Franchising in Germany: overview

A Q&A guide to franchising in Germany.

The Q&A provides an overview of the main practical issues concerning local and international franchising, including: current market activity; franchising regulatory framework; contractual issues relating to franchising agreements (analysing pre-contract disclosure requirements, formalities, parties' rights and obligations, fees and payments, term of agreement and renewal, termination and choice of law and jurisdiction); Operations Manual; liability issues; intellectual property; real estate; competition law; employment issues; dispute resolution; exchange control and withholding; and proposals for reform.

To compare answers across multiple jurisdictions, visit the Franchising: Country Q&A tool.

This Q&A is part of the global guide to franchising law. For a full list of jurisdictional Q&As visit www.practicallaw.com/franchising-guide.

Contents

Market

1. What have been the main developments in the franchising market over the past 12 months?

Franchise systems face complex challenges with respect to ongoing digitalisation. As e-commerce sales steadily increase, franchisors must prepare themselves in the best possible way by pushing forward the digitalisation of their business models. Online-shops run solely by the franchisor have been strongly disputed as an alleged infringement of the franchisee's exclusivity. Furthermore, consumer protection law has played an increasing role in this area (see Question 9).

 
2. What are the most commonly used methods of local and international franchising?

Local franchising

In Germany, all methods of franchising (direct franchising, multi-unit franchises, joint ventures, and development agreements) are used. Direct franchising seems to still be the preferred method for local franchisors. As there are no franchise specific laws in Germany (see Question 5), the choice of a certain franchise model depends on the individual needs of the franchisor.

International franchising

International franchisors usually wish to use the same franchise concepts in Germany that they have developed for their worldwide business. Master franchising seems to still be the preferred method of international franchising for international franchisors operating in Germany. However, if the franchise agreement is subject to German law, an adaption of the sample agreement into German legal standard terms is necessary (see Question 5).

 
3. Are there any specific reasons for an overseas franchisor to use a separate entity for entering into a franchise agreement with a franchisee in your jurisdiction?

Apart from tax considerations or general considerations to use a limited liability company to protect oneself against liability claims from franchisees or their customers, there are no specific reasons to use a separate entity.

 

Regulation of franchising

4. What is the legal definition of franchising and/or a franchise?

There is no legal definition of franchising and/or a franchise in Germany. The German Code (Bürgerliches Gesetzbuch) (BGB) Franchise Association (Deutscher Franchise Verband EV) (DFV) (www.franchiseverband.com) states that franchising is a sales and distribution system by means of which goods, services or technologies are marketed. This system is based on a close, long-term co-operation between legally and financially independent companies, the franchisor and the franchisees. The franchisor grants its franchisees the right to run a business according to its concept, at the same time the franchisees also commit themselves to do so in return for direct or indirect remuneration. The franchisees can utilise the system's name, trade mark, logo or other IP or protection rights, as well as know-how, economic and technical methods and the business system of the franchisor within the framework and for the duration of the contract signed between the parties. Therefore, the franchisor provides the franchisees with ongoing technical and economic support.

 
5. What are the laws regulating franchising?

In Germany, there are no specific laws regulating franchising. Therefore, the legal framework for the offer and sale of franchises is governed only by the general provisions of:

  • Contract law (German Civil Code) (Bürgerliches Gesetzbuch) (BGB).

  • Consumer law.

  • Commercial law (the Commercial Code).

  • Competition law.

  • Unfair trade law.

German law provides that the franchisor must disclose all necessary information to the franchisee (see Questions 11 and 12).

In particular, the provisions of the BGB concerning standard terms apply where the franchisor applies standard franchise agreements (section 305, BGB). Under section 307 of the BGB, all standard term provisions must be reasonable and cannot unduly disadvantage the other party contrary to the requirements of good faith, otherwise those provisions are null and void.

 
6. What is the regulatory authority responsible for enforcing franchising laws and requirements in your jurisdiction?

There is no regulatory authority responsible for enforcing franchising laws and requirements in Germany. However, there is the non-governmental body German Franchise Association (Deutscher Franchise Verband EV) (DFV) (www.franchiseverband.com). Membership is not compulsory, but members must abide by the principles contained in the DFV's code of ethics. In addition, members must conduct a strict quality review before admission as a full member into the DFV. Membership of the DFV is regarded as an indication of quality for a franchise system.

 
7. Must the franchisor be registered with a professional or regulatory body before setting up a franchise system?

German statutory law does not provide for any kind of registration with a professional or regulatory body before setting up a franchise system.

 
8. Is there a code of ethics or other means of promoting ethical franchising in your jurisdiction?

As a member of the European Franchise Federation (EFF), a national franchise association must comply with the EFF's code of ethics (CoE). The German Franchise Association (Deutscher Franchise Verband EV) (DFV) adopted a CoE based on the EFF's CoE (see Question 6). Franchisors that are members of the DFV must comply with this CoE.

