agreements. From there, what recommendations could we give to make better use of mediation? Although we will have to adapt them to each specific case, the following points could be very useful:

    1. Specifically foresee in the contract a mediation clause as an alternative dispute resolution method. Although the franchisee and franchisor can agree to mediate once the conflict arises without having reflected it in the contract, it will surely be more complicated to do so when both have already initiated the discrepancies. It is preferable, therefore, to do it before: it places the parties in a better predisposition, they will be able to choose the procedure in a better way, as well as the institution, the mediator, the formalities, etc.
    2. If the parties have agreed on a mediation agreement, this may be initiated at the request of only one of them, without having to re-reach an agreement.
    3. The mediation clause is also recommended, because once an application for the initiation of mediation has been agreed upon, the limitations period of the legal actions will be suspended until the termination of the mediation.
    4. By virtue of this agreement and having initiated the mediation, the courts will not be able to hear such controversies during the time in which the mediation takes place, provided that the interested party invokes it.
    5. In the clause, it is convenient to foresee some elements, such as what issues may be the subject of mediation (all or only some of them), the need or not of a previous negotiation, adequate deadlines to avoid that this procedure can be used to delay other ways, the applicable law to mediation and to the agreement reached with it, the competent jurisdiction for the adoption of precautionary measures, where appropriate, or the jurisdiction or arbitration to settle the dispute in case of failure of mediation.
    6. It is true that one of the principles of mediation is its voluntary nature. However, the existence of the clause and being obliged to attend at least one informative session before initiating any judicial procedure can convince of its advantages even the most reticent party.
    7. Include the mediation as an alternative dispute resolution method within the pre-contractual information that the franchisor must deliver to potential franchisees. Although the Spanish norm does not seem to expressly demand that reference be made, this seems an optimal moment to show transparency and the will to solve possible problems in an agile manner. It also predisposes the good understanding, cooperation and good faith of the franchised brand before the beginning of relations.
    8. Appropriately select the mediation institution to which to refer in case of conflict or foreseeing the best way to choose the most appropriate mediator. Currently there are many institutions or professionals that offer guarantees of impartiality. It may be relevant that it is a mediator with specific training, who facilitates the communication and confidence of the parties and, insofar as possible, who can fully understand the nature of the franchise. There are institutions in Spain such as the Signum Foundation (http://fundacionsignum.org/) or MediaICAM of the Madrid Bar Association (https://mediacion.icam.es) that can be good choices.

    On the topic of the importance of Mediation in Distribution Agreements, you can check out the recording our webinar “Mediation in International Conflicts”

    It is recommended that franchise agreements clearly foresee how to solve and deal with potential conflicts. The relationship between franchisor and franchisee may have some difficulty due, for example, to the absence of specific regulation of its content (at least in Spain) and to the fact that its elements are contained in different pieces of legislation. What I will say in these posts could also be useful for other distribution contracts, or in general collaboration agreements, although I will focus on franchising due to its special characteristics.

    Conflicts between franchisees and franchisors can cover multiple legal and commercial aspects: product supplies, brands, know-how, exclusivity and territory, non-competition, promotion and advertising, sales through the Internet … And all this, in a context in which, frequently, both parties want to maintain their collaboration and good relations.

    How to face, then, these potential conflicts? A first step is usually the direct negotiation between the parties and their advisers who have the task of being useful to them in this purpose. But this does not always end with a positive result. And the almost natural step if this happens is usually the beginning of a judicial procedure often preceded by a series of previous formal requirements.

