Franchising in France: overview

A Q&A guide to franchising in France.

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.

Gilles Menguy, GM Avocats
Contents

Market

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

Despite a difficult economic context, all the economic indicators of the French franchising sector have increased in 2015, as follows:

  • The number of points of sale increased by 2.1%.

  • The number of franchise networks increased by 1.9%.

  • The overall sector turnover increased by 3.8%.

France therefore occupies the first place in the European market in the franchising sector.

Over 1,312 franchised businesses have been created in 2015. The number of franchised outlets and points of sale have increased in particular in the following sectors:

  • Food: 763 new outlets.

  • Personal services: 311 new outlets.

  • Automotive: 241 new outlets.

  • Household equipment: 228 new outlets.

  • Construction: 159 new outlets.

In addition, new networks have been set up, for example:

  • Fast food sector: 11 new networks.

  • Automotive services: 8 new networks.

  • Business services: 8 new networks.

  • Construction: 7 new networks.

  • Food industry: 7 new networks.

The food sector remains in the first place with regards to turnover, representing a total of EUR19.52 billion, an increase of over EUR1 billion compared to 2014. The fast food sector has slightly decreased, although it is still generating a turnover of EUR4.17 billion. In 2015, the main event in this sector was the purchase of Quick by Burger King. The retail clothing sector represents over EUR4.33 billion, while the housing equipment sector has largely increased to reach a global turnover of EUR6.09 billion.

For 2016 and the following years, while the objectives of many large networks appear to focus on the purchase of competing networks, local development and the same level of growth should continue.

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

Direct, multi-unit and master franchise agreements are commonly used, depending on the nature and the importance of the franchise network.

Local franchising

French franchisors often rely on direct franchising for the French territory.

International franchising

At the international level, large networks commonly use multi-unit or master franchises to develop on the French market. Certain franchisors also enter the market directly, through a specific entity or a joint venture.

The method used for entering foreign markets may vary depending on various issues, such as:

  • Legal restrictions on franchisors, for example the need to obtain licences, permits or registrations (for example, the requirement to be registered as a franchisor in China and the registration requirement of franchise disclosure documents in the US, which involve additional costs, such as those to adapt financial statements under US standards).

  • Tax issues, in particular regarding withholding tax issues applying to the payment of royalty fees and other monies.

  • Issues relating to trade mark registration, protection and enforceability.

 
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?

Overseas franchisors may prefer to use specific separate entities when entering the French market for various reasons pertaining to liability and tax issues. These issues are however not specific to franchising, and there are no specific legal matters relating to French franchise law with regards to that choice.

 

Regulation of franchising

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

French law does not provide a definition of a franchise agreement. Instead, case law defines a franchise agreement as a relationship characterised by the existence of the following three elements:

  • A trade mark licence.

  • The communication of specific know-how.

  • Assistance provided to the franchisee by the franchisor.

 
5. What are the laws regulating franchising?

In France, franchising is not subject to a special statutory regime. Rather, franchise law derives mainly from case law. Courts deciding on a franchise case will adapt general French contract and commercial law to the specific situation.

The only specific provision is Article A. 441-1 of the Commercial Code, which requires every person that sells products or provides services under a franchise agreement to inform the consumer that it is acting as an independent contractor, in a visible way on all information documents, especially those of a promotional nature. This must be done on the inside and on the outside of the retail premises.

On 21 July 2016, Law No. 2016-1088 regarding the modernisation of social dialogue introduced the franchisor's obligation to set up a social dialogue committee including employee representatives, franchisees and the franchisor. The social dialogue committee has an advisory capacity on labour questions. The creation of a social dialogue committee is compulsory if the following conditions are met:

  • The franchise network employs at least 300 employees in France.

  • The franchise agreement contains terms that have an impact on labour conditions.

  • A representative union requests it.

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

There is no specific regulatory authority responsible for enforcing franchising laws and requirements in France.

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

The franchisor need not be registered before setting up a franchise system in France.

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

The French Franchise Federation promotes compliance with the European Code of Ethics for Franchising. However, this code is not binding.

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

Under French law, a franchisee cannot be regarded as a consumer. A consumer is defined as any natural person who is acting for purposes that are outside the scope of his/her trade, business, craft or profession (Preliminary Article, Consumer Code). Provisions protecting consumers are therefore not applicable to franchise agreements.

