An overview of relevant changes resulting from the enactment of the Franchise Act
More and more businesses are run on a franchise basis. That is, the entrepreneur (the franchisee) uses a concept developed by the franchisor. For example, did you know that many Albert Heijn stores are operated by franchisees? But franchising is also common within the service sector.
Tension
The tension between franchisor and franchisee lies (mainly) in the franchisor’s position of power. It has the know-how of the concept and (usually) prescribes the rules that the franchisee must comply with. For example, most franchise agreements prescribe in detail the opening hours, advertising, personnel policy and assortment the franchisee must comply with. This interferes with the franchisee’s free enterprise, but at the same time offers the latter more security of a successful business.
Introduction of Franchise Act
Until recently, there was no legal regulation of franchise agreements. Parties had to shape their mutual relationship themselves. An industry-initiated code of conduct in 2016 – the Dutch Franchise Code – did not result in a fairer playing field. Therefore, the legislature has now intervened by introducing the Franchise Act as of Jan. 1, 2021. Below is a brief overview of the main rules.
Starting point
In order to create more balance in the relationship between franchisor and franchisee, the law includes the principle of good franchisor and good franchisee conduct as a basic rule. This relatively open standard provides guidance on how parties should behave in specific situations.
Duty to inform
The law states that the franchisor must provide a draft franchise agreement to the intended franchisee at least four weeks prior to the conclusion of the franchise agreement. In addition, the franchisee must be adequately informed before the relationship begins, including:
- whether or not franchisors compete;
- franchisor’s financial position;
- The (amount of) investments to be made by the franchisee under the franchise; and
- With what frequency there will be consultation between the parties.
The franchisee is thus given the opportunity to review (or have reviewed) the draft franchise agreement. During this period, the franchisor may not amend the draft franchise agreement. This is only allowed if the change is in the franchisee’s favor. Going further, during this “review period” the franchisor may also not ask the franchisee to make investments or other payments in advance related to the intended franchise relationship.
Duty to investigate
On the other hand, the franchisee does have a duty to investigate. Thus, the franchisee must take the necessary measures to avoid entering into the franchise agreement under the influence of incorrect assumptions. Examples include engaging legal counsel and obtaining financial advice.
Consent regulation
The legislature has also accommodated the franchisee for existing franchise relationships. For example, a consent clause has been included, which restricts unilateral change clauses in favor of the franchisor. Certain changes (including changing the franchise formula and making additional investments by the franchisee) require the franchisee’s consent or the consent of a majority of the franchisees operating the same franchise formula. The franchisee must also be informed in a timely and proper manner about proposed changes to the franchise formula.
Compensation for goodwill at end of franchise relationship
Furthermore, an obligation to pay a goodwill fee is included. This is due upon termination of the franchise agreement if the (franchise) business is continued by a new franchisee or the franchisor itself. The amount of this compensation is equal to the goodwill reasonably attributable to the franchisee. It is not yet clear which principles underlie the calculation. It is conceivable that the principles applicable to customer compensation at the end of an agency relationship will be followed.
Non-competition
Also relevant is that the law restricts the scope of non-compete provisions. The law imposes the following requirements on a (validly agreed upon) non-compete clause:
- the clause must have been agreed upon in writing;
- the clause must relate only to the products and/or services that are (actively) the subject of the franchise agreement;
- the clause must not extend beyond the (geographic) territory as agreed in the franchise agreement; and
- the clause is (arguably) necessary to protect franchisor’s know-how.
What does this mean for practice?
Franchisee and franchisor no longer have “free rein. The introduction of the Franchise Act has attempted to protect (more) the franchisee. Whether this ‘intervention’ will (re)balance the balance of power between parties in practice remains to be seen. For franchise agreements concluded before January 1, 2021, based on transitional law, these new rules will only apply as of January 1, 2023, effectively giving parties another two years to adjust their existing agreements.
It is therefore recommended that both existing and pending franchise agreements be reviewed and – if necessary – adapted to the new Franchise Act. This also applies to model agreements and/or checklists used within the organization. Please feel free to contact one of the lawyers of the Corporate Law practice group.