    However, there is a way that, taking into account the characteristic elements of the franchise contract and the nature of possible conflicts, can be an excellent and privileged alternative method to solve them: mediation. Let’s see why:

    1. In mediation there is no third party that imposes its decision on the conflict. The franchisor and the franchisee solve it by themselves with the help of a professional (the mediator) who, in a neutral and independent way, uses their skills and specifically acquired knowledge (help in identifying the interests of the parties, active listening, legitimacy …) so that both can reach a consensus. The mediator does not advise (the parties can go with their respective advisors), it does not decide or sentence, but it helps that the parties find the solution that most satisfies both: they better than anyone else know the business, its evolution, the aspects perhaps not foreseen in the contract and the future that they want for themselves.
    2. Mediation is a harmonized mode of dispute resolution in the European Union through the Directive on certain aspects of mediation in civil and commercial matters. This allows the parties in different Member States to be familiar with it, therefore it is possible to foresee a unified system in contracts with international parties, and it will be easier to enforce the agreements reached.
    3. Mediation allows, therefore, to satisfy both parties better than the judicial alternative and with more creative solutions that a judge will never be able to apply. Unlike a legal proceeding where one usually wins and another loses, mediation can bring together the interests of franchisees and franchisors and, in this way, both obtain a better response. It allows a less belligerent and more friendly format that can be very useful since in many cases the disputes do not have too much entity to go to court, or refer to non-essential aspects of the relationship, or can be addressed from more global perspectives or with references to objective parameters. In addition, frequently, franchisees and franchisors want to continue maintaining their commercial relationship and, through mediation, resolved the conflict, this will be possible (unthinkable, however, if they had initiated a judicial confrontation).
    4. Mediation is, in principle, voluntary. At any time, the parties can abandon it even in those Member States or conflicts for which it may be mandatory to attend at least to the information session.
    5. It is a method that easily adapts to the characteristics of both parties: it is very flexible with the formalities, and the franchisor and the franchisee are who, with the help of the mediator, design a large part of the procedure to arrive at a solution being able to control its evolution. It also allows a solution that is much more adapted to their specific situation, provides more imaginative solution ideas, allows better dialogue, maintains the relationship, distinguishes facts from opinions or judgments, and allows the parties to return to their business saving energies that would otherwise be devoted to conflict management.
    6. It is a faster procedure than a trial, with a cost that can be assumed and controlled in advance.
    7. Mediation is confidential, so the publicity of the conflict is reduced, avoiding reputation costs or by extending to the rest of the network. What is treated in a mediation procedure cannot be disclosed even in a subsequent judicial proceeding.
    8. Both parties can arrive at a solution that will be binding for them. In addition, even if no agreement is reached, with the mediation the parties are in a better position to continue the relationship and resolve their problems: they have been able to present their points of view, they have been heard and have listened, they have opened dialogue channels, they have been able to show greater flexibility and, in short, they have improved their relations as a requirement to end the conflict and reach agreements.
    9. The degree of compliance with conflicts resolved through mediation is much higher than those imposed by a judge since the agreements are more satisfactory for them and it has been the parties themselves who have decided what to do.
    10. And finally, if the mediation has not worked, the possibility of claiming in the courts remains open.

    If you want to develop your distribution network abroad, a network of commercial agents is the easiest way, and France is no exception. Before entering into an agency  contract ruled by French law, it is nevertheless advisable to know its main features, which will be discussed in this post. 

    Definition

    A commercial agent is a professional representative who negotiates and eventually concludes contracts in the name of and on behalf of his principal.

    The French Commercial Code (Article L134-1) defines a commercial agent precisely as:

    «L’agent commercial est défini comme un mandataire qui, à titre de profession indépendante, sans être lié par un contrat de louage de services, est chargé, de façon permanente, de négocier et, éventuellement, de conclure des contrats de vente, d’achat, de location ou de prestation de services, au nom et pour le compte de producteurs, d’industriels de commerçants ou d’autres agents commerciaux.»

    «The commercial agent is an agent who, as an independent professional, without being bound by an employment contract, is in a permanent position to negotiate and eventually to enter into contracts for the sale, purchase, rent/hire or performance of service in the name and on behalf of manufacturers, industrialists, traders or other commercial agents.»