Although franchisees cannot be considered as consumers, they benefit from certain protections under the Commercial Code, which are directly inspired by the protection of consumers. For example, Article L.442-6, I, 2° of the Commercial Code prohibits abusive clauses in commercial contracts. The franchisor may be liable under this provision if it subjects its franchisee to obligations that cause a significant imbalance in the rights and obligations of the parties. While this formulation is quite broad, judges have been reasonable in interpreting it. For example, courts have held that a penalty clause does not per se cause a significant imbalance.

More generally, certain restrictive practices are prohibited, such as (Article L.442-6, Commercial Code):

  • Gaining an advantage that is not related to a service provided (for example, imposing an obligation to participate in the financing of promotional activities that is not justified by a common interest and without offering proportionate compensation).

  • Imposing abusive conditions relating to prices under the threat of termination of the business relationship.

  • Refusing to communicate terms of sales.

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

There are no other specific requirements that must be met before a business can sell a franchise in France.

 

Franchise agreement

Pre-contract disclosure requirements

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

Over the years, the French courts have developed a body of case law on the duty of good faith applicable to pre-contractual negotiations, which is based on Article 1134 paragraph 3 of the Civil Code.

In the 1980's, the franchise industry was gaining momentum in France and case law did not address the particularities of pre-contractual negotiations of franchise agreements. On 31 December 1989, Parliament adopted a specific law (Loi Doubin) imposing a mandatory pre-contractual disclosure obligation, which was later codified under Article L.330-3 of the Commercial Code.

Promotional documents

The franchisor cannot be held liable if the information contained in promotional documents aims to show the franchisor in its best light, as this is the purpose of these documents. However, franchisors must ensure that promotional documents are not gravely misleading for prospective franchisees.

Courts have held that promotional documents can have a binding character when they have influenced the consent of the contracting party in a precise and detailed way. The franchisor therefore takes the risk of having its promotional materials considered as part of the contract.

Pre-contractual information document

Like in many jurisdictions, French law requires the franchisor to provide a pre-contractual information document to the franchisee.

More specifically, any person that provides another person with a trade name, a trade mark or a sign, and requires from that person a commitment of exclusivity or near-exclusivity for the exercise of its activity, must, before the signing of any contract in the common interest of both parties, provide to the other party a document giving truthful information enabling that party to make an informed decision (Article L.330-3, Commercial Code).

The pre-contractual information document must include the following information (Article R.330-1, Commercial Code):

  • Identification of the franchisor. The franchisor must be properly identified. It is therefore necessary to state its legal name, commercial name, address of its headquarters, the amount of invested capital and its business registration number.

  • Identification of managers. This includes details of any criminal records.

  • Information regarding the trade mark. Since the trade mark licence is an essential element of the franchise, the pre-contractual information document must specify the trade mark registration date and registration number. If the franchisor is a licensee of the trade mark, the document must include the period of validity of the licence.

  • Information on the franchisor's banks. The franchisor must specify the banks with which it has accounts. If the franchisor uses multiple banks, it only needs to list the five main ones.

  • Business history of the franchisor. The pre-contractual information document must specify the date of creation of the franchise business and the main stages of its development. Additionally, any relevant information on the franchisor, the franchise system (such as relevant litigation) and the experience of the franchisor's managers must be provided. This information can be limited to the five preceding years. These elements can be of critical importance when it comes to the consent of the franchisee. For example, the Paris Court of Appeal has held that a franchise contract was void on the grounds that the disclosure document provided false information regarding the credentials of the franchisor's directors.

  • General and local market study and information on the franchise system's potential for development. A franchisee should pay close attention to the market study, as it allows the franchisee to evaluate the investment opportunity. While the presentation of the local market study can be general, it must not be incomplete, misleading or unreliable. For example, the information is defective when it fails to report the presence of nearby competitors. However, the franchisor need not provide a detailed market survey, an implementation study or a forecast balance sheet. It is risky for the franchisor to provide additional information, as it is responsible for all information communicated, whether or not this information must be provided. If any additional information is untrue, the franchisee can bring a claim for fraud and demand compensation. For example, overly optimistic forecasts on which a franchisee relied upon to make its decision can be sufficient to demonstrate that the franchisee's consent was vitiated.

