France: Franchise & Licensing

There is no legal definition of franchise under French law. Instead, case law defines a franchise agreement as a relationship characterized by the existence of these three elements:

i) A trade mark license
ii) The communication of specific know-how
iii) Assistance provided to the franchisee by the franchisor

Additionally, the European Code of Ethics for Franchising provides a definition for franchising. Although it has no legal force under French Law, it may be referred to as a guiding authority, for example, to define the meaning of ‘know-how’. The French Franchise Federation (‘FFF’) promotes compliance with the European Code of Ethics for Franchising.

A franchisor has a duty to test the business and concept in question prior to offering it for franchise. The franchisor will usually be required to establish that the concept/business model has been operating for at least two years and has been profitable.

Additionally, Article L. 330-3 of the Commercial Code requires certain pre-contractual disclosures before the execution of a franchising agreement. These pre-contractual disclosures extend to all contracts which grant to another party the use of a trade name, brand or corporate name while also requiring some sort of exclusivity or quasi-exclusivity undertaking in order to carry out their activity. This requirement, which was codified in the Commercial Code in an attempt to reinforce the concept of fairness, is in place to protect the weaker party by enabling it to commit to the contract with a full knowledge of the facts. Article 1112-1 of the Civil Code by extension also creates an affirmative duty for a party to disclose any information which may be material to other party’s consent to the contact.

The pre-contractual disclosures are made in one document called a Document d’Information Pré-contractuelle (‘DIP’). The specific elements to be included in the DIP are set forth in Article R 330-1 of the Commercial Code.

Failure to meet these disclosure requirements can result in an annulment of the contract.

For more information, see question 4.

There is no specific registration requirement in order to set up a franchise system in France, but generally, any company (including foreign entities) engaging in commercial activities must be registered with the Registre du commerce et des sociétés. Notably, there is no requirement to register a Franchise Disclosure Document (‘FDD’).

There is a requirement to register trademarks that will be licensed to the franchisee, with either the French National Register (’INPI’) or the European Union Intellectual Property Office (’EUIPO’). Only registered trademarks can be protected.

French law requires certain mandatory pre-contractual disclosures by a franchisor before executing a franchising contract. (Articles L. 330-3 and R. 330-1 of the Commercial Code).

The purpose of these disclosures is to provide the franchisee with full knowledge of the facts enabling them to make an informed decision before contracting with the franchisor.

This information is provided in one document called the Document d’Information Pré-contractuelle (‘DIP’). The requirements are set forth in Article R. 330-1 of the Commercial Code, which includes, inter alia, the following information:

• Information about the franchisor (legal name, commercial name, headquarter address, amount of invested capital, business registration number, and details of the business bank accounts).
• Information regarding the trade mark (registration date and number). If the franchisor is a licensee of the trade mark, the document must include the period of validity of the license.
• The state and prospects for development of the market concerned, and whether the goods or services to be sold are already sold within the territory. The market study can be general, but it must not be incomplete, misleading or unreliable.
• Information on the franchise network (list of all companies in the network operating in France and their signature dates, and number of franchisees which have left over the past year including reason why, i.e. expired, terminated, or cancelled).
• Main terms of the agreement (duration, conditions of renewal, assignment and termination, and scope of exclusive rights).
• The franchisor’s annual financial statements for the two previous financial years.
  This duty applies to any franchising agreement performed on French territory, regardless of the law governing the agreement.

Article 1112-1 of the Civil Code by extension also creates an affirmative duty for a party to disclose any information which may be material to other party’s consent to the contact. Thus, failure to disclose material information could be interpreted as a violation of this disclosure requirement. Case law has yet to develop regarding the application of this law to the pre-contractual disclosure requirements, however, it could presumably be interpreted as another grounds for the annulment of an agreement subject to the pre-contractual disclosure requirement.

Delivery and Timing
The DIP must be delivered to the franchisee at least 20 days before the signing of the franchise contract, allowing the franchisee the opportunity to independently review the document

When payment of a sum is required in advance of signing the contact, the disclosure must be provided before payment is made.