    The definition shows that the agent is independent: he/she is free to organise his/her own employment activity and business (sole agency, limited company etc.). This notion is fundamental, because the more the agent will be present and active in the organisation of the principal activity, the more the contract will be at risk of being requalified as a VRP (employee contract of sales representative) contract by the courts.

    In the spirit of the contractual relationship and in the drafting of the contract itself, one must be very careful not to confuse an agent with a VRP since, according to French law, the latter is considered an employee, with greater rights and compensation for termination of contract.

    Requirements

    The agent must be registered in the register of commercial agents at the Registry of the Commercial Court at his place of domicile. 

    Contract form

    The written form is not mandatory but strongly recommended. Article L134-2 of the Commercial Code provides that each party may request both the contract and addenda to be in writing.

    Execution of the contract – important clauses

    • Duration: for a fixed period or indefinite.
    • Fee: a commission freely defined between the parties.
    • Territory: it is very important to define the territory with precision and avoid wide generic clauses such as “world”.
    • Exclusive: the clause must specify whether the exclusivity is in relation to the territory and/or on the clientele in a precise manner and if the principal reserves the right to intervene.
    • Notice of withdrawal (Article L134-11, paragraph 3 of the Commercial Code): 1 month for the first year, 2 months for the second year, 3 months thereafter.

    Post-contract – important clauses

    Post-contractual non-competition clauses (Article L134-14 of the Commercial Code) must be in written form and limited to a maximum of 2 years post-contract.

    The non-competition clauses restriction (territory, customers, products) must not be so restrictive as to prohibit the agent from working after the end of the contract. Therefore customers and products included in the agreement must be competitors of the type of goods subject of the agency contract. Otherwise, the courts will consider the clause as null and non-existent, entitling the agent to claim compensation.

    French law does not provide any compensation for compliance with this clause.

    After termination of the contract, the agent is entitled to an indemnity for termination as compensation (Article L134-12 of the Commercial Code). It is a rule of public order, therefore, the clause that provides for an exemption of this entitlement will be considered null and non-existent.

    The agent has one year to assert this right to severance indemnity.

    There is no requirement of keeping it in writing, however, it is advisable to write a notice of receipt as proof of the termination.

    The amount of the compensation is equal to two years of commissions (gross) received by the agent. This is to be seen as a maximum measure and it is up to the principal to prove the reason as to why the agent should be entitled to a lower compensation.

    In the event of litigation, the courts will at their discretion evaluate the amount of the request of a maximum of two years.

    Cases in which compensation is not due:

    • Assignment of the contract to another agent;
    • Termination of the contract by the agent;
    • Serious non-fulfilment of the contract by the agent.

    Serious breach of contract can result from the non-fulfilment of clauses that are defined in the contract as important or must be assessed from time to time with the advice of your lawyer.

    Focus: the termination of contract due to retirement

    The agent is entitled to the indemnity for termination as compensation also when he/she ceases the activity and retires.

    French jurisprudence (in particular the jurisprudence of the Court of Cassation), however, requires a more specific check of the reason for the termination of the contract: the agent must not only claim to be entitled to the retirement pension, he should also assert he is not in physical conditions to be able to work anymore.

    Which is the competent French court?

    Even if the agent is a trading company, the nature of the contract is still civil. By virtue of this, the competent court varies according to the person who brings the claim.

    If the agent is the claimant, he can choose between “tribunal de grande instance” and “tribunal de commerce”.

    If, on the other hand, the principal is the claimant, he must also begin the claim before the “tribunal de grande instance”.

    Long expected by manufacturers of brand-name products, brick-and-mortar-distributors, internet retailers and online platform providers as Amazon, eBay, Zalando, the Court of Justice of the European Union (CJEU) just decided yesterday on 6 December 2017 – its “Santa Claus decision” – that manufacturers may lawfully ban sales via third party platforms.