  • Presentation of the franchise network. The pre-contractual information document must give a truthful image of the network and must include the:

    • name and form of exploitation of each company belonging to the network;

    • address of franchisees established in France and the date of conclusion or renewal of their franchise agreements;

    • number of companies that have left the network in the year preceding the issuance of the pre-contractual information document (the franchisor must specify the cause of departure, such as nullity of the contract, contract termination or non-renewal); and

    • the existence of companies distributing the franchisor's products and services in the franchisee's area (for example, the franchisor must disclose information about any signed distribution contract or affiliate in the same zone).

    The presentation need not include information on branches or other distributors (such as dealers or commission agents). Additionally, if the network includes more than 50 franchisees, only the 50 franchisees that are closest to the proposed location must be listed. The description of the network status must be particularly truthful. Judges often sanction concealment of the difficulties encountered by current franchisees in the franchise network.

  • Main terms of the franchise agreement. The pre-contractual information document must present the essential terms of the franchise contract, including the:

    • duration of the contract;

    • conditions of renewal, assignment and termination;

    • exclusive rights granted to the franchisee (exclusive territory); and

    • franchisee's obligation to purchase any supply from the franchisor.

  • Amount of investment required from the franchisee. The pre-contractual information document must present the specific expenditures and investments related to the trade mark that the person receiving the draft contract must pay for until the opening date of the franchise outlet. The franchisor must specify the fee that will be billed to join the franchise network. The franchisor must also set out the possible expenses for preparing the local commercial premises.

Delivery of pre-contractual information

The pre-contractual information document must be delivered to the prospective franchisee to allow it to perform a thorough study without the presence of the franchisor. It is therefore not sufficient to hand over this information at the franchisor's headquarters or to publish it on the company's internet website.

Additionally, the document must be delivered at least 20 days before the signing of the franchise contract (not 20 days before the contract becomes effective).

This obligation also applies for contract renewals, including by tacit agreement. Similarly, the pre-contractual information document must be given to any assignee of the franchise agreement.

The burden of proof of delivery of the pre-contractual information document lies with the franchisor. A copy of the document should be signed by the franchisee to be used as proof of receipt.

Penalties for violation of pre-contract disclosure requirements

The sanctions for failing to comply with pre-contract disclosure obligations are both criminal and civil.

Each infringement is subject to a criminal fine of EUR1,500 for natural persons and EUR7,500 euros for legal entities (Article R.330-2, Commercial Code). These fines are doubled in the case of repeated offences.

The two main civil sanctions are invalidity of the contract and compensation of the franchisee.

Invalidity is governed by Articles 1108 to 1116 of the Civil Code. Invalidity is not automatic in the event of non-compliance with the pre-contractual information obligation. The franchisee must demonstrate that its consent was vitiated, for example, by error or fraud, without which the franchisee would not have agreed to sign the franchise agreement. The courts have held that non-observance of the 20-day period for delivery of the pre-contractual information does not necessarily imply vitiated consent.

Certain information, such as the address of the franchisor's bank, does not play a crucial role in the consent of the franchisee. Therefore, inaccuracy of "non-crucial" information does not constitute a major risk of invalidity of the contract. However, a pre-contractual information document that is misleading, incomplete or unrealistic often leads to the nullity of the contract.

The franchisor can, in addition or as an alternative sanction to invalidity, be ordered to pay damages under Article 1149 of the Civil Code when the breach of its duty to provide truthful information has caused direct harm to the franchisee.

The damages and causation must both be proven. Additionally, these damages are treated under French law as a loss of opportunity. The Court of Cassation specifies that damages resulting from the breach of the pre-contractual information obligation are loss of chance damages (that is, loss of the chance not to contract or to contract on more favourable terms, but not to obtain any gains expected).

Error on profitability

The French courts have recently held that the franchise agreement must be cancelled when the franchisee miscalculated the profitability of its business after relying on the financial estimates provided by the franchisor (Cass. Com., 4 October 2011, No 10-20.956; Court of Appeal of Aix-en-Provence, 21 February 2013, Juris-Data No 2013-004249).

The franchisor need not provide the franchisee with any financial estimates (see above, Pre-contractual information document). However, when the franchisor prepares financial estimates and provides them to the franchisee, and the effective financial results are far removed from these estimates, a French judge can justify the cancellation of the contract based on the franchisee's miscalculation of its profitability. A franchisor can, however, present the average profit figures within its network of franchisees.

 
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?

The pre-contractual disclosure requirements under the Commercial Code set out a precise and specific list of information that the franchisor must provide to the franchisee (see Question 11).

Formalities

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

There are no specific formal contractual requirements to create a valid and binding franchise agreement.