 
9. Do franchisees benefit from any laws designed to protect consumers or small businesses?

In general, franchisees do not benefit from consumer protection laws, as franchisees are considered as entrepreneurs and not as consumers. However, there are laws that are aimed at protecting the franchisee's customers. In this respect, consumer protection law has played an increasing role. German unfair competition law obliges the advertising seller to indicate its name and address if he offers a sale in an advertisement. German courts have applied this rule to franchising.

In the Fressnapf case (Federal Supreme Court, 4th of February 2016, I ZR 194/14), the franchisor had sent out leaflets about a promotion with recommended retail prices to customers. The court took the view that the customer was unable to notice the disclaimer "recommended retail price, only in participating outlets" and that therefore the whole advertisement did not qualify as an advertisement with recommended retail prices. As a result, the court considered the advertisement as an advertisement with fixed prices. In this situation, the advertising franchisor must indicate, under unfair competition law, which of the franchisees (indicated on the last page of the leaflet) participates in the promotion.

Furthermore, small franchisees (business start-ups) have a statutory right of withdrawal from the franchise agreement if the franchisee is subject to a procurement obligation (Bezugsbindung)(see Question 9).

 
10. Are there any other requirements which must be met before a business can sell a franchise?

There are no specific laws or government agencies in Germany that regulate the offer and sale of franchises (see Questions 5 and 7). In addition, no specific government consents or official authorisations are required to approve or perfect a franchise transaction with an overseas franchisor, or enable it to operate through a franchisee in Germany.

 

Franchise agreement

Pre-contract disclosure requirements

11. Is the franchisor subject to any general or formal pre-contract disclosure requirements?

There is no explicit German pre-contractual disclosure law in connection with franchise contracts. Only the general provisions regarding contract negotiations apply, in particular the principle of culpa in contrahendo (that is, fault in conclusion of a contract). This principle provides that before the conclusion of a franchise contract, the franchisor must ensure that all relevant facts have been clearly presented to the potential franchisee. In the case of a violation of the franchisor's duty to present the relevant facts, the franchisee can claim damages. The scope and content of the duty depend on each individual case, and especially on the franchisee's experience and knowledge.

Under German case law and the German Franchise Association's guidelines on pre-contractual disclosure obligations, franchisors should at least disclose information on the following matters:

  • Information on the franchise concept, including date of the beginning of the franchise system and actual number of franchisees.

  • Indication of the people in charge to act on behalf of the franchisor.

  • The franchise offer, including, amongst other things:

    • performances and experiences of the pilot business; and

    • necessary investment and manpower for the franchisee's business.

  • Information that enables the franchisee to do his own profitability analysis of the profitability of the franchise business.

  • Information that enables the franchisee to elaborate a location analysis.

  • The franchise contract and the franchise handbook (with all standard appendices).

  • Memberships to franchise associations.

  • Information on differing distribution channels of the franchise product or service.

  • Pending lawsuits with a potential impact on the franchisee's business.

  • Indication of the initial and ongoing support provided by the franchisor.

If there is local sub-franchising, it is the responsibility of the sub-franchisor to make pre-sale disclosures to sub-franchisees. The extent to which the sub-franchisor must disclose information to the sub-franchisee depends on the sub-franchisee's need for information and the ability of the sub-franchisor to obtain information. Therefore, the sub-franchisor must, at least, offer information on the master franchise and the assignment of tasks between the franchisor and sub-franchisor. The sub-franchisor must also set out the extent of derivation of rights from the franchisor (in particular with regard to trade marks and know-how).

 
12. Must the franchisor disclose fairly and in good faith all facts material to the prospective franchisee's decision to enter into the arrangement, or must the prospective franchisee rely on its own due diligence?

German courts have stressed that, as a general rule, the franchisee must obtain information at its own initiative about the general market conditions and their impact on the prospective franchise business. However, if there are particular circumstances of which only the franchisor is aware, and which are recognisably of importance to the franchisee's decision about whether or not to enter the franchise agreement, the franchisor must disclose that information to the franchisee.

It also follows from German case law that the franchisor must not provide misleading information on the franchise system and must disclose all relevant information in order to avoid subsequent damage claims. Any lack of information, or any misleading information, may lead to the franchisor's liability on the basis of a breach of the pre-contractual disclosure obligations. Non-binding guidance for franchisors concerning their disclosure obligations in Germany can be found in the German Franchise Association's guidelines on pre-contractual disclosure obligations (www.franchiseverband.com/index.php?id=43).

 

Formalities

13. What are the formal contractual requirements to create a valid and binding franchise agreement?

In principle, there are no formal contractual requirements to create a valid and binding franchise agreement under German law.