    In a previous Legalmondo post we analysed this dispute (“the Coty case”) just resolved by the CJEU. According to its decision, such platform ban is not necessarily an unlawful restriction of competition under article 101 Treaty on the Functioning of the European Union (“TFEU”): The court has confirmed that selective distribution systems for luxury goods, which shall primarily preserve the goods’ luxury image may comply with European antitrust law.

    More specifically, the court decided that platforms bans are lawful, namely that EU law allows restricting online sales in

    “a contractual clause, such as that at issue in the present case, which prohibits authorised distributors of a selective distribution network of luxury goods designed, primarily, to preserve the luxury image of those goods from using, in a discernible manner, third-party platforms for internet sales of the goods in question, provided that the following conditions are met: (i) that clause has the objective of preserving the luxury image of the goods in question; (ii) it is laid down uniformly and not applied in a discriminatory fashion; and (iii) it is proportionate in the light of the objective pursued. It will be for the Oberlandesgericht to determine whether those conditions are met.”

    (cf. the CJEU’s press release No. 132/2017).

    This is the intermediary result of the Coty case as it is now up to the Higher Regional Court of Frankfurt to apply these requirements in the Coty case. Simply put, the question in that case is whether owners of luxury brands may generally or at least partially ban the resale via internet on third-party platforms. The Coty case’s history is quite interesting: The luxury perfume manufacturer Coty’s German subsidiary Coty Germany GmbH (“Coty”) set up a selective distribution network and its distributors may sell via the Internet – but banned to sell via third party platforms which are externally visible as such, i.e. Amazon, eBay, Zalando & Co. The court of first instance decided that such ban of sales via third party platforms was an unlawful restriction of competition. The court of second instance, however, did not see the answer that clear. Instead, the court requested the CJEU to give a preliminary ruling on how European antitrust rules have to be interpreted, namely article 101 TFEU and article 4 lit. b and c of the Vertical Block Exemptions Regulation or “VBER” (decision of 19.04.2016, for details, see the previous post “eCommerce: restrictions on distributors in Germany”). On 30 March 2017, the hearing took place before the CJEU. Coty defended its platform ban, arguing it aimed at protecting the luxury image of brands such as Marc Jacobs, Calvin Klein or Chloe. The distributor Parfümerie Akzente GmbH instead argued that established platforms such as Amazon and eBay already sold various brand-name products, e.g. of L’Oréal. Accordingly, there was no reason for Coty to ban the resale via these marketplaces. Another argument brought forward against the platform ban was that online platforms were important for small and medium-sized enterprises. Indications on how the court could decide appeared on 26 July 2017, with the Advocate General giving his opinion, concluding that platform bans appear possible, provided that the platform ban depends “on the nature of the product, whether it is determined in a uniform fashion and applied without distinction and whether it goes beyond what is necessary” (see the previous post “Distribution online – Platform bans in selective distribution (The Coty case continues)”).

     

    Practical Conclusions:

    1. This “Santa Claus decision” of 6 December 2017 is highly important for all manufacturers of brand-name products, brick-and-mortar-distributors, internet retailers and online platform providers – because it clarifies that manufacturers of brand-name products may ban sales via third party platforms (Amazon, eBay, Zalando and Co.) to ensure the same level of quality of distribution throughout all distribution channels, offline and online.
    2. As a glimpse back in advance: the district court of Amsterdam already on 4 October 2017 decided that Nike’s ban on its selective distributors not to use online platforms as Amazon was a lawful distribution criterion to safeguard Nike’s luxury brand image (case of Nike European Operations Netherlands B.V. vs. the Italy-based retailer Action Sport Soc. Coop, A.R.L., ref. no. C/13/615474 / HA ZA 16-959). More details soon!
    3. The general ban to use price comparison tools as stipulated by the sporting goods manufacturer Asics in its “Distribution System 1.0“ shall be anti-competitive – according to the Bundeskartellamt, as confirmed by the Higher Regional Court of Düsseldorf on 5 April 2017. The last word is, however, still far from being said – see the post “Ban of Price Comparison Tools anti-competitive & void?”. It will be interesting to see how the Coty case’s outcome will influence how to see such bans on price comparison tools.
    4. For further trends in distribution online, see the EU Commission’s Final report on the E-commerce Sector Inquiry and details in the Staff Working Document, „Final report on the E-commerce Sector Inquiry“.
    5. For details on distribution networks and distribution online, please see my articles

