Franchising in Italy: overview

A Q&A guide to franchising in Italy.

The Q&A provides an overview of the main practical issues concerning franchising, including current market activity; regulation of franchising; contractual issues relating to franchising agreements (including 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.

Aldo Frignani and Alessandra Sonnati, Frignani Virano e Associati
Contents

Market

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

In 2015, the franchise brands distributed under a franchise network reached 947, of which 860 are Italian brands (see Rapporto Assofranchising in www.assofranchising.it/images/documenti_pdf/Rapporto_Assofranchising_2015_web.pdf).

There are approximately 164 Italian brands operating abroad and approximately 58 master franchisees of foreign franchisors operating in Italy (see Question 2, International franchising). Dominos, Starbucks and Victoria's Secret are among the notable overseas brands that have set up franchises in Italy in the last 12 months.

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

Local franchising

The most commonly used method of local franchising is direct franchising (where the franchisor grants to a franchisee the rights to open a franchise unit or a multiple number of franchise units in a given area (multi-unit franchises)).

Master franchise agreements are also used, while development agreements and joint ventures are not very common.

There are no local laws or commercial issues that are likely to impact any of the above methods.

International franchising

The most commonly used method in international franchising is master franchising (where the franchisor grants a foreign party the right to itself establish and operate franchised outlets and to sublicense others to do so). Direct franchising and joint ventures are not very common.

Area development/representative agreements (where a franchisor grants a third party the right to promote the system and to select prospective franchisees within an exclusive territory) are also used. However, agreements where the developer is granted a right or licence to use the trade marks or the system are not considered to be franchise agreements.

There are no local laws or commercial issues that are likely to impact any of the above methods. There are no specific issues that limit or promote the use of franchising as a technique for the international expansion of a domestic brand outside Italy.

 
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?

Except for general reasons for using an affiliate to issue international franchise agreements (for example to insulate the home country franchisor from exposing its domestic assets to risk) the only specific reasons for using a separate entity are tax related.

 

Regulation of franchising

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

In Italy, franchise contracts have a statutory definition. The notion, which includes both economic elements and legal characteristics, encompasses every business relationship between two legally and financial independent parties, whereby one party grants the other party (in exchange for consideration) the right to use a set of industrial or IP rights (related to trade marks, trade names, shop signs, utility models, industrial designs, copyright, know-how, patents, technical and commercial support and assistance), on the basis that the franchisee joins a system characterised by a group of franchisees operating in the territory for the purpose of distributing specific goods and services (Article 1, Law No 129/2004).

 
5. What are the laws regulating franchising?

In Italy franchise offers and sales are regulated by Law No 129/2004 (Law), which prescribes the law on contract (such as form, duration, mandatory contents, disputes and so on). Therefore the rules governing different type of contracts (for example the rules concerning supply contracts) can sometimes be applied by the courts to franchising.

The Law also applies to master franchising (see Question 2, International franchising) and corner franchising (that is, where the franchisee sets up a space exclusively dedicated to the franchise activity in an area at his disposal).

In addition, there are five main statutes that regulate franchising:

  • The Code of Intellectual Property (Legislative Decree No 30 of 19 March 2005).

  • Law No 192 of 18 June 1998 and in particular Article 9, which prohibits abuse of economic dependence including arbitrary or unfair termination of the contractual relationship. Although the law was originally specifically targeted at subcontracting, it has been subsequently interpreted by the case law as to include franchising.

  • The Consumer Code (Legislative Decree No 206 of 6 September 2005) (as amended by Legislative Decree No 1 of 24 January 2012).

  • Legislative Decree No 145 of 2 August 2007, on misleading advertising.

  • The Law No 173 of 17 August 2005 (on doorstep selling and pyramid selling). Although not directly applicable to franchising, since it prohibits pyramid selling scheme, it has a direct effect also on certain types of (illegal) business that incorrectly call themselves franchise.

  • Regulation (EU) 330/2010 on the application of Article 101(3) of the TFEU to categories of vertical agreements and concerted practices applies to franchise agreements.

The general rules on retail sales, which are applied to any retail dealer (franchised or not) and the rules that govern the specific field of activity in which the franchised network will operate (for example, rules concerning the supply of food to consumers, rules concerning the alcoholic beverages licences and so on) will also apply.

Although parties can choose the law applicable to the agreement, mandatory provisions of Italian law (such as disclosure provisions) must prevail.

