Competition and franchise

Competition within the franchise formula

Franchise and competition law exist in a constant state of tension. The franchisor seeks a uniform, recognizable formula with agreements regarding assortment, prices, purchasing, presentation, and sales channels. Competition law, on the other hand, protects free competition and sets limits on what parties may agree upon amongst themselves. A franchise agreement that crosses this boundary may be void with regard to the relevant aspect, and in serious cases, the Authority for Consumers and Markets (ACM) or the European Commission may impose fines. It is therefore important for franchisors and franchisees to know where the boundaries lie.

Who do we work for?

We assist franchisors who wish to have their franchise system reviewed or structured from a competition law perspective, and franchisees who are confronted with restrictive agreements and want to know whether they are sustainable. In addition, we advise on ACM investigations, disputes regarding the validity of restrictive clauses, and the assessment of online sales restrictions. This subject is relevant in all franchise sectors, but particularly strongly in retail and hospitality, where price, purchasing, and sales channels are central.

The cartel prohibition and vertical agreements

The cartel prohibition (Article 6 of the Competition Act and Article 101 TFEU) prohibits agreements that restrict competition. Agreements between parties at different levels of the production or distribution chain, such as between a franchisor and a franchisee, are called vertical agreements. Not every vertical agreement is prohibited: many agreements necessary for a franchise formula to function are permitted, provided they remain within the applicable frameworks. The assessment requires knowledge of both competition law and franchise practice.

The Group Exemption for Vertical Agreements

Vertical agreements are subject to the Vertical Contracts Block Exemption (Regulation 2022/720), which replaced the previous block exemption on 1 June 2022. Subject to conditions, vertical agreements are exempt from the cartel prohibition, in particular when the market share of both the supplier and the purchaser remains below 30 percent and the agreement does not contain so-called hardcore restrictions. The updated block exemption and the accompanying guidelines contain specific rules regarding, among other things, online sales, dual distribution, and price restrictions, which are directly relevant to franchising.

Hardcore restrictions

Certain agreements are considered so harmful that they fall outside the group exemption and are almost always prohibited. The best-known example is vertical price fixing: imposing a fixed or minimum selling price on the franchisee. A franchisor may apply maximum prices or non-binding recommended prices, but may not force the franchisee to pay a specific minimum price. Certain absolute territorial protection and specific restrictions on online sales can also qualify as hardcore restrictions. A hardcore restriction renders the clause void and can lead to fines.

Online sales and channel restrictions

The relationship between the physical franchise location and online sales channels is sensitive under competition law. A franchisor may set quality requirements for online sales, but a complete ban on online sales or a ban on the use of price comparison sites is critically assessed under the renewed block exemption. At the same time, the franchisor's own online channel may affect the position of the franchisees, which is of importance under both competition law and franchise law (right of consent).

Consequences of a competition law violation

An agreement that violates the cartel prohibition is void by operation of law with regard to the relevant part (Article 6, paragraph 2 of the Competition Act). This means that a franchisor cannot rely on the void clause, and that a franchisee may, under certain circumstances, claim damages. In addition, the ACM can impose fines on companies that violate the cartel prohibition, with fines that can amount to a substantial percentage of annual turnover. A competition law assessment of the formula prevents these risks.

Our working method

We first assess the franchise agreement and the formula documentation for antitrust risks: pricing, purchasing and acquisition obligations, territorial protection, and online restrictions. Subsequently, we advise on adjustments to make the formula viable without unnecessarily compromising uniformity, or on defense during an investigation or dispute. Where necessary, we engage specialist antitrust expertise.

The Pronuptia doctrine: necessary franchise agreements

Not every restrictive clause in a franchise agreement falls under the cartel prohibition. Since the Pronuptia judgment of the European Court of Justice, clauses that are necessary to protect the franchisor's know-how or to maintain the identity and reputation of the formula may fall outside the cartel prohibition. This concerns so-called ancillary restrictions: restrictions that are inextricably linked to an agreement that is permissible in itself and are necessary and proportionate for that purpose. Examples include confidentiality obligations, quality requirements, and the prohibition against exploiting the formula for a competitor during the term of the agreement. Whether a specific clause qualifies as a necessary ancillary restriction requires a thorough assessment, which our lawyers and in-house counsel carry out jointly.

The non-compete clause reviewed under competition law

Non-compete clauses are common in franchising but are subject to competition law. During the term of the agreement, a non-compete clause is in principle permitted under the Group Exemption for Vertical Agreements for a duration of five years or less; a clause for an indefinite period or longer than five years is subject to critical assessment. Stricter requirements apply to the post-contractual non-compete clause, which applies after the termination of the partnership: as a rule, it may not last longer than one year, must be limited to the location or territory of the former franchisee, may only relate to competing goods or services, and must be necessary to protect the transferred know-how. A clause formulated too broadly may be void on this point. Whether it concerns an international group or the baker on the corner leaving a franchise system, the validity of the clause determines whether a franchisee is allowed to resume business.

Purchase obligations and exclusive purchasing

Many franchise systems require the franchisee to purchase a portion of the product range from the franchisor or a designated supplier. Under competition law, such a purchasing obligation is equated with a non-compete clause if the franchisee must purchase more than 80 percent of their requirement for a specific product from the designated party. In that case, the five-year limit applies again to the duration. If the obligation remains below that 80 percent, it is not considered a non-compete clause and is permitted more broadly. When drafting or reviewing purchasing and supply clauses, we pay close attention to these limits to ensure the system remains uniform without deviating from competition law.

Noticeability and the de minimis exemption

Not every restrictive agreement is relevant under competition law. The cartel prohibition applies only to agreements that noticeably restrict competition. Furthermore, for small-scale agreements, there is the de minimis exemption (Article 7 of the Competition Act): agreements between a limited number of undertakings with a limited combined turnover, or agreements with a small combined market share, fall outside the cartel prohibition under certain conditions. For the smaller franchise formula or the individual franchisee, this may mean that an agreement that appears restrictive at first glance is permissible in practice. We assess whether a formula or clause remains below these thresholds before a competition law risk is unnecessarily assumed.

Competition within the broader franchise law

Competition law is one of the areas of law that converge within a franchise relationship. Restrictive clauses almost always affect the contractual relationship, the Franchise Act, the right of consent regarding amendments, and sometimes tenancy and intellectual property law. Our franchise practice group handles these topics in conjunction, ensuring that a competition law amendment does not create new problems elsewhere in the agreement. You can find an overview of our full range of services in this area on the Franchise Legal Advice, where the connection with other franchise topics is also explained.