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

The franchisee must ensure that it does not damage the reputation of the franchisor's trade mark. For example, judges have held that a franchisee using misleading advertising damages the image of the network. In this case, a franchisee's default may justify the termination of the contract.

The other obligations of the franchisee are mainly financial obligations, such as payment of the initial fee and royalties (see Question 18).

Obligations of the franchisor

The franchisor must ensure that:

  • Know-how is properly transferred.

  • Franchisees can make good use of the trade mark.

  • It provides proper assistance to the franchisees.

The difficulty is to determine how much support the franchisor must provide to the franchisee, as the franchisee remains an independent businessman and is responsible for the management of its own business. The role of the franchisor should therefore be limited to providing advice and technical training, to ensure the successful implementation of the franchised concept. The franchisor can opt to extend this role to marketing aspects. However, the duty of support does not imply financial support to franchisees.

Support is due to the franchisee from the moment of execution of the franchise agreement and as long as the agreement remains valid. The franchisor must pay special attention to franchisees that experience difficulties.

Additionally, the French courts appear to take into account the collective dimension of a franchise network. In this context, a franchisor has a particular duty to watch over its network, in the interests of all its members. A franchisor that does not exercise its control and supervision over the network is likely to incur liability. Therefore, the franchisor must ensure that:

  • Franchisees do not violate the territorial exclusivity of other franchisees.

  • Members of the network do not tarnish the image of the trade mark as a whole (for example, by not complying with the franchise concept or by violating health and safety rules).

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

A franchise agreement must contain the following elements:

  • A trade mark licence.

  • Communication of specific know-how.

  • Provision of assistance to the franchisee by the franchisor.

The absence of one of these elements can lead to the nullity of the franchise agreement. In consideration for these elements, franchisees pay an initial franchise fee and royalties to the franchisor.

Trade mark licence

The franchisor must have rights over the trade mark, which are then licensed under the franchise agreement. This requires the trade mark to be properly filed and registered with the French Intellectual Property Institute (Institut National de la Propriété Industrielle) (INPI). In any event, the trade mark must exist before the franchise agreement can be considered valid.

However, the franchisor is not required to own the trade mark. The franchisor can license a trade mark owned by a third party.

The French courts consider that a franchisor that is a licensee of a trade mark can validly franchise and grant a sub-licence even if the trade mark licence has not been registered with the INPI. However, in the absence of registration, the franchise contract will not be enforceable against third parties.

The trade mark must meet certain conditions. For example, it must not be generic or harm the rights of third parties. Additionally, the trade mark must be "notorious" (that is, well known), and the franchisor must ensure its promotion. The notoriety requirement does not apply when the trade mark is new. However, in this case, the franchisor must be diligent in promoting the new trade mark to the public. Generally, the franchisor has a duty to:

  • Protect the trade mark's reputation.

  • Ensure that it is not damaged by the acts of any third party.

A franchise agreement is not valid if the trade mark is generic or merely describes the product or service. In this case, the courts will declare the contract null.

Communication of specific know-how

The communication of specific know-how to the franchisee is not considered as a secondary obligation, but rather as a main feature of the franchise agreement. A franchisor must prove that it has provided to its franchisees identifiable and "one of a kind" know-how, without which the franchise system cannot function. In addition, this know-how must both:

  • Provide an economic advantage to the franchisee in the market.

  • Be confidential.

Provision of assistance to the franchisee

According to the European Commission's Guidelines on Vertical Restraints (2010/C 130/01), the franchisor usually provides commercial or technical assistance to the franchisee during the term of the agreement. However, the concept of assistance remains unclear, as French case law has defined it in several different ways.

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

Exclusion and entire agreement clauses are enforceable in France. They are effective to prevent the parties to the franchise agreement from subsequently raising claims based on statements or representations made during contractual negotiations, and before the signing of the written contract.

 
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 maximum duration of an exclusive or quasi-exclusive supply provision is ten years (Article L.330-1, Commercial Code). Exclusive supply must be indispensable to maintain the identity of the network.

Non-compete obligations and transfer restrictions

An obligation of non-affiliation to a competing network during the term of the franchise contract is legal. It usually applies to the franchisee as a legal entity and to its directors and shareholders.

Franchise agreements are concluded intuitu personae (that is, the person of the contracting parties is an essential term of the agreement), but this only has effect between the franchisor and the franchisee. Therefore, a franchise agreement should indicate that any changes in the person of the franchisor have no effect on the existence and performance of the franchise agreement.