However, in Germany, the franchisee has a statutory right of withdrawal if the franchisee is subject to a procurement obligation (Bezugsbindung) within the meaning of section 505(1) of the German Civil Code (Bürgerliches Gesetzbuch) (BGB), that is, where the franchisee is subject to a recurring purchase obligation in connection with the franchise agreement it has entered into. It is irrelevant in this respect whether the merchandise must be purchased from the franchisor or from a third party designated by the franchisor (system supplier). An indirect supply agreement (for example, an obligation to purchase training materials or related public relations products) is sufficient in this regard.

A further prerequisite is that the franchisee is a business start-up investing an amount not exceeding EUR75,000 (generally referred to as the "right of withdrawal threshold" (Widerrufswertgrenze) under section 512 of the BGB). Since the entry fee upon conclusion of a franchise agreement does not normally exceed EUR50,000, it can be assumed that in the case of a start-up franchisee entering into a franchise agreement with a procurement obligation, instructions on the right of withdrawal are usually necessary.

The right of withdrawal allows the franchisee to withdraw from a franchise agreement. The statutory withdrawal period is two weeks. The two-week withdrawal period commences when the franchisee is advised in due form about its right of withdrawal. If the franchisee has not been advised, or has not been properly advised, the withdrawal period is extended to a year and two weeks.

 

Parties' rights and obligations

14. Is there a general obligation to behave fairly, reasonably or in good faith to the other party during the term of the franchise agreement?

Under German law, contracting parties must affect performance according to the requirements of good faith, taking customary practice into consideration (section 242, German Civil Code ( Bürgerliches Gesetzbuch) (BGB)). This is a basic principle of German law and is a general provision. It enables courts to "tailor" its decision to the circumstances of the particular case (section 307 of the BGB, regarding the test of standard terms and conditions in terms of the reasonableness of its contents, is an implementation of the basic principle of good faith). The principle of good faith requires that contractual rights are exercised in a way that is consistent with good faith. However, the question of whether certain behaviour violates the principle of good faith is always a case-by-case decision. The courts use the principle of good faith very sparingly and refrain from introducing new contractual provisions that they consider more appropriate by means of this sweeping clause.

Obligations of the franchisee

As there are no particular laws dealing with franchising, there are also no certain obligations specifically imposed on either the franchisee or the franchisor.

Obligations of the franchisor

In principle, the sub-franchisor is solely responsible for conducting proper pre-contractual disclosure to the franchisee. Nevertheless, in the case where the sub-franchisor has used and relied on misleading disclosure material provided by the franchisor, the sub-franchisor may have a right of recourse against the franchisor.

Individual officers and directors can usually not be liable as they are not the franchisee's contractual partner. Intermediaries or third parties may, however, be held liable for violations of pre-contractual disclosure obligations where they, by laying claim to being given a particular high degree of trust, substantially influenced the pre-contract negotiations or the entering into of the contract.

 
15. Does local law require that particular provisions must be expressly included in a franchise agreement?

There are no specific laws regulating franchising. However, there might be an obligation to give a written revocation instruction in the case where the franchisee is entitled to revoke the contract under German consumer credit law (see Question 13). In addition, the contractual provisions must be in line with German standard terms law (if the contract is subject to German law) (see Question 5).

 
16. Are exclusion and entire agreement clauses enforceable in your jurisdiction? If so, are they effective to protect the franchisor?

As far as the provisions of the franchise agreement are considered standard terms and conditions, exclusion and entire agreement clauses, even though commonly used, are not effective to protect the franchisor from the plea that the parties have deviated from the written contract by individual oral agreement (as section 305b of the German Civil Code states that "individually agreed terms always take priority over standard terms and conditions"). It is, nevertheless, possible and advisable to include a clause that reiterates the legal presumption of the completeness of a document. The franchisee has then the burden of proof to provide evidence to the contrary.

 
17. Can the franchisor impose product tying or other purchasing restrictions and non-compete obligations on the franchisee during the term of the agreement?

Restrictions on purchasing and product tying

The franchisee's obligation to sell only the contract goods in the premises that have been designated is lawful if that obligation is essential to maintain the identity and reputation of the franchise network (European Court of Justice, Case 161/84 CMLR 414, Volume 45 Pronuptia). If a purchase obligation is not essential for the identity and reputation of the franchise network, the EC Block Exemption Regulation No 330/2010 (BER) can still apply. Under the BER, purchase obligations are exempted by the BER where the duration is not indefinite or does not exceed five years. Contracts with purchase obligations that are tacitly renewable beyond a period of five years are therefore not exempted by the BER (see the second subparagraph of Article 5(1), BER). However, this exemption only applies to franchise systems with a market share of less than 30%. If the market share is higher than 30%, the block exemption does not apply, but an individual exemption under 101(3) of the Treaty on the Functioning of the European Union (TFEU) might still be possible.