In 2000 the Italian government decided to sponsor prospective franchisees for the first time by providing investment grants and soft loans (Legislative Decree No 185 of 21 April 2000). A year later the Treasury issued Legislative Decree No 295 of 18 May 2001 implementing the legislative decree, which provides support packages that are available to franchisees operating in the southern regions of Italy and in certain areas of northern Italy who are unemployed at the time of applying for financial assistance (as financial assistance is available only for programmes that reduce unemployment). The funds are administered through Sviluppo Italia S.p.A. (formerly Sviluppo Italia S.p.A.), a company controlled by the Treasury that evaluates both the commercial viability of the franchise formula proposed by the franchisor and the financial and commercial viability of the plan submitted by the prospective franchisee. The support package is a loan for the start-up investment and a loan for the franchisee's operating costs. The funds available have always been inadequate to the needs so the support programme has had very little effect on franchising as a whole.

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

No regulatory authorities have been set up to enforce franchising laws and requirements in Italy. The enforcement rests with the Italian courts.

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

There are no filing, registration or approval requirements that must be satisfied before setting up a franchise system.

With regards to IP rights, Italian law grants protection to both registered and unregistered trade marks and service marks. Unregistered trade marks are protected only if they are used, and only in the territorial area in which they are used.

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

The Italian Franchising Association (Associazione Italiana del Franchising) has adopted a Code of Ethics (see www.assofranchising.it). It was originally modelled on the Code of Conduct of the European Franchise Federation and has been subsequently updated to make it compliant with the franchise law. The code, however, has no legal force and is binding only on the members of the association. This means that violations of the Code by members can only lead to their exclusion from the association.

The Code mainly includes provisions concerning disclosure duties of the franchisor (that is, the prospective franchisee must be informed of all the relevant economic and regulatory terms of the transaction) and fairness of contractual terms. According to the Code, the contract must:

  • Be in writing.

  • Provide for an adequate territory of exclusivity for the franchisee and for an adequate duration.

  • Cover various aspects of termination of the contract.

  • Provide training for the franchisee.

  • Allow the franchisee to use the franchisor's distinctive signs.

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

In January 2012, the Consumers' Code was amended to include small undertakings, with certain characteristics, in the protection granted to consumers from unfair practices. If a franchisee is an entity with less than ten employees and an annual turnover of less than EUR2 million, it is considered to be a consumer for the purposes of the provisions of this Code. The Code was amended to protect franchisees from misleading advertising by franchisors and now includes a long list of other unfair promoting activities or contractual clauses (Articles 18 to 26, Consumers' Code).

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

Before selling a franchise, the franchisor must have tested his business concept on the market (Article 3.2, Law No 129/2004). This testing period must last at least one fiscal year and this requirement can be met by testing carried out abroad by a foreign franchisor, which is considered suitable to fulfil the requirement.

 

Franchise agreement

Pre-contract disclosure requirements

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

Before signing the contract, the franchisor must disclose the following (Law No 129/2004 (Law)):

  • Relevant information about the franchisor.

  • Trade marks used in the concept.

  • Characteristics of the business.

  • A list of the franchisees and of the franchisor's direct outlets.

  • The annual variations in the number of franchisees with their locations and addresses during the last three years.

  • A short description of judicial or arbitral disputes concerning the franchising network concluded in the last three years.

Most of the above requirements are straight forward for both domestic and foreign franchisors to comply with. However, franchisors who before the execution of the franchise agreement only carried out their business abroad must disclose the following instead of the information in the last three points above:

  • A numerical list of the franchisees currently operating in the network as well as a list of outlets directly run, country by country.

  • Details of the variation, year by year and country by country, in the number of franchisees, including their location in the last three years.

  • A description of a judicial or arbitral dispute concerning the franchising network concluded in the last three years (see Ministerial Regulation No 204 of 2 September 2005).

The franchisor must provide the above information at least 30 days before the date of execution of the contract. The Law provides no specific penalties in cases where the franchisor does not observe the 30-day period and the contract is executed before its expiration. Non-compliance with the disclosure requirements does not automatically invalidate the contract but could give the franchisee grounds for the annulment of the contract if material information was not provided.

In addition, if one party provides false information, the other party can ask for the annulment of the agreement and claim compensation for damages (Article 8, Law). According to legal scholars and some case law, this provision can apply if insufficient disclosure is made.

The franchisor can withhold information, which is reasonably deemed to be confidential information or if disclosure could infringe third party rights.

