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Franchising – Not that bad after all?!

In 1986, the Pronuptia de Paris GMbH case received great attention and showed that the European Union takes a relatively positive attitude towards franchising agreements. The case is considered a major case in the field of franchising, and dealt with a franchising agreement under the trademark Pronuptia de Paris in order to sell wedding dresses. The franchisee had the exclusive right to use the trademark for marketing purposes and received assistance from Pronuptia, e.g. regarding marketing or education issues. At the same time, Pronuptia agreed to not open any stores or provide any products to third party in the respective territory of the franchisee. On the other hand the franchisee agreed to sell wedding dresses under the trademark Pronuptia de Paris. Moreover, it was required to purchase 80% of the wedding dresses from Pronuptia and pay an entry as well as royalty fees. Additionally, it was forbidden to compete with Pronuptia in any way.

However, the franchisee was sued later for refusing to pay royalties. Court of Justice ruled that the compatibility of franchise agreement was to be evaluated in the light of provision of each agreement and the economics context. What can be learned from this case is that there are inherent restrictions in each franchising system. Firstly, the franchisor must be able to communicate his know-how and assistance to the franchisee without the risk of benefitting competitors. This implies that provisions, which are essential in order to avoid the risk of benefitting competitors, are not seen as restrictions on competition under European Law (Article 81). Also, the franchisee may not open a shop or transfer a shop to another party without approval of the franchisor – again an actual limit on competition, however granted by European Law. Secondly, the franchisor must be able to take measures in order to maintain the identity a reputation of his business. This implies that undertakings, which serve the control of that purpose, also do not constitute restrictions on competition under Article 81 of the European Law.

Concluding, it becomes clear that the benefits of franchising agreements lead the European Law to not restrict franchising agreements per se, but rather evaluated systems based on the economics context. Anti-competitive restrictions are almost always present in a franchising system, however they are not always forbidden by European Law, as they are necessary measures in order for a franchising system to properly work. The inherent benefits of franchising systems might outweigh the costs of these anti-competitive restrictions.

 Markus Eyting, 1722

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Author: studentnovasbe

Master student in Nova Sbe

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