The five-year duration limit does not apply when the goods or services are resold by the franchisee "from premises and land owned by the franchisor or leased by the franchisor from third parties not connected with the franchisee". In such cases, the non-compete obligation can be of the same duration as the period of occupancy of the point of sale by the franchisee (Article 5(2), BER).

Obligations to purchase the products from the franchisor or from a third-party supplier designated by the franchisor are lawful provided that such a clause does not prevent the franchisee from obtaining the products from other franchisees of the network.

Non-compete obligations

Obligations not to compete during the term of the franchise agreement are subject to competition law, as they restrict the franchisee's freedom of business activities and prevent other suppliers from distributing their products or services through the franchisee involved. Under competition law, non-compete obligations are treated like purchase obligations. Therefore, they are lawful if they are essential to maintain the identity and reputation of the franchise network or to protect the know-how transferred by the franchisor to the franchisee. (European Court of Justice, Case 161/84 CMLR 414, Volume 45 Pronuptia). If they are not essential, the BER can still apply (see above, Restrictions on purchasing and product tying).

Under competition law, post-term non-compete clauses may fall under the ban on cartels (§ 101(1) , TFEU) if they have an appreciable impact on competition. Those post-term non-compete clauses are generally not exempted by the BER. Nevertheless, the BER provides for several other exemptions. It allows non-compete clauses to be agreed for one year provided that they meet all the following criteria:

  • They solely apply to competing products or services.

  • They are essential for the protection of know-how.

  • They are restricted to the business locations of the franchisee during the term of the agreement.

Irrespective of that, a clause prohibiting the franchisee to use the know-how provided by the franchisor after the term of the agreement is valid, provided that the know-how is not publicly known. There are also no time restrictions for such clauses.

 

Fees and payments

18. What fees are usually payable by the franchisee? Are there any restrictions on the parties' freedom to set the fees and payments, or any other payment requirements?

German law does not provide specific laws or regulations affecting the nature, amount or payment of fees. In principle, the parties can set the fees and payments as they wish. Usually, the fees consist of:

  • A one-time fixed fee.

  • Ongoing royalties (percentage of the revenues or profit made by the franchisee).

  • A contribution to the marketing funds (marketing fee).

The amount of the ongoing fees should reflect the quality and value of the franchise system and the services provided by the franchisor, given that fees that are clearly disproportionate to the franchisor's performance are considered void (section 138, German Civil Code.

Under German law, the interest rate on overdue payments is 9% above the base interest rate (according to the European Central Bank) in the case of legal transactions to which consumers are not involved (which is the case in franchise agreements). On top of that, the franchisor can charge a lump sum payment of EUR40 for overdue payments. In addition, the interest rate for other payment obligations amongst merchants (for example, compensation for damages) is only 5% above the base interest rate.

 

Term of agreement and renewal

19. Are parties free to agree on the term of the franchise agreement? What is the typical term of a franchise agreement in your jurisdiction?

German law does not impose a minimum or maximum term for a franchise agreement. It is characterised by the principle of contractual freedom, allowing the parties to agree on provisions at their discretion. Restrictions follow principally from the regulations on standard terms and conditions (section 307 et seq, German Civil Code) (see Question 5) that specify the principle of good faith and ban standardised provisions that unreasonably disadvantage the franchisee.

 
20. What rights of renewal are usually included in the franchise agreement? Are fees paid on renewal?

Commercial practice

Whether there is a renewal of a franchise agreement is solely at the discretion of the parties. This means that a franchisor can refuse to renew a franchise agreement for no particular reason. However, in Germany, it is not common practice to provide a clause in a franchise contract, which grants the franchisee a right of renewal (even if the right is subject to conditions).

Local law

This freedom refuse to renew a franchise agreement can only be limited under particular circumstances.

Certain investment protection for investments that the franchisee made at the franchisor's instigation shortly before the termination of the franchise agreement may be subject to a level of investment protection under the principle of good faith. For example, if a franchisor has announced its intention to renew the franchise agreement and encouraged the franchisee to further investments shortly before the contract expires, the refusal to renew the franchise contract without good cause can entitle the franchisee to claim damages.

 

Termination

21. Are there any limitations on the right of a franchisor to terminate the agreement?

Franchise agreements can be entered into for a definite or an indefinite term.

Under German law, agreements with an indefinite term can be terminated either without cause (termination under consideration of contractual and/or statutory periods of time) or for cause. The period of notice depends on the duration of the contract. German law provides for the following statutory notice periods:

  • One month's notice within the first year of the term.

  • Two months' notice within the second year of the term.

  • Three months' notice within the third to fifth year of the term.

  • Five months' notice after five years of the term.

The parties can agree on a longer notice period as provided for by the German Commercial Code, but cannot shorten it. Unless otherwise agreed by the parties, any termination is valid only to the end of a calendar month.

A franchise agreement with a definite term can end upon expiry of the contract term or by termination for cause.