The law is silent on the issue of whether a franchisor must provide disclosure to the unit franchisees when there is a master franchisee. The obligation on a franchisor to provide disclosure to the unit franchisees depends on the structure of the master franchise agreement. An overseas franchisor that retains the right to enter directly into franchise agreements in the territory where the master franchisee operates must participate directly in the local disclosure process. In all other cases where the master franchisees have the same role and economic function as a franchisor, the master franchisee must provide disclosure.

 
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?

See Question 11. In addition, the franchisor must:

  • Exercise goodwill, fairness and good faith at all times in dealing with the prospective franchisee.

  • Must provide the prospective franchisee with any information the franchisee should consider necessary or useful for the purposes of the franchise agreement in a timely manner.

Formalities

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

The only formal contractual requirement to create a valid and binding franchise agreement is that it must be in writing; otherwise it will be null and void (Law No 129/2004). However, in relation to international franchising agreements only, on request by the prospective franchisee, the franchisor must provide the information concerning the agreement and the related annex in the Italian language (Article 3, Ministerial Regulation No 204 of 2 September 2005).

There are no other requirements prescribed in the law (such as signing the franchise agreement in front of a notary public).

The doctrine and case law consider franchise agreements as hybrid licence and service agreements, falling within the broad category of distribution agreements.

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?

Obligations of the franchisee

Parties must observe good faith during the course of negotiations and performing the contract (Articles 1337 and 1375, Civil Code). These provisions are very broad and allow the judges substantial discretion in determining what is meant by ''good faith'' in specific circumstances.

The duty to negotiate and to behave in good faith can require different positive or negative behaviours, depending on the concrete case.

The duty to observe good faith is a mandatory provision and cannot be overridden by any provision in a franchise agreement.

Obligations of the franchisor

See above, Obligations of the franchisee.

In general, franchisors and their officers and directors are not liable for failures of the local sub-franchisor to comply with the good faith requirements.

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

The following essential items must be contained in the franchise agreement (Article 3.4, Law No 129/2004):

  • The amount of investments necessary to start the franchise business.

  • The way of calculating and paying the royalties.

  • The specification of the know-how and of the services performed by the franchisor.

  • The conditions for the contract's renewal, termination and assignment.

The absence of an essential item causes the nullity of the contract.

The following non-essential items can also be contained in the franchise agreement:

  • The entrance fee (which can be opted out).

  • The minimum sales target to be reached by the franchisee.

  • Territorial exclusivity.

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

In principle, exclusion of liability clauses are valid and enforceable to the extent that they both:

  • Do not infringe any mandatory provisions or public order rules.

  • Do not exclude or limit in advance a party's liability for gross negligence or wilful misconduct.

Entire agreement clauses are valid and enforceable and are commonly used. However they do not exclude liability for gross negligence or wilful misconduct (for example in cases of fraudulent pre-contractual representations).

Exclusion and entire agreement clauses do not exclude the rights of third parties to claim for damages suffered as a consequence of the franchisor's own acts or those of his franchisee, specifically if the other requirements of tort law (for example, negligence) are met.

 
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

There are no restrictions on a franchisor's right to ''tie'' products but the related obligation must be agreed in writing.

Any obligation on the buyer to purchase from the supplier or from another undertaking designated by the supplier more than 80% of the buyer's total purchases of the contract goods or services is considered a non-compete obligation (Article 1(d), Regulation (EU) 330/2010 on the application of Article 101(3) of the TFEU to categories of vertical agreements and concerted practices). However, under the Guidelines on Vertical Restraints, a non-compete obligation on the goods or services purchased by the franchisee falls outside the above provisions where the obligation is necessary to maintain the common identity and reputation of the franchised network. However, in these cases, the duration of the non-compete obligation must not exceed the duration of the franchise agreement itself.

Non-compete obligations and transfer restrictions

Non-compete obligations (see above, Restrictions on purchasing and product tying ( www.practicallaw.com/9-631-0105) ) during the franchise agreement are considered strictly connected with the nature of franchising and therefore admitted by case law.

The franchisor must always be in complete control of the franchise network and be able to choose its franchisees. The franchisor can require its prior consent to transfers of the franchisee business and/or to transfers of interests in the entity owing the franchised. To this end, it is advisable that the agreement contains detailed provisions on the procedure to be followed in the case of transfers.

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?