     

    The Coty case is extremely relevant to distribution in Europe because more than 70% of the world’s luxury items are sold here, many of them online now. For further implications on existing and future distribution networks and the respective agreements, stay tuned: we will elaborate this argument on Legalmondo!

    Based on our experience in many years advising and representing companies in the commercial distribution (in Spanish jurisdiction but with foreign manufacturers or distributors), the following are the six key essential elements for manufacturers (suppliers) and retailers (distributors) when establishing a distribution relationship.

    These ideas are relevant when companies intend to start their commercial relationship but they should not be neglected and verified even when there are already existing contacts.

    The signature of the contract

    Although it could seem obvious, the signature of a distribution agreement is less common than it might seem. It often happens that along the extended relationship, the corporate structures change and what once was signed with an entity, has not been renewed, adapted, modified or replaced when the situation has been transformed. It is very convenient to have well documented the relationship at every moment of its existence and to be sure that what has been covered legally is also enforceable y the day-to-day commercial relationship. It is advisable this work to be carried out by legal specialists closely with the commercial department of the company. Perfectly drafted clauses from a legal standpoint will be useless if overtaken or not understood by the day-to-day activity. And, of course, no contract is signed as a “mere formality” and then modified by verbal agreements or practices.

    The proper choice of contract

    If the signature of the distribution contract is important, the choice of the correct type is essential. Many of the conflicts that occur, especially in long-term relationships, begin with the interpretation of the type of relationship that has been signed. Even with a written text (and with an express title), the intention of the parties remains often unclear (and so the agreement). Is the “distributor” really so? Does he buy and resell or there are only sporadic supply relationships? Is there just a representative activity (ie, the distributor is actually an “agent“)? Is there a mixed relationship (sometimes represents, sometimes buys and resells)? The list could continue indefinitely. Even in many of the relationships that currently exist I am sure that the interpretation given by the Supplier and the Distributor could be different.

    Monitoring of legal and business relations

    If it is quite frequent not to have a clear written contract, it happens in almost all the distribution relationships than once the agreement has been signed, the day-to-day commercial activity modifies what has been agreed. Why commercial relations seem to neglect what has been written in an agreement? It is quite frequent contracts in which certain obligations for distributors are included (reporting on the market, customers, minimum purchases), but which in practice are not respected (it seems complicated, there is a good relationship between the parties, and nobody remembers what was agreed by people no longer working at the company…). However, it is also quite frequent to try to use these (real?) defaults later on when the relationship starts having problems. At that moment, parties try to hide behind these violations to terminate the contracts although these practices were, in a sort of way, accepted as a new procedure. Of course no agreement can last forever and for that reason is highly recommendable a joint and periodical monitoring between the legal adviser (preferably an independent one with the support of the general managers) and the commercial department to take into account new practices and to have a provision in the contractual documents.

    Evidences about customers

    In distribution contracts, evidences about customers will be essential in case of termination. Parties (mainly the supplier) are quite interested in showing evidences on who (supplier or distributor) procured the customers. Are they a result of the distributor activity or are they obtained as a consequence of the reputation of the trademark? Evidences on customers could simplify or even avoid future conflicts. The importance of the clientele and its possible future activity will be a key element to define the compensation to which the distributor will pretend to be eligible.

    Evidences on purchases and sales

    Another essential element and quite often forgotten is the justification of purchases to the supplier and subsequent sales by distributors. In any distribution agreement distributors acquire the products and resell them to the final customers. A future compensation to the distributor will consider the difference between the purchase prices and resale prices (the margin). It is therefore advisable to be able to establish the correspondent evidence on such information in order to better prepare a possible claim.