Under German law, a termination without notice requires a good cause and the prior sending of a warning letter beforehand. Only major infringements of the contractual duties can constitute a good cause in this respect. This can be, for example, the refusal to pay the franchise fees or the repeated breach of fundamental rules of the franchise system (such as the prohibition to co-operate with competitors). To determine whether an action provides a good cause that justifies the termination of the franchise agreement without notice, an overall assessment of all circumstances of the individual case, and a weighing of the interests of the franchisor and the franchisee, is required.

The termination must be declared within reasonable time after the incident leading to the conflict.

Under German law, neither the necessity, nor the requirements, for "good cause" can be waived within the standard terms and conditions.

A franchise agreement can also end by the conclusion of an agreement to annul the franchise relationship.

 
22. Are post-term restrictive covenants enforceable?

Post-term restrictive covenants that do not fall under the ban on cartels (§ 101(1) , Treaty on the Functioning of the EU) (see Question 17) are only permissible for two years after the termination of the franchise agreement, and must be limited to the contract goods and the area in which the franchisee was active (§ 90a, Commercial Code). As a compensation for a post-term non-compete obligation, the franchisee may claim a reasonable compensation (for more information on non-compete clauses, see Question 17).

 
23. Can the franchisor or a replacement franchisee continue to sell to the former franchisee's customers?

The franchisor, or a replacement franchisee, can continue to sell to the former franchisee's customers.

However, a commercial agent is entitled to an indemnity at the end of the agreement (Article 89b, German Commercial Code) (for example, if the commercial agent has generated new customers for the principal's business, or has significantly increased the extent of business with already existing customers, and the principal continues to derive substantial benefits from business with those customers). The compensation payment must be equitable with regard to all circumstances and, in particular, the profits lost by the agent with regard to the potential business transacted with those customers.

Section 89b of the German Commercial Code may apply analogously in the case of termination of franchise agreements if two conditions are met:

  • The franchisee is included in the sales organisation of the franchisor to the extent that he has duties which, financially, to a considerable extent, are comparable to those of a commercial agent.

  • The franchisee is contractually obliged to (directly or indirectly) transfer his customer base to the franchisor at the latest at the ending of the agreement.

By a decision of 5 February 2015, the Federal Court of Justice (Bundesgerichtshof) has clarified that, for franchising, a mere de facto customer continuity is not adequate for the right to compensation by the analogous application of section 89b of the German Commercial Code. Therefore, the fact that customers continue to, for example, walk into restaurants, filling station shops or bakery shops does not fulfil the second bulleted pre-condition above unless there is a contractual obligation to transfer the franchisee's customer base to the franchisor.

The right to claim indemnity cannot be waived in advance. Under certain circumstances, the franchisee will not be entitled to an indemnity (for example, if the contract is terminated for cause due to the franchisee's culpable conduct).

As to the amount of the compensation payment, under German law it must be "reasonable". German law also provides that it must not amount to more than one year's annual remuneration, calculated on the basis of the franchisee's average earnings for his activities over the preceding five years. If the franchise agreement goes back less than five years, the average for the period of activity will be determinative.

 

Choice of law and jurisdiction

24. Will local courts recognise a choice of foreign law in a franchise agreement for a business operating in your jurisdiction?

German courts recognise the choice of a foreign law in a franchise agreement entered into between a non-German and a German party. In the case of a valid choice of foreign law, overruling German law can only apply in cases where the provisions of a foreign law interfere with the fundamental principles of the German jurisdiction (ordre public, or public law: for example, in cases in which the application of such provisions would be incompatible with fundamental civil rights).

 
25. Will local courts recognise a choice of foreign jurisdiction in a franchise agreement for a business operating in your jurisdiction?

German law acknowledges agreements on jurisdictions unless there is exclusive jurisdiction (such as for disputes relating to real property or anti-trust law). Jurisdiction agreements can, in general, refer both to international and local jurisdictions. Franchise agreements can also assign all, or certain, disputes to arbitration. Therefore, both the franchisor and franchisee can challenge the court's jurisdiction by reference to a valid arbitration agreement.

Mediation as a form of joint dispute resolution is increasingly recognised. However, as a mediation process does not end with an enforceable judgment, franchisors and franchisees usually agree on mediation proceedings as only the first stage of dispute resolution.

 

Operations Manual

26. How does the franchisor ensure that the franchisee complies with the business standards, systems and requirements?

First of all, it is necessary to define the franchisee's obligations in as much detail as possible within the franchise agreement. All the relevant information on the franchise system and its operational implementation is provided in the handbook given to the franchisee after the franchise agreement has taken effect. The franchisor also offers training in order to teach the franchisees about its franchise business. Usually, the franchise agreement also provides for monitoring and reporting obligations.