Approximately half of the franchisors already operating franchise systems in Italy ask for an entry fee. The amount of this fee can vary significantly, depending on the field of activity, specific features and targets of the franchised network and so on. If an entry fee is payable, it must be expressly indicated in the agreement (Article 3.4 (b), According to Legislative Decree No 231 of 9 October 2002, as amended by Legislative Decree No 192 of 9 November 2012, implementing Directive 2011/7/EU on combating late payment in commercial transactions, the creditor is entitled to a statutory interest for late payment without the necessity of a dunning letter or a reminder sent to the debtor. The statutory interest rate is equal to the sum of the "reference rate" plus 8%. The "reference rate" is the European Central Bank’s interest rate (actually 0.05%). The parties may agree upon a different interest rate. The law sets the limit at which the interest is considered usurious and it is revised quarterly (actually from 8.375% to 24.34% depending on the type of transaction)Law No 129/2004).

Besides the entry fee, franchisors can earn their revenue in the form of both a percentage of the turnover or a continuing licence fee (independent of the turnover). The first form is usually preferred. In some cases, especially where goods sold prevail, the royalty can be embedded in the prices of goods and services that are sold to the franchisee.

Advertising fees are usually charged by large franchisors. As with royalty fees, advertising fees can be a fixed contribution or a percentage of the turnover.

According to Legislative Decree No 231 of 9 October 2002, as amended by Legislative Decree No 192 of 9 November 2012, implementing Directive 2011/7/EU on combating late payment in commercial transaction, the creditor is entitled to a statutory interest for late payment without the necessity of a dunning letter or a reminder sent to the debtor. The statutory interest rate is equal to the sum of the "reference rate" plus 8%. The "reference rate" is the European Central Bank's interest rate (actually 0.05%). The parties can agree on a different interest rate. The law sets the limit at which the interest is considered usurious and it is revised quarterly (in practice, from 8.375% to 24.34% depending on the type of transaction).

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?

The franchisor must guarantee the franchisee a minimum term related to the period of amortisation of the franchisee's investments (Article 3, Law No 129/2004). This term cannot be less than three years. If the parties have signed a franchising contract with a fixed term, on expiry of this term the agreement simply ceases to be in effect. There is no requirement to declare the reasons for the non-renewal under Italian law.

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

Commercial practice

Rights of renewal are commonly included in the franchise agreement, frequently in the form of an automatic renewal for an equal or shorter period, unless notice of termination is given by one party in advance (usually six or 12 months). A fee for the renewal can be requested, if provided by the agreement, but it is not a common practice in Italy.

Local law

The basic principle of freedom of contract implies that a franchisor has no obligation to renew a contract when it has come to an end (Article 1322, Italian Civil Code).

However, the franchisee can be protected against the non-renewal of a contract by provisions prohibiting situations of abuse of economic dependence, including arbitrary or unfair termination of contracts (Article 9, Law No 192 of 18 June 1998).

Termination

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

Generally speaking, franchise agreements can terminate in the following circumstances (Civil Code):

  • In the case of fixed term agreements, when the term of the agreements comes to an end.

  • By mutual consent.

  • By unilateral withdrawal.

  • By breach.

  • By other causes admitted by the law.

A franchisee has no statutory right to any compensation or indemnity on termination or non-renewal of the contract. This right only exists for commercial agents (Article 1751, Civil Code) and there is no case law that applies this provision by analogy to distributors or franchisees.

A contract can include an agreed amount of liquidated damages that must be paid in the case of a specific breach of contract (Article 1382, Civil Code). These liquidated damages must be paid regardless of whether the actual damage is proved by the damaged party.

 
22. Are post-term restrictive covenants enforceable?

A franchisee's freedom to carry out a competing activity after termination of the contract can be restricted subject to four conditions:

  • The restriction must relate to competing goods and services.

  • It must be limited to the premises and land from which the buyer has operated during the contract period.

  • It must be necessary to protect the know-how transferred by the franchisor.

  • Its duration cannot exceed 12 months.

Non-compete covenants that are not caught by anti-trust prohibitions (see the de minimis Guidelines) must (Article 2596, Civil Code):

  • Be in writing.

  • Be limited to a given territory and a determined field of business.

Finally, the duration of a non-competition covenant cannot exceed the period of five years. Where a longer period is agreed by the parties, the duration of the agreement will be automatically reduced to five years. There is no obligation to make payment to the franchisee in order to be able to enforce such provision.

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

If parties have not agreed on an ownership of customers clause, both the franchisor and the replacement franchisee can deal with the former franchisee's customers.

The law does not provide for any compensation in the case the franchisor or a replacement franchisee continues to sell to the former franchisee's customers in the same market or premises.