Conversely, transfers and changes in the person of the franchisee usually require the franchisor's prior consent. In the absence of consent, the franchise agreement can be terminated.

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?

Initial fee

The amount of the initial fee is freely determined by the parties. The contract also specifies the payment terms. Generally, the initial fee is due on signing the contract, and not from the effective date the premises (if any) are opened for business.

When a pre-contract is concluded, the parties generally provide for payment of a percentage of the initial fee. These fees are generally stipulated as non-refundable.

Royalties

The royalty fees are usually proportionate to the turnover of the franchisee. The rate is usually in the range of 5% to 10%. The parties can also specify a variable rate to reflect a revenue range.

The franchise agreement usually specifies what services are covered by the royalty fees.

The payment terms relating to the royalty fees are usually defined with precision.

Although there are no limitations on the amount of fees, the franchisee can obtain before the courts the reimbursement of any fee if it can demonstrate that either the:

  • Franchisor failed to perform its contractual obligations.

  • Contractual fee is abusive and cause a significant imbalance in the rights and obligations of the parties.

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 maximum duration of a franchise agreement is ten years.

According to a study of the French Franchise Federation, the average duration of franchise agreements is seven years.

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

Commercial practice

The franchise agreement can provide that the franchisee must pay an entrance fee on renewal. However, this practice is not typical in France.

Local law

There is no right of renewal protected by law, nor any legal restrictions on fees or charges payable on renewal in France.

Under general contract law, a contract that expires is tacitly renewed when the parties continue to perform their contractual obligations. In this case, the contract becomes a permanent contract and each party can terminate the contract at any time provided that they give reasonable notice. To avoid this situation, it is therefore very common to include tacit renewal clauses, which specifically stipulate that the contract will be renewed for a period identical to the initial term.

Termination

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

Without a termination clause, a contract can only be terminated by a court. Therefore, the purpose of a termination clause is to allow the franchisor to unilaterally terminate the contract if the franchisee breaches the franchise agreement. The types of breach need not be defined (although the contract usually provides a list of examples of situations that give rise to the right to terminate).

The termination clause always specifies the length of the prior notice and the post-contractual consequences.

With the exception of damages following termination for breach and costs for the removal of signage, the termination of the franchise agreement does not incur specific costs, provided that certain rules are observed.

Any abrupt termination of an established commercial relationship is prohibited (Article L.442-6, I, 5°, Commercial Code). As a franchise relationship is an "established business relationship", the franchisor can be held liable if it does not comply with the termination clause, in particular if the franchisee is not given sufficient notice.

Non-renewal of the franchise agreement on expiry is not wrongful. Most franchise agreements contain specific provisions dealing with renewal and the time frame for any renegotiation, if any. However, the franchisor is not at fault provided that it exercises its right not to renew in accordance with the limitations of the renewal provision. However, the courts have at times held that non-renewal is abusive if the franchisor induces the franchisee to make investments shortly before the contract expires. Similarly, the franchisor may be liable if it induces the franchisee into thinking that the contract will be renewed.

Franchisors are generally not required to support and assist franchisees regarding post-contractual obligations, in particular in relation to the conversion of premises or sale of the business.

The Supreme Court clearly stated that the franchisor is under no obligation to watch over the fate of the franchisee after the termination of the franchise contract.

 
22. Are post-term restrictive covenants enforceable?

Post-term non-compete obligations are valid, provided that they meet certain conditions.

Case law protects franchisees by imposing certain requirements. Namely, post-contractual clauses of non-affiliation or non-compete provisions are only legal if they meet the following criteria:

  • They are indispensable to ensure the protection of the transferred know-how, which can only benefit the members of the network.

  • They allow the franchisor the time to grant a zone of exclusivity to a new franchisee.

  • They are proportional to the goal that they pursue.

To be valid, a non-compete clause or non-affiliation clause must be both:

  • Limited in duration and space.

  • Proportionate to the legitimate interests of the franchisor and to the protection of the network.

In this regard, a non-compete clause does not appear in proportion to the legitimate interests of the franchisor when it prohibits the installation of the franchisee within a 50 kilometres radius of a fast food chain.