However, where the franchisee infringes its obligations set out in the franchise agreement, the franchisor may be entitled to claim damages. It is not uncommon for the franchise agreement to include a contractual penalty for the infringement of certain obligations. With regard to the provision of contractual penalties in franchise agreements, due to the German laws on standard terms and conditions (if applicable: see Question 5), there are many restrictions on such provisions. For example, it is not advisable to agree on a contractual penalty for all infringements of the franchise agreement. It is also important to make sure that the amount of the penalty is not disproportionate to the gravity of the infringement.

Finally, in case of a severe breach of contractual obligations, the franchisor can terminate the franchise agreement for good cause (after sending a corresponding warning letter) (see Question 21).

 
27. Can the franchisor change the Operations Manual unilaterally, as is usually required?

Under German law, the franchisor can reserve to itself the right to change the Operations Manual unilaterally during the term of the franchise agreement, as the franchise agreement is considered as a standard terms contract (see Question 5). However, such a reservation clause must be appropriate (which will be the case if the provision states that any amendments must properly take into account the franchisee's reasonable interests).

 

Liability issues

28. What are the franchisee's remedies against the franchisor for deceptive or fraudulent selling practices?

The franchisee can initiate proceedings to have the franchise agreement declared invalid by a court if the franchisee has entered into the franchise agreement due to a deception caused by fraudulent intent on the franchisor's part. If the franchise agreement is declared invalid, the franchisor must compensate the franchisee for the damages suffered. The franchisee can file a complaint with the competent public prosecutor's office on the grounds that the franchisor has used deceptive or fraudulent selling practices.

If the franchisor only infringes its disclosure obligation, the franchisee can claim damages for breach of faith. In this case, the franchisor must put the franchisee in the position it would have been in if the franchisor had fulfilled its disclosure obligation properly. If the franchisee would not have agreed to the franchise agreement under full disclosure, it can rescind the franchise agreement. The franchisor can then:

  • Consent to the cancellation of the franchise contract.

  • Pay back all obtained franchise fees.

  • Reimburse the franchisee for all expenses made in connection with its franchise business.

The franchisee's income earned with the franchise business will be deducted from the above compensation.

 
29. How can third-party claims against the franchisee be brought successfully against the franchisor?

Indemnity

Franchisees are usually self-employed entrepreneurs who cannot act on behalf of, or for the account of, the franchisor. Third parties cannot make direct contractual claims against the franchisor. Third parties can therefore only claim damages against the franchisor under tort law or under the law on product liability (for example, where a defective product manufactured by the franchisor causes bodily injury).

The franchisee can bring indemnity claims/take recourse against the franchisor only if the damage is caused by a breach of the franchisor's duties. Due to standard terms of contract law, it is not possible to exclude liability in the franchise agreement for injury to life, body or health and in the case of gross fault.

Precautions

Franchise agreements typically stipulate the legal and economic independence of the franchisee. They should also provide that the franchisee must not act on behalf of, or for the account of, the franchisor.

 

Intellectual property

30. What provisions are usually made in relation to intellectual property rights (IPRs), including know-how?

The use of IPRs and know-how is limited to the purpose of the franchise system. Confidentiality provisions in the franchise agreement will prohibit:

  • Any misuse of IPRs.

  • Disclosure of substantial and secret know-how or trade secrets.

Infringements of confidentiality obligations can lead to liability for damages. To secure confidentiality, it is possible to agree on a contractual penalty.

A breach of business confidentiality constitutes a breach of contract and can represent good cause for termination of the franchise agreement, without notice.

 
31. What are the registration requirements for licensing IPRs?

Trade mark protection in Germany requires registration with the German Patent and Trademark Office, registration as a Community trade mark with the European Trademark Office (Alicante, Spain) or as a designation of international trade marks for Germany. Registration as a trade mark is possible for signs, words (including personal names), designs, letters, numerals, colours, the shape of goods, or sounds.

Even though know-how is part of the franchisor's IPRs , its protection is not subject to specific statutes, such as the Trademark Act or the Copyright Act. There is therefore no registration requirement for licensing know-how.

 

Real estate

32. Are consents from landlords difficult to obtain when transferring leases or granting subleases from a franchisor to a franchisee?

There are no special franchise-related regulations concerning the real estate market or real estate law under German law. Therefore, the general rules of the German Civil Code will apply. Commercial leases and subleases can be freely concluded between lessor and lessee.

In order to grant a sublease, the permission of the landlord is required under German law. Where the landlord refuses to give that consent, the lease can be terminated without notice if the sub-lessee does not have adequate cause to rebut that refusal.

It is also possible to prohibit subleasing in general (provided that residential space is not concerned).

 
33. How can a franchisor prevent the franchisee from occupying the premises after the franchise agreement has ended?

It is common to make the lease or sublease coterminous with the franchise agreement. In order to prevent the franchisee from occupying the premises after the franchise agreement has ended, it can also be agreed with the landlord and the franchisee that the franchisor can enter into the lease agreement as the franchise agreement ends. Finally, the franchisor can also insist on a purchase option for the franchise business.