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?

The local courts will recognise a choice of foreign law in a franchise agreement, except where Italian mandatory rules (for example, disclosure provisions) apply.

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

The parties can freely agree that any dispute will be submitted to a court in a foreign country or to an international arbitration.

 

Operations Manual

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

A franchisor can ensure that its franchisees comply with the business standards, systems and requirements by:

  • Enlisting in the Operations Manual the quality standards, procedure and requirements.

  • Inserting in the agreement a specific contractual clause imposing to the franchisee to observe the Operations Manual and not to deviate from the system.

  • Reserving the right to inspect the franchisee's point of sale.

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

There is no provision of law imposing limits to the right of the franchisor to change the Operations Manual. However, in a case where the franchisees complained that the franchisor unilaterally modified the object of the franchise agreements (from sale of electrical products and related services to sale and installation of heating and cooling systems), the arbitrator held that the franchisor was in breach of the agreement to have varied and substituted, without the franchisees consent, the range of products and services (Arbitral Award Rome, 17 January 2007, franchisor v franchisees).

Therefore, a clause in the franchise agreement permitting the franchisor to vary, amend and modify the system and the Operations Manual if the franchisor, in its sole discretion, determines that the variation, amendment and modification, may be beneficial to the network and to the system, should be sufficient to prevent franchisees' claims.

 

Liability issues

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

The Italian Competition Authority can prosecute a franchisor for unfair commercial practices (including deceptive and fraudulent selling practices) and issue a fine (Consumers' Code). A franchisee has a right of action for related damages before the civil courts.

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

Indemnity

The Italian legal system acknowledges vicarious liability only under certain and codified circumstances, which include:

  • Vicarious liability of employers for acts of their employees.

  • Administrative vicarious liability of corporate entities for crimes committed by their employees.

  • Liability of parents for damages cause by the minors.

  • Liability of car owners for the damages caused by the car.

However, in a limited number of cases, franchisors have been held vicariously liable for the conduct of their franchisees when third parties were in good faith convinced that they were dealing with an agent of the franchisor in lieu of the franchisee. In addition, a franchisor's vicarious liability was also found because the third party (although being aware it was dealing with a franchisee) relied on the fact that the franchisee belonged to a well-known franchise network and therefore had the same commercial standing and integrity as the franchisor (Court of Appeal of Naples, 3 March 2005, published in I Contratti No 12/2005, p. 1138). In this case, a franchisor of a network of real estate agencies was held liable to one of its franchisee's customers for the reimbursement of a deposit. The court stated that the franchisor failed to carefully select its franchisee and omitted to put in place appropriate monitoring and control systems on the franchisee's activity. Interestingly, the Law No 129/2004 does not place any specific obligation or burden on franchisors to control and monitor franchisees.

To reduce the risk, the franchise agreement can expressly specify that:

  • Under no circumstances is the franchisor liable for any act, omission or any other obligation of the franchisee.

  • The franchisee must indemnify the franchisor against any claim arising directly or indirectly from, or as a result of, or in connection with, the franchisee's operation of the franchised business.

Precautions

It is advisable that the contract expressly obliges the franchisee to disclose his independence from the franchisor to third parties. The contracts should also expressly state that no relationship of agency is set up between the parties, and that the franchisor is not, in any case, bound by the acts or statements of the franchisee.

 

Intellectual property

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

The rights granted to franchisees relating to the use of IP rights (IPRs) typically include the right to use a set of industrial or IP rights, related to trade marks, trade names, shop signs, utility models, and know-how.

The franchisor must provide the prospective franchisee with details of the trade marks used in the system, including essential information relating to registration or deposit, or to the licence granted to the franchisor by any third party owner of the trade marks, or any documentation proving the actual use of the franchise's trade marks (Article 4.1 (b), Law No 129/2004).

According to Italian best practice, the franchising agreement must include all the covenants that are usually included in any other trade mark licence. The franchisor can limit the use of its IPRs like in any trade mark licence.

The franchisor can limit the use of its know-how, provided that the know-how is secret, has a commercial value, and has been subjected to reasonable steps to keep it secret. Among the contractual clauses to protect the know-how, the following are commonly used:

  • A confidentiality clause (according to which the franchisee can be required not to disclose to third parties the know-how provided by the franchisor).

  • A grant-back clause (according to which the franchisee can be required to communicate to the franchisor any experience gained in exploiting the franchise and to grant it a non-exclusive licence for the know-how resulting from that experience).

