The outlook for franchises

Franchise agreements will usually include vertical restraints such as non-compete restrictions. These are generally acceptable if they are necessary to maintain the common identity and reputation of the franchised network as long as they do not exceed the duration of the agreement itself. 

The cornerstone of the franchise model is the transfer of know-how which is essential to maintaining a common brand identity. Unlike other vertical arrangements, the necessary information exchanged between franchisors and franchisees during ongoing conversation on brand identity can sometimes lead to situations and conversations in which it is easy to inadvertently go beyond what is acceptable. This is particularly relevant, in a commercial environment where the line between vertical partners and competitors is increasingly blurred.  In some instances, depending on the geographical spread of the franchise, franchisors running their own retail units could be in competition with their franchisees. On this basis, extra care should be taken by franchisors in their discussions with franchisees. It remains to be seen whether the updated VBER will provide further details on the type of information, which can be lawfully exchanged between franchisors and franchisees. One practical way to do so would be to provide a full definition of the Commission’s interpretation of ‘know-how’.

Some have argued that pricing uniformity is a crucial element of brand identity. They believe that retail price maintenance should be tolerated in the context of a franchise to promote the common identity of a franchise network. As things currently stand, franchisors, are strictly prohibited from imposing set retail prices on franchisees. Whilst maximum prices and recommend retail prices are acceptable (as long as in practise they do not amount to fixed prices), minimum prices and fixed prices are prohibited. The Commission’s Evaluation published in September 2020 provides no indication that it is minded to relax this rule in the updated VBER due in March 2022. 

For more information please contact Peter Willis or Ariane Le Strat.