Under EU competition law, any post-term non-compete obligations must not exceed one year (Regulation (EU) 330/2010 on the application of Article 101(3) of the TFEU to categories of vertical agreements and concerted practices). Most franchise agreements in France comply with this limitation, despite the fact that EU law is generally not applicable, as most franchise agreements do not have any effect on trade between EU member states. However, French competition law has aligned with this approach, in particular following the enactment of Law No. 2015-990 of 6 August 2015 (Loi Macron).

 
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. The franchisor need not provide any compensation to the franchisee, provided that it complies with the termination clause of the franchise agreement.

Only agents are entitled to compensation at the end of the agency contract (Article L.134-12, Commercial Code). Other types of distributors are not entitled to payment for loss of customers. The franchisee is deemed to have its own clientele, which rules out any right of compensation.

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 franchise agreement can include a choice of law clause. If the parties choose a foreign law and the claimant request a French court to apply it, the court will hear the case if the French private international rules allow it. A choice of foreign law, however, does not prevent the enforcement of mandatory French laws, such as pre-contractual information requirements (see Question 11).

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

The parties can choose the competent forum to hear disputes arising under the contract. Local courts will recognise a choice of foreign jurisdiction if the French private international rules allow them do so.

 

Operations Manual

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

The provisions of the franchise agreement ensure that the franchisee complies with the business standards, systems and requirements.

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

The right of the franchisor to introduce changes, both to the Operations Manual and other aspects of the franchised business, are often (and should be) addressed in the franchise agreement. The agreement should include a maximum frequency for changes and limits on the investments required from the franchisee.

 

Liability issues

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

Deceptive or fraudulent practices can constitute grounds for termination or rescission of an agreement under general French contract law. These practices can also give rise to criminal proceedings.

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

Indemnity

The relationship between the franchisor and the franchisee is governed by the franchise agreement, and claims relating to the franchisor's contractual obligations can only be raised by the franchisee. Third-party claims can, however, be brought with regards to trade mark infringement or liability arising out of defective products in particular. In addition, third-party claims can arise under tort law.

Precautions

The pre-contractual information document usually mentions that the franchisee must enquire and verify, with its own counsels, if the franchise project is viable. Similarly, the preamble of the franchise agreement typically states that the franchisee has done its own relevant due diligence and sign the franchise agreement knowingly. In addition, franchise agreements usually expressly state that compliance with the rules and standards that are necessary to enable the franchisee to benefit from the advantages of the franchised concept do not imply any limitation of the franchisee's independence or responsibility in its business management, nor affect its status as an independent entity. The franchisee must therefore comply with all legal obligations related to its status as an independent entity.

 

Intellectual property

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

The trade mark licence is a characteristic feature of the franchise agreement (see Questions 4 and 15). Another feature of the franchise agreement is the franchisee's right to use the franchisor's know-how for the duration of the contract.

The provisions relating to the franchise grant and IPRs, including know-how, describe in detail all the elements covered by the franchise and prohibit the franchisee from making any changes to them.

The right to sue a counterfeiter is typically expressly reserved to the franchisor. A franchisee can sue a third party for unfair competition if the franchisor authorised it to do so.

 
31. What are the registration requirements for licensing IPRs?

A franchise agreement is a hybrid trade mark licence and services agreement, and can therefore be registered with the French Intellectual Property Institute (Institut National de la Propriété Industrielle). Failure to register the agreement has no effect on the validity of the franchise agreement. See also Question 15, Trade mark licence.

 

Real estate

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

Commercial lease agreements in France contain change of control clauses, which can require either:

  • The landlord's prior consent.

  • Mere notification to the landlord.

Payment for consent is usually not required.

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

A franchise agreement should include specific provisions relating to the franchisee's obligation to cease to operate its franchised business on expiration or termination of the franchise agreement.

However, as the franchisee remains an independent merchant at all times, the franchisor does not interfere in the relationship between the franchisee and the lessor of the premises.

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

This issue is governed by the provisions of the franchise agreement. For example, the agreement can provide for:

  • A right of first refusal.

  • A right of first offer.

  • Assignment mechanisms.

The intervention of the lessor is subject to the provisions of the agreement between the franchisee and the lessor. There are no other legal formalities applicable.

 
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?

The franchisor can pass on all related costs to the franchisee under the lease-management regime (location-gérance). However, the franchisor cannot charge 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

EU competition law forbids franchisors from imposing minimum retail prices on franchisees.

French and EU law limit the duration and territorial scope of post-term non-compete clauses (see Question 22).

In addition, general French and EU anti-trust rules apply to franchise networks, such as rules regarding monopolies and concentrations.