  • A field of use restrictions clause on the basis of which the franchisee is obliged not to use the know-how for purposes other than the managing of the franchised business.

  • A clause obliging the franchisee to return to franchisor the Operations Manuals and all the relevant material at the termination of the contract.

Many of the restrictions above can survive the termination of contract. The rule prohibiting post-term protection of generally available know-how cannot apply if and when the know-how has been made generally known by the franchisee himself in breach of his contractual duty. As a general principle, no obligation concerning the protection of know-how can be imposed on anybody once it has fallen into the public domain (Regulation (EEC) 4087/88 on the application of Article 85(3) of the Treaty to categories of franchise agreements).

The Italian Code of Industrial Property grants legal protection to know-how and other trade secret information if the following criteria are met:

  • The information must not be generally known or readily ascertainable.

  • The information must have an economic value.

  • The owner of the trade secret must have adopted reasonable measures under the circumstances to protect the secrecy of the information.

Remedies include an injunction against the use of the trade secrets, damages and publication of the court's decision.

 
31. What are the registration requirements for licensing IPRs?

There are no registration requirements for licensing IPRs. However, in order to provide the franchisee with a stronger protection, the franchisor should be the owner/licensor of the trade mark in Italy, otherwise there will be no absolute protection neither for the franchisor nor for the franchisee against a third party using or registering the same trade mark.

 

Real estate

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

According to the Law on Fair Rents (Law No 392 of 27 July 1978, as amended), the tenant can (even without the landlord's consent) sublease or assign the lease agreement only to the extent he is effectively selling or leasing his business as a going concern. The landlord can oppose an assignment or sublease on serious grounds within 30 days of receiving notice. ''Serious grounds'' are not defined by the law. According to the case law, serious grounds include reasons related to the reliability and economic position of the assignee.

In all other cases the sublease and/or assignment of a real estate lease requires the landlord's consent, unless otherwise agreed in the lease agreement. There are no formalities (such as payment, taxes, duties or timing) prescribed in the law, except what is expressly mentioned in the lease agreement.

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

The lessee of commercial premises can generally occupy the premises for a period of six years and can have a lease renewal for an additional six years (Rent Control Law of 27 July 1978, as subsequently amended). The lessor can only terminate the agreement if the lessor intends to do one of the following (Article 29, Rent Control Law):

  • Use the property as its private home or as private home of its relatives.

  • Use the property for the carrying out of commercial, industrial, or other activities.

  • Re-build or completely renovate the property.

  • Renovate the property for the purposes of making it consistent with the requirement of law for carrying out a commercial activity.

Although the franchisor cannot terminate the lease agreement if the franchisee regularly pays the rent, until 12 years have elapsed. Any term, which limits the duration of the lease agreement or grants to the lessor an advantage contrary to the provisions of the law, is null and void. Therefore, it is not possible to validly limit the duration of the lease or prevent the franchisee from retaining occupation rights after the expiry or termination of the franchise agreement.

Parties can only opt out of the above provisions if the annual rent of the property is higher than EUR250,000.

A viable, although more expensive, alternative for a franchisor to prevent the franchisee from occupying the premises after the franchise agreement has ended is instead of leasing the bare premises, lease the fully functional turnkey business (premises, furniture, equipment, administrative licence and so on). The lease of a business, as opposed to the lease of naked commercial premises, is not subject to the rent control law and therefore its duration can be agreed upon for a shorter period. In any event, it is advisable that the agreement expressly clarifies that the termination of the franchise relationship automatically leads to the termination of the rental business agreement.

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

The franchisor can acquire the franchisee's premises at the end of the franchise relationship by way of an option right to buy the business concern of the franchisee.

To be valid, the option must determine the price or the price calculation formula (including the goodwill, so to reduce the risk of a tax assessment) and the terms of exercise. In addition, a consideration for the grant of the option is required.

It is not possible to register an option to purchase at the land registry.

As options to purchase are difficult to enforce, a penal clause can be agreed by the parties in the case of non-performance.

If the franchisor does not want to buy the business concern of the franchisee, an alternative is to enter into an option to the assignment of the lease agreement, provided that the landlord consents in advance to such assignment.

 
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?

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

 

Competition law

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

Competition law

The main national competition law is Law No 287/1990, which is based on the EU competition rules. It prohibits agreements between undertakings (such as vertical agreements) where the object or effect is the restriction of competition in the national market or a relevant part of the market, in a consistent manner (Article 2.3).

