In a recent case
involving a Body Shop franchise, the German Court
of Appeal decided that the exclusive 100% purchase
tie contained in the franchise agreement was
unenforceable because it violated EU competition
law. The EU Vertical Restraints Block
Exemption which applies to franchise agreements
contains a provision whereby sellers must be
permitted to source 20% of their products from
independent sources. This decision will come
as a shock to many franchisors because it has
always been thought that the franchise industry is
by and large exempt from this restriction based on
European case law.
The plaintiff
franchisee had been a Body Shop franchisee for 11
years. Initially, it had been permitted to
source certain products independently. In
2002, the Body Shop imposed a new franchise
agreement. Under this new agreement the
franchisee was obliged to purchase all contract
goods from The Body Shop or from distributors
authorized by The Body Shop. The franchisee
argued that this was an exclusive purchase tie
which violated EU law and was unenforceable.
The Body Shop defended its position referring to
EU case law which suggests that a 100% purchase
tie can be justified where it is necessary to
protect the uniform image and know-how of the
franchise.
The court found that
the exclusive purchase obligation did not serve
the purpose of protecting the know how of the
franchisor. Nor was it necessary to protect
the identity and reputation of the franchise
system. The franchisor was unable to
convince the court that there was damage to the
brand or system resulting from the sale of some
independently owned product. In the past 18
years, the franchisor had allowed its franchisees
to sell up to 35% independently sourced
product. There had been no significant
change which made it necessary to include an
exclusive purchase obligation in the franchise
agreements in order to protect The Body Shop brand
from dilution. The court pointed out that
the franchisor could impose quality standards for
third party products.
The court did not
consider an exemption under the block exemption
regulation as this exemption only applies to
restrictions with a maximum duration of 5 years,
whereas the present franchise agreement had a term
of seven years.
What should
franchisors do?
-
Any German franchise
agreements that impose a 100% purchase tie will
need to be reviewed;
-
New franchisors and
those making system changes need to think
carefully about justification for full purchase
ties.
For more information on
franchising in Germany or the new draft
legislation, please contact Babette
Märzheuser-Wood or Vicky
Reinhardt.