    Damages in case of termination of contracts

    Similarly, it would be convenient to justify what damages have been suffered as a result of the termination of a contract: has the distributor made investments by indication of the supplier that are still to be amortized? Has the distributor hired new employees for a line of business that have to be dismissed because of the termination of the contract (costs of compensation)? Has the distributor rented new premises signing long-term contracts due to the expectations on the agreement? Please, take into account that the Distributor is an independent trader and, as such, he assumes the risks of his activity. But to the extent he is acting on a distribution network he shall be subject to the directions, suggestions and expectations created by the supplier. These may be relevant to later determine the damages caused by the termination of the contract.

    France is a great market for franchise networks where almost 2,000 networks are operated. It is one of the most successful scheme of developing business.

    Franchisor must mainly respect French regulations on pre-disclosure information and French and EU competition regulations, among others rules. Although the control of the quality of its network and of its brand image is a very important and legitimate issue for franchisor, the latter cannot interfere too much in the day-to-day activity of the franchisees, since franchisees are independent businesses. Therefore relations between franchisors and franchisees are only based on commercial law and not on employment law. However, recent French rules will lead franchisors to implement some employment law rules with their franchisees and franchisees’ employees.

    Foreign franchisors operating franchise networks in France must indeed know how to deal with the constraints incurred by the Employment Act (dated 08 August 2016) and its Decree (dated 04 May 2017), and effective as from May 07 2017, relating to the creation of an employee forum for the whole franchise network. Indeed this Social Dialogue Committee can impact deeply the organization of franchise networks.

    First of all, only networks in which operators are bound by franchise agreements are concerned by the new social dialogue committee. Accordingly, trademark licensing and distribution contracts appear not to be included. Franchise agreements should be understood as sui generis contracts that are the sum of three separate agreements: a trademark licensing agreement, a know-how licensing agreement, and a commercial or technical assistance agreement. However, the Act of 08 august 2016 creates some confusion by stating that the franchise agreements concerned by this Social Dialogue Committee are the agreements “referred to in article L330-3 of the French Commercial Code”, although not only does that article not define what a franchise contract is, it may also apply to other contracts (exclusive distribution agreements) to determine whether the network fall into the scope of this Act.

    Furthermore, according to the Act, only specific franchise agreements including “clauses that have an impact on work organisation and conditions in franchisee businesses” are concerned. The Act does not define such clauses although, on the one hand, whether a social dialogue committee is called for depends on identifying such clauses, and on the other hand, franchisees are in essence independent of the franchisor when organising and managing their business, including in employment matters. It will therefore be necessary to conduct an employment audit of all franchise agreements (for instance, what happens if a clause sets opening hours or defines a dress code?) to determine whether the network fall into the scope of this Act.

    Finally, a Social Dialogue Committee is only called for in franchise networks employing at least 300 staff working (full-time) in France. It would seem that this does not include the franchisor’s employees or the employees of operators that are not bound to the network’s head by a franchise agreement (e.g., operators bound by a trademark licensing contract).

    An implementation implying a long negotiation

    Even where the legal requirements are met, franchisors are under no obligation to set up a Social Dialogue Committee spontaneously. However, once a trade union has called for an Social Dialogue Committee to be set up, the franchisor does have an obligation to take part actively in the negotiations initiated by that trade, to check with all the franchisees whether the number of employees in its network reaches the 300 threshold, and then to set up a “negotiation forum” made of representatives of employees (trade unions) and of employers (franchisor and franchisees) to negotiate an agreement creating and organizing the future Social Dialogue Committee.

