Franchising and Internet. Is it appropirate to apply the same principles which have been established for selective distribution

André LombartCMS DeBacker

T: 0032 2 743 69 15E: andré.lombart@cms-db.com

April 20, 2023 Slide 2Franchising and Internet: same principles as for selective

distribution?

Franchising and Internet

Selective Distribution and Franchising are of another nature

What is Selective Distribution ?

• As defined in the BER (art 1)

• “a distribution system where the supplier undertakes to sell the contract goods or services only to distributors selected on the basis of specified criteria and where these distributors undertake not to sell such goods or services to unauthorized distributors”

• Simply a mode of distribution of goods or services with a qualitative selection of the dealers

April 20, 2023 Slide 3Franchising and Internet: same principles as for selective

distribution?

Franchising and Internet

What is Franchising

• As defined ,not in the BER, but only in the Guidelines (199)

• “Franchise agreements contain licenses of IP rights (trade marks, signs, know-how for the use and distribution of goods or services. In addition (…) the franchisor usually provides the franchisee (…) with commercial and technical assistance. The license and the assistance are integral components of the business method being franchised”

• Franchise is not a simple distribution mode of goods or services, as agency, exclusive distribution, selective distribution,…). It is a “license of a business system”, a license of a global commercial concept that contains “distribution” of goods or services.

• Real franchise system : “business format franchise”

April 20, 2023 Slide 4Franchising and Internet: same principles as for selective

distribution?

Franchising and Internet

A license of a global commercial concept • Need of existence of a global concept : purpose of the agreement

• The concept has been satisfactory tested by the franchisor

• Pilot units are required

– legally in some countries (Italy)

– Code of ethics

– Generally admitted

• Disclosure on the concept is legally required

• Transfer of know-how is essential

• Training : initial and permanent

• Franchisee only allowed to reproduce the concept (range, furniture, marketing, commercial methods,….)

• Concept is defined in a comprehensive Manual

• Liability of the franchisor for the effectiveness of the concept

• Franchisee pay fees (initial and continuous)

April 20, 2023 Slide 5Franchising and Internet: same principles as for selective

distribution?

Franchising and Internet

Franchising and internet

Franchisor operates a selling website

• Exclusive territorial rights of the franchisees

• Unfair competition : franchisor need to support

Prohibition or restrictions for the franchisee

April 20, 2023 Slide 6Franchising and Internet: same principles as for selective

distribution?

Franchising and Internet

Prohibition or restrictions for the franchisee

Current status• Unclear

• Trends to apply the same rules as for selective distribution

• An outright prohibition of sales through internet is a restriction of competition (case Pierre Fabre Conseil de la concurrence France 29 octobre 2009)

• Internet sales are generally regarded as “passive sales”

• Art 4c BER prohibits the restriction of active and passive sales to end-users by members of a selective distribution system

April 20, 2023 Slide 7Franchising and Internet: same principles as for selective

distribution?

Franchising and internet

Prohibition or restrictions for the franchisee

Why is it inconsistent to apply the same rules to franchising

• For selective distributors internet is simply another mean for distributing the goods

• In franchising internet sales could not be part of the franchise system– Not part of the franchise system– Not tested by the franchisor– Even if operated by the franchisor, not part of the know-how transferred

to franchisee (manual, training,….)– No liability of the franchisor– Need of uniformity of the network

April 20, 2023 Slide 8Franchising and Internet: same principles as for selective

distribution?

Franchising and Internet

Why would a franchisor be allowed to prohibit the franchisee to

• Extent the range of products

• Sell from outside the agreed store

• Change the furniture of the store

• Apply others commercial methods

• Not to apply totally the standards of the system as described in the Manual

but not be allowed to prohibit the franchisee to start by its own selling the goods or services trough internet what is certainly not a easy task !!

April 20, 2023 Slide 9Franchising and Internet: same principles as for selective

distribution?

Questions?

André LombartCMS DeBacker

T: 0032 2 743 69 15E: andré.lombart@cms-db.com