 
34. How can the franchisor effectively acquire the franchisee's premises at the end of the franchise relationship?

Under certain conditions the franchisee can demand a reasonable indemnity from the franchisor after termination of the franchise agreement if and to the extent that the franchisor continues to derive substantial benefits, even after termination of the franchise agreement, from business relations with new customers brought about by the franchisee (see Question 23). It is not possible to contractually exclude this entitlement. Therefore, the franchisor can only try to ensure that the requirements for such a claim are not met (see Question 23).

The franchisor's option to purchase the franchise business does not have to be protected at a land registry. Where the purchase option involves the purchase of real estate, a priority notice should be entered on the land register to secure the purchase option.

 
35. If the franchisor leases or subleases its own site to its franchisee, can it pass on all related costs to the franchisee? Can the franchisor charge its franchisee tenant a rent expressed as a percentage of the franchisee's sales?

There are no specific restrictions on this under German law.

 

Competition law

36. What is the effect of competition law rules on franchising agreements? Are there any available exemptions?

Competition law

Competition law rules provide legal restrictions on franchise agreements.

German anti-trust law has been fully harmonised with European anti-trust law since 2005. All kinds of competition restraints within distribution agreements, such as non-compete clauses, price-fixing and guaranteed exclusive areas, must now be in full compliance with European anti-trust law. Article 101(1) of the Treaty on the Functioning of the European Union prohibits agreements between undertakings that may affect trade between member states, and that have as their object or effect the prevention, restriction or distortion of competition within the common market.

Apart from restrictions on non-compete clauses and the prohibition of cross-supplies (see Question 17), competition law provides further restrictions on price fixing and the guarantee of an exclusive area.

Price fixing

German and European anti-trust law prohibit all kinds of direct or indirect price fixing. The franchisee must be free to determine at what price it wants to sell its products or render its services. The exemptions provided by the EC Block Exemption Regulation No 330/2010 (BER) do not apply to agreements with price-fixing clauses. The franchisor can, however, set a maximum price at which the product or service of the franchise system must be sold. The franchisor can also issue non-binding price recommendations. Furthermore, fixed resale prices may be permissible to organise a co-ordinated short-term (usually two to six weeks) low-price campaign in a franchise system.

Guaranteed exclusive area

A franchisee cannot be provided with a completely exclusive area under German and European anti-trust law. Nevertheless, there is a wide range of exemptions to that rule. Therefore, it is possible to provide exclusivity in the sense that franchisees can be prohibited from actively distributing outside their exclusive areas. Active distribution is defined as all forms of marketing in which the franchisee actively approaches potential customers. Passive distribution, on the other hand, cannot be prohibited. Passive distribution constitutes all forms of marketing where the franchisee does not actively approach potential customers. This means that the franchisee cannot be prohibited from delivering goods or rendering services at the request of its customer, even if this customer is located outside of the franchisee's assigned exclusive area.

Exemptions

Exemptions from the restrictions of anti-trust law are made either on an individual basis or, if applicable, under a block exemption. Vertical restraints, such as those typically encountered in franchise systems can, up to a certain extent, be exempted by the BER (see also, Guaranteed exclusive areas).

Online/e-commerce restrictions

The set-up of a website is expressly deemed to be passive distribution by the European Commission and the franchisee cannot be deprived of the right to promote its business on the internet (see also above, Guaranteed exclusive areas).

 

Employment issues

37. Can a franchisee be regarded as an employee of the franchisor?

Depending on the nature of the franchise relationship, there can be a risk that the franchisee is considered an employee (or a quasi-employee) of the franchisor, leading to the franchisor being confronted with employer obligations and the franchisee's employee rights. Whether a franchisee is classified as an independent businessman or as an employee (or quasi-employee) depends on the scope of the control exercised by the franchisor, and on the extent of the entrepreneurial risk assumed by the franchisee.

In this respect, the courts use the criteria of personal dependency (employees) or economic dependency (quasi-employees). Personal dependency will be assumed if the franchisee is excessively bound to the franchisor's instructions regarding subject matter, conduct, time, length and place of its activity. Conversely, self-employment will be assumed if the franchisee is mostly free to determine its activity and bears the entrepreneurial risk. In the case where the franchisee is a company limited by shares (for example, a limited liability company or a stock corporation), the franchisor will not face the risk of it being qualified as an employee (except for the particular case of a one-man-company in which the characteristics of dependant employment prevail).

In order to avoid this risk, the franchisor must make sure that there is no personal or economic dependency on the part of the franchisee. This can be accomplished by a corresponding contract design, as well as a corresponding execution of that contract.

 

Dispute resolution

38. How are franchising disputes typically dealt with? What provisions for handling disputes are usually included in domestic franchise agreements?