Article 3 prohibits the abuse of a dominant position.

However, as it is a general principle of EU law that no provision of national law should conflict with the uniform application of the EU competition rules, the provisions of Regulation (EU) 330/2010 on the application of Article 101(3) of the TFEU to categories of vertical agreements and concerted practices (Vertical Restraints Block Exemption) must also be noted (see below, Exemptions).

Exemptions

Under the Vertical Restraints Block Exemption and the related Guidelines, distributors remain free to decide how to distribute their products. However, to benefit from the block exemption they cannot have a market share in excess of 30%, and their franchise agreements must not contain any hard-core restrictions of competition.

The new rules introduce the same 30% market share threshold for distributors and retailers. Under the new rules:

  • Exclusive dealing is permitted.

  • Territorial restrictions are permitted.

  • Resale price maintenance is permitted only in very limited cases (for the launch of a new product, to organise a co-ordinated short-term low price campaign (two to six weeks in most cases) in a franchise system applying a uniform distribution format).

  • Minimum purchase targets are permitted.

  • Restrictions on the sources of supply to franchisees are permitted, within certain limits.

Online/e-commerce restrictions

According to the Guidelines, franchisees must be free to sell on their websites as they do in their shops and other physical points of sale.

In general, restrictions of the use of the Internet by distributors are considered hard-core restrictions. For example, any obligations on distributors to automatically reroute customers located outside their territory, or to terminate consumers' transactions over the Internet if their credit card data reveal an address that is not within the distributor's territory, are hard-core restrictions. Similarly, any obligation that dissuades distributors from using the Internet, such as a limit to the proportion of overall sales that a distributor can make over the Internet, or the requirement that a distributor pays a higher purchase price for units sold online (dual pricing), is also considered a hard-core restriction.

However the franchisor can require quality standards for the use of the Internet site to resell his goods, just as the franchisor can require quality standards for a shop or for advertising and promotion in general.

 

Employment issues

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

Before the franchise law came into force, the Italian judges drew a line between franchising agreements and employment contracts, establishing that even if the contract terms are burdensome to the franchisee, they will not be sufficient to transform an entrepreneurial business with a minimum of independence and income into an employment contract (see Bratti v Ges. Com. Srl and Cipac spa (1987), in (1987) JIFDL 38; Ottenio v Istituto Sociopsicologico ''L'Ideale'' (1984), in A. Frignani, Il franchising, Turin, 1990, 385). Currently, Law 129/2004 clarifies that the two undertakings must be legally and financially independent, therefore avoiding any future interpretative dispute on the nature of the contract of franchising as an employment relationship.

 

Dispute resolution

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

Parties can freely provide that the contract will be submitted to a court in the franchisor's country or to an international arbitration. In a domestic contract these clauses, if not individually negotiated, should be specifically approved in writing by the franchisee (Article 1341, Civil Code). This is also advisable in an international franchising agreement.

Arbitration typically provides a speedier resolution than court proceedings. In addition, some parties prefer arbitration because arbitrators often have specialised knowledge of the matters in question and because the award remains confidential.

However, arbitration is not ideal in all circumstances as it is more costly, especially if an arbitration panel is appointed and because arbitrators cannot grant interim measures.

A relatively small number of disputes arising from domestic franchise agreements are settled through arbitration, compared to the number of disputes submitted to the ordinary courts.

On the contrary, disputes arising from international franchise agreements are usually settled through arbitration, which is considered more neutral, with respect to the parties.

In disputes between an overseas franchisor and the local franchisee or master franchisee, a requirement for an overseas forum and overseas governing law may be held by a court as too burdensome for the franchisee, especially given the local courts' empathy to franchisees (the weaker party).

Under Italian franchise law mediation is not required, it is purely suggested.

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

Foreign judgments are enforced locally under the Regulation (EU) 1215/2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (Recast Brussels Regulation). According to the Recast Brussels Regulation, a foreign judgment is enforceable in Italy unless any of the following applies:

  • It is contrary to the public order.

  • The judgment has been issued by default and the defendant has not been given enough time to defend itself.

  • The judgment is irreconcilable with another one issued between the same parties.

  • It comes into conflict with the provisions of the Recast Brussels Regulation in matters of insurance, consumers, employees or exclusive jurisdiction.

The recognition and enforcement in Italy of a foreign or international arbitration award is governed by the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958. The motion for recognition and enforcement must be filed with the competent Court of Appeal under the procedural rules contained in Article 839 of the Italian Civil Procedure Code.