    The negotiations with trade unions and franchisees will end, within six months, in an agreement subject to the consent of franchisor, trade union(s) and at least of 30% of the franchisees (representing 30 % of the employees of the network). This agreement shall define the Social Dialogue Committee’s composition, how its members are designated, their term of office, the frequency of meetings, if and how many hours employees may dedicate to the committee, the material or financial means required for the committee to fulfill its purpose, and how running and meeting costs and representatives’ travel and subsistence expenses are handled, among other things. This last issue could be a major concern not only for franchisor but also for franchisees-employers. Failing to reach such agreement, the Decree imposes the creation of the Social Dialogue Committee with several strict and minimum provisions which could create unreasonable burden for the franchisor.

    Once set up, internal rules define precisely how the Social Dialogue Committee is to function (required majorities, notices of meeting and referral, publication of debates, etc.).

    Much ado about nothing?

    The Social Dialogue Committee does not have the authority to investigate cases or to issue binding rulings, but the Social Dialogue Committee must be kept informed of franchisees joining or leaving the network and “of the franchisor’s decisions liable to impact the volume and structure of staff, working time, or the employment, work, and vocational training conditions of the franchisees’ employees”.

    The Social Dialogue Committee may also make suggestions for improving such conditions throughout the network.

    The impact of the Social Dialogue Committee is eventually rather limited, but franchisors have to master and control seriously the implementation of the rules in order to avoid loss of times and energy by their own franchisees and a disorganisation of its network.

    If your business is related to France or you wish to develop your business in this direction, you need to be aware of one very specific provision with regards to the termination of a business relationship.

    Article L. 442-6, I, 5° of the French Commercial Code protects a party to a contract who considers that the other party has terminated the existing business relationship in a sudden and abrupt way, thus causing her a damage.

    This is a ‘public policy’ provision and therefore any contractual provision to the contrary will be unenforceable.

    Initially, the lawmaker aimed to protect any business relationship between suppliers and major large-scale retailers delisting (ie, removing a supplier’s products that were referenced by a distributor) at the moment of contracts renegotiations or renewals.

    Eventually, the article has been drafted in order to extend its scope to any business relationship, regardless of the status of the professionals involved and the nature of the commercial relationship.

    The party who wishes to terminate the business relationship does not need to provide any justification for her actions but must send a sufficient prior notice to the other party.

    The purpose is to allow the parties, and in particular the abandoned party, to anticipate the discharge of the contract, in particular in cases of economic dependency.

    It is an accentuated obligation of loyalty.

    There are only two cases strictly interpreted by case law in which the partner is exempted from sending a prior notice:

    • an aggravated breach of a contractual obligation;
    • a frustration or a force majeure.

    There are two main requirements to be fulfilled in order to be able to invoke this provision in front of a judge – an established business relationship and an abrupt termination.

    The judge will assess whether the requirements have been fulfilled on a case by case basis.

    What does the term ‘established business relationship’ mean?

    The most important criterion is the duration, whether a written contract exists or not.

    A relationship may be considered as long-term whether there is a single contract or a few consecutive contracts.

    If there is no contract in place, the judge will take into account the following criteria:

    • the existence of a long-term established business relationship;
    • the good faith of the parties;
    • the frequency of the transactions and the importance and evolving of the turnover;
    • any agreement on the prices applied and/or the discounts granted to the other party;
    • any correspondence exchanged between the parties.

    What does the term ‘abrupt termination’ mean?

    The Courts consider the application of Article L442-6-I 5° if the termination is “unforeseeable, sudden and harsh”.

    The termination must comply with the following three conditions in order to be considered as abrupt:

    • with no prior notice or with insufficient prior notice;
    • sudden;
    • unpredictable.

    To consider whether a prior notice is sufficient, a judge may consider the following criteria:

    • the investments made by the victim of the termination;
    • the business involved (eg seasonal fashion collections);
    • a constant increase in turnover;
    • the market recognition of the products sold by the victim and the difficulty of finding replacement products;
    • the existence of a post-contractual non-compete undertaking ;
    • the existence of exclusivity between the parties;
    • the time period required for the victim to find other openings or refocus the business activity;
    • the existence of any economic dependency for the victim.