If there are no specific provisions in the franchise agreement, insoluble disputes are dealt with by the civil courts. Unlike countries in which parallel court systems exist on both the federal and state levels, Germany has only one uniform court system, consisting of the:

  • Local courts.

  • Regional courts.

  • Higher regional courts.

  • Federal Supreme Court.

Mediation as a form of joint dispute resolution is increasingly recognised. Nevertheless, given that a mediation process does not end with an enforceable judgment, franchise agreements usually include mediation proceedings as only the first stage of dispute resolution.

In contrast to court proceedings, arbitration can offer a number of advantages, including:

  • Significantly higher flexibility (for example, with regard to the number of arbitrators, place and language of the arbitration proceedings).

  • Potentially lower costs.

  • Time efficiencies.

  • Greater confidentiality.

  • A binding, enforceable and non-appealable resolution of the dispute.

However, arbitration proceedings can be even more expensive than court proceedings, particularly if the matter in dispute is of relatively low value. In this case, it can also be difficult to find (highly specialised) arbitrators, given the relatively low arbitrators' fees following the low value of the dispute.

Where an overseas forum and overseas governing law has been validly agreed, the German courts will decline jurisdiction when seized by one of the parties. The validity of a jurisdiction agreement is assessed by the law of the court seized, therefore, in this case by German law (see Question 25).

 
39. How are foreign judgments or foreign arbitral awards enforced locally?

Foreign judgments that are enforceable in another member state of the EU can also be enforced in Germany without any further need for an additional decision to validate or register the judgments.

Other foreign judgments, as well as foreign arbitral awards, can only be enforced after its legitimacy has been ascertained by a judgment for enforcement. After that judgment for enforcement has been obtained, the foreign judgment is enforced in the same manner as a domestic one.

 

Exchange control and withholding

40. Are any exchange control or currency regulations applicable to payments to an overseas franchisor?

There are no exchange control or currency regulations applicable to an overseas franchisor in Germany.

 
41. Is there a withholding obligation on payments made to an overseas franchisor?

Income tax on domestic taxable income from the licensing of know-how or rights of use of non-tax-resident business entities or entrepreneurs, which do not have a permanent establishment in Germany is levied at source by way of a withholding tax, unless otherwise provided for in an applicable double tax treaty. The withholding tax is normally paid by the debtor (the franchisee) on account of the creditor (the franchisor). The tax rate is 15%. The solidarity surcharge amounts to 5.5% of the income tax or the corporate income tax payable.

 

Reform

42. Are there any proposals to reform the laws affecting franchising?

There is an ongoing discussion in Germany about the necessity for specific statutory regulations on franchising. Recently, there seem to be legislative attempts to codify German franchise law, in particular with regard to the pre-contractual disclosure obligations.

In 2015, the German Federal Ministry of Justice assigned a research project concerning "Special Statutory Provisions about Franchise Agreements in International Comparison" with a focus on "Pre-contractual Disclosure Obligations of the Franchisor" to the Technical University of Chemnitz.

 

Online resources

Laws on the Internet, Federal Ministry of Justice and Consumer Protection (Gesetze im Internet, Bundesministerium der Justiz und für Verbaucherschutz)

W www.gesetze-im-internet.de/index.html

Description. Official website providing current laws that is maintained by the Federal Ministry of Justice and Consumer Protection. With each individual law there is an English translation that is for guidance only and is not binding (the English version is not always the current one and may be out of date).



Contributor profile

Karsten Metzlaff, Partner

Noerr LLP

T +49 30 20942067
F +49 30 20942094
E Karsten.metzlaff@noerr.com
W www.noerr.com

Professional qualifications. Germany, 1991

Areas of practice. German and European anti-trust law; distribution and franchising law.

Non-professional qualifications:

  • State-certified real estate manager (Kaufmann der Grundstücks- und Wohnungswirtschaft).
  • Recommended lawyer for Franchise, Who's Who Legal (2016).
  • Professor Dr Karsten Metzlaff is distinguished as a leading lawyer for anti-trust and distribution law in leading legal directories.
  • Best Lawyers, Chambers Europe, Legal 500, Who's Who Legal and the JUVE Handbook distinguishes him as one of the leading names in distribution law.

Languages. German, English, French, Spanish

Professional associations/memberships:

  • International Bar Association (IBA).
  • Co-Chair International Franchising Law Committee.
  • Franchise Forum of American Bar Association (ABA).
  • German Franchise Association (Deutschen Franchiseverband e.V.).

Publications. Co-editor of the distribution law journal "Zeitschrift für Vertriebsrecht", ZVertR, Beck-Verlag; Commentary on section 1 GWB (German Act Against Restraints of Competition)/Article 101 TFEU/Horizontal Guidelines/Vertical Agreements Block Exemption Regulation, in: Flohr/Wauschkuhn (ed), Kommentar Vertriebsrecht (distribution law commentary), CH Beck Verlag (2013), among others.


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