 

Exchange control and withholding

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

There are no exchange controls in Italy applying to payment made to an overseas franchisor. However, banks and financial institutions must monitor any payments over a certain amount for anti-money laundering purposes.

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

Royalties paid to a non-resident franchisor are subject to a withholding tax at a standard rate, subject to any applicable bilateral tax treaty.

 

Reform

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

There is currently a bill in Parliament to amend the franchise law, however, the changes will be very minimal.

 

Online resources

Italian Parliament

W www.parlamento.it/leg/ldl_new/v3/sldlelencoordcron.htm

Description. Italian laws from 1996 can be found on this website in Italian only.

Italian Competition Authority

W www.agcm.it/en/

Description. Anti-trust laws can be found on this website in Italian and English.

Eur-Lex Access to the European Union law

W http://eur-lex.europa.eu/homepage.html

Description. EU law can be found on the website.



Contributor profiles

Prof Avv. Aldo Frignani, Founder

Frignani Virano e Associati

T + 39 0116602302
F + 39 0116601884
E aldo.frignani@studiofrignani.com
W www.studiofrignani.com/

Professional qualifications. Italy, Lawyer; Professor of Comparative Law and of EU Private Law, University of Turin School of Law

Areas of practice. Franchising; agency; commercial contracts; IP; international contracts; EU law; anti-trust; mergers and acquisitions; arbitration; securities and project financing.

Languages.. English, French, German, Spanish.

Professional associations/memberships. Legal committee of European Franchising Federation (member); Study group of UNIDROIT (which drafted the Guide to International Master Franchising) (member); European Franchise Lawyers Group (member and former chairman); International Bar Association (member); American Bar Association (member) and Associazione Italiana del Franchising (legal adviser).

Publications

  • Il Franchising, Turin, 1990.

  • Chapter on Italy in M. Mendelsohn, Franchising in Europe, London, 1992.

  • Factoring, Leasing, Franchising, Venture Capital, Leveraged Buy-Out, Hardship Clause, Countertrade, Cash & Carry, Merchandising, Know-how, Securitisation, 6th ed., Turin, 1996.

  • Disclosure Requirements in International Transactions in CCH-Business Franchise Guide, 1998.

  • Il contratto di franchising, Giuffré, Milan 1999.

  • Franchising in Italy, in International Encyclopaedia of Franchising (a cura di M. Mendelsohn), Kluwer, Londra, 1999.

  • Franchising. La nuova legge, Giappichelli, Torino, 2004.

  • Il contratto internazionale, 2ª ed., 2010 (containing 4 chapters on ''Distribution contracts including a 100 page chapter on ''International Franchising'').

  • Franchising in Italy in WORMALD, ABELL (editors), Alternative corporate re-engineering (Building Business through third party relationships and expansion into new markets), Thomson Reuters, London, 2011 (in co-operation with A. Sonnati).

  • Il contratto di franchising. Orientamenti giurisprudenziali prima e dopo la legge 129 del 2004, Giuffré, Milano, 2012.

  • Franchising in Italy, in LOEWINGER, LINDSEY (editors), in International Franchise Sales Law, 2a ed., ABA Forum on Franchising, Chicago (in co-operation with F. Turitto), 2016.

Avv. Alessandra Sonnati, Partner

Frignani Virano e Associati

T + 39 0116602302
F + 39 0116601884
E alessandra.sonnati@studiofrignani.com
W www.studiofrignani.com/

Professional qualifications. Italian Bar, 1999; JD, University of Turin, 1996

Areas of practice. Franchising; distribution; commercial contracts and IP.

Professional association. Member of the Turin Bar

Languages.. Italian, English

Publications

  • Contribution to A. Frignani, ''Il contratto di franchising – Orientamenti giurisprudenziali prima e dopo la legge 129 del 2004'', Milan 2012.

  • Chapter on ''Alternative corporate re-engineering in Italy'', in Alternative corporate re-engineering, Sweet & Maxwell 2011.

  • ''Italian case law. A survey of the most recent Italian case law on franchising'', in IBA International Franchising Newsletter, April 2011, (in co-operation with A. Frignani).

  • ''Italy: can a franchise network be qualified as a Group of Companies?'' in International Journal of Franchising Law, 2010, 8, pp. 25-28.

  • ''Termination of Master Franchise Agreements and the consequences among the parties'' in International Journal of Franchising Law, 2008, 4, pp. 5-12 (in co-operation with A. Frignani).


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