    The courts have decided that a partial termination may also be considered as abrupt in the following cases:

    • an organisational change in the distribution structure of the supplier;
    • a substantial decrease in trade flows;
    • a change in pricing terms or an increase in prices without any prior notice sent by a supplier granting special prices to the buyers, or in general any unilateral and substantial change in the contract terms.

    Whatever the justification for the termination, it is necessary to send a registered letter with an acknowledgment of receipt and ensure that the prior notice is sent sufficienlty in advance (some businesses have specific time periods applicable to them by law).

    Compensation for a damage

    The French Commercial Code provides for the award of damages in order to compensate a party for an abrupt termination of a business relationship.

    The damages are calculated by multiplying the notice period which should have been applied by the average profit achieved prior to the termination. Such profit is evaluated based on the pre-tax gross margin that would have been achieved during the required notice period, had sufficient notice been given.

    The courts may also award damages for incidental and consequential losses such as redundancy costs, losses of scheduled stocks, operational costs, certain unamortised investments and restructuring costs, indemnities paid to third parties or even image or reputational damage.

    International law

    The French supreme court competent in civil law (‘Cour de cassation’) considers that in cases where the decision to terminate the business relationship and the resulting damage take place in two different countries, it is a matter of torts and the applicable law will be the one of the country where the triggering event the most closely connected with the tort took place. Therefore the abrupt termination will be subject to French law if the business of the supplier is located in France.

    However, the Court of Justice of the European Union (CJEU) has issued a preliminary ruling dated 14 July 2016 answering two questions submitted by the Paris Court of Appeal in a judgment dated 17 April 2015. A French company had been distributing in France the food products of an Italian company for the last 25 years, with no framework agreement or any exclusivity provision in place. The Italian company had terminated the business relationship with no prior notice. The French company issued proceedings against the Italian company in front of the French courts and invoked the abrupt termination of an established business relationship.

    The Italian company opposed both the jurisdiction of the French courts and the legal ground for the action arguing that the Italian courts had jurisdiction as the action involved contract law and was therefore subject to the laws of the country where the commodities had been or should have been delivered, in this case Incoterm Ex-works departing from the plant in Italy.

    The CJEU has considered that in case of a tacit contractual relationship and pursuant to European law, the liability will be based on contract law (in the same case, pursuant to French law, the liability will be based on torts). As a consequence, Article 5, 3° of the Regulation (EC) 44/2001, also known as Brussels I (which has been replaced by Regulation (EC) 1215/2012, also known as Brussels I bis) will not apply. Therefore, the competent judge will not be the one of the country where the damage occurred but the one of the country where the contractual obligation was being performed.

    In addition and answering the second question submitted to it, the CJEU has considered that the contract is:

    • a contract for the sale of goods if its purpose is the delivery of goods, in which case the competent jurisdiction will be the one of the country where the goods have been or should have been delivered; and
    • a contract for services if its purpose is the provision of services, in which case the competent jurisdiction will be the one of the country where the services have been or should have been provided.

    In this case, the Paris Court of Appeal will have to recharacherise the contractual relationship either as consecutive contracts for the sale of goods and deduct the jurisdiction of the Italian courts, or as a contract for services implying the participation of the distributor in the development and the distribution of the supplier’s goods and business strategy and deduct the jurisdiction of the French courts.

    In summary, in case of an intra-Community dispute, the distributor who is the victim of an abrupt termination of an established business relationship cannot issue proceedings based on torts in front of a court in the country where the damage occurred if there is a tacit contractual relationship with the supplier. In order to determine the competent jurisdiction in such case, it is necessary to determine whether such tacit contractual relationship consists of a supply of goods or a provision of services.

    The next judgment of the Paris Court of Appeal and those of the Cour de cassation to come need to be followed very closely.

    Marika Devaux

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