Exemptions

Exemptions relate to general anti-trust rules and are not specific to franchising.

Online/e-commerce restrictions

Under EU competition law, franchisors cannot prevent franchisees from engaging in e-commerce. The franchisee's online presence can only be limited to the franchisee's territorial rights. However, a franchisor can:

  • Impose requirements relating to the franchisee's website to protect the franchise network and brand image.

  • Organise a unified portal on the franchisor's website.

 

Employment issues

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

As a matter of principle, the franchisee is considered as an independent trader and as employer of its own employees.

It is therefore legally impossible to consider the franchisee's employees as employees of the franchisor.

However, the qualification of independent trader implies that the franchisee acts as such. If during the franchise agreement, the franchisee loses its independence and is placed in a subordinate relationship to the franchisor, the French courts have held that the franchisee could be considered an employee of the franchisor, so that labour laws would apply. The courts will consider whether the franchisor either or both:

  • Strictly defines retail prices.

  • Is the owner of the franchisee's client list under the contract.

In the event of termination of the franchise agreement, the former franchisee's employees remain under the employment of the former franchisee.

If there is a transfer of the business to a new legal entity, the employment contracts are transferred automatically. More specifically, if a change occurs in the legal status of the employer, namely in the case of inheritance, sale, merger, transformation of the business or incorporation of the company, all labour contracts, effective at the time of the change, remain valid between the new employer and the company's personnel (Article 1224-1, Labour Code).

 

Dispute resolution

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

Domestic franchise agreements usually provide for judicial proceedings, in particular for reasons relating to cost. French court proceedings have the advantage of not being costly. In addition, French court proceedings allow the parties to petition the juge des référés for urgent interim measures.

Decree No. 2015-282 of 11 March 2015 introduced a mandatory preliminary conciliation process, which applies to all commercial disputes. The claimant's claim form must mention what steps were taken to reach an amicable solution. Where appropriate, the judge can order a measure of conciliation or mediation when it appears that the parties have not attempted to find an amicable outcome. However, this requirement does not apply in emergency situations, for example, where one party is seeking an injunction.

France is an attractive international centre for arbitration, and international agreements often contain arbitration clauses. French law is very liberal regarding the enforcement of arbitral awards.

International agreements providing for an overseas forum and governing law are valid under EU and French private international law, provided that this does not violate the French international public order (that is, a set of fundamental principles that the courts must apply at all times when rendering any decision).

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

Foreign judgments and foreign arbitral awards can be enforced efficiently in France.

France has signed the UN Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958, which has been in force in France since 24 September 1959.

 

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, subject to the application of the franchisor's local laws.

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

France has concluded international tax treaties with most countries in the world. Double taxation issues are governed by the provisions of these treaties.

International franchise agreements often contain provisions pertaining to withholding taxes (for example, gross-up clauses specifying the party that will bear the burden of any withholding taxes).

 

Reform

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

There are currently no specific proposals to reform franchise law in France.

However, the decrees relevant to the Law No. 2016-1088 of 21 July 2016 regarding the modernisation of social dialogue are yet to be published (see Question 5).

On 10 February 2016, the French Government issued an Ordinance enacting a new law applicable to contracts. This Ordinance was published on 11 February 2016 and will enter into effect on 1 October 2016. It allows the courts to reinterpret contractual terms and intervene in the contractual relationship, mostly in favour of the weaker party, to balance the parties' rights and obligations. This departs from the civil law tradition, under which the law will enforce what the parties have agreed to, based on the pacta sunt servanda principle (that is, the principle that agreements must be kept). Under the civil law tradition, the role of the courts is limited in commercial matters to the interpretation of unclear language, with the courts otherwise refraining from "administering" the contract.

 

Contributor profile

Gilles Menguy, Managing Partner

GM Avocats

T +33 1 76 21 77 21
F +33 1 76 21 77 22
E gmenguy@gm-avocats.com
W www.gm-avocats.com

Professional qualifications. Avocat, Barreau de Paris, 1998; Solicitor, England and Wales, 2006; Adjunct Professor (franchising and European distribution law), Paris Nanterre University

Areas of practice. Franchising, covering contract, both French and international, corporate and M&A, litigation, and the role of general counsel to franchisors (rated in the International Who's Who of Franchising Lawyers since 2010 and selected in the high-name recognition category of distribution and franchise law firms in France by the legal magazine Revue Décideurs since 2011).


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