This also applies during renewal of a contract, including when renewal by tacit agreement. The disclosure must also be provided to assignees of the franchise agreement, and to a sub-franchisees.

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 as proof of receipt. Electronic signatures are allowed.

Consequences of non-disclosure
There is no regulatory body enforcing the disclosure requirements. Any violation would be assessed by the competent courts. Non-compliance does not automatically trigger annulment of the contract. Instead, the decision will hinge on whether the franchisee was prevented from giving informed and clear consent.

Courts have annulled contracts on the grounds that the pre-contractual disclosure was not made in time. However, it must be proven that such failure prevented the franchisee from making an informed decision to enter into the contract.

For the avoidance of risk, it is recommended to disclose any SPVs in the DIP, and to provide said DIP to the company that is entering into the contract, be it the parent company or the individual franchisee.

A franchisee may seek relief under general contractual laws relating to fraud, misrepresentation, or a breach of the duty of good faith. A franchise agreement can also be voided where it violates the general principles of a valid contract, or the pre-contractual disclosure requirements.

A contract that has been issued on a non-negotiable, ‘take-it-or leave-it’ basis will be considered a contract of adhesion. Article 1110 of the Civil Code defines an adhesive contract as one that contains a set of non-negotiable clauses, determined in advance by one of the parties.

Contracts of adhesion are generally legal, however subject to certain interpretations, for example, that they will be interpreted against the drafter. Additionally, any clause that creates a significant imbalance between the rights and obligations of the parties to the contract shall be deemed void (except those clauses dealing with the price or subject matter of the contract).

There is no express prohibition of franchise agreements issued on a non-negotiable basis. However, franchise agreements are generally considered contracts of adhesion, hence why specific safeguards are in place under Article L. 420-2 (abuse of dominant position) and Article L33-03 (mandatory disclosures) to protect the franchisee.

Trademarks, know-how, trade secrets, and copyright are all protectable Intellectual Property rights in France.

Trademarks

Under French law, any sign capable of being graphically represented and distinguishing the goods or services of an undertaking from those of another can be registered as a trademark (Article L.711-1 of the Intellectual Property Code). This can include, inter alia, names, audible signs, and figurative signs.

Trademarks, and any license or assignments thereof, must be registered with the INPI or EUIPO in order to be enforceable against third parties.

A duly registered trademark confers exclusive rights for 10 years, which is renewable indefinitely. These rights enable the trademark holder to act against any unauthorised use of the trademark.

Trademark holders can protect their trademarks by opposing the registration of new trademarks that may cause them harm, and by taking civil action for infringement.

Trade Secrets and Know-how

Trade secrets have recently been codified into the Commercial Code. Article L.151-1 defines trade secrets as information that:

1. in itself or in the specific configuration of its components, is not generally known or easily accessible to persons within the relevant business sector;
2. has actual or potential commercial value due to its secret nature; and
3. is subject to reasonable protective measures by its legitimate holder, taking into account the circumstances, to preserve its secret nature.

In case of infringement, Article L.152-3 of the Commercial Code allows the holder of a trade secret to seek interim measures, such as injunctions to prevent the use or disclosures thereof.

The legitimate holder of the trade secret can authorize a franchisee to have access to the secret. It is advisable that the franchisee be bound by confidentiality clauses.

French law does not provide a codified definition of know-how, and therefore relies on case law as guiding authority.

Trade secrets and know how cannot be protected by copyright, and thus can be enforced on the grounds of unfair competition.

Copyrights

Under French law, copyrights are automatic rights that protect original works of the mind (Article L.111-1 of the Intellectual Property Code). No registration is therefore required.
Article 112-1 of the Intellectual Property Code covers many types of works that can be covered by copyright, including literary, musical, artistic, graphical, and photographic, to name a few. The work must be concretely fixed into a tangible medium, thus ideas and concepts are not copyrightable.

Copyrights can be subject to license or transfer. However, French law distinguishes between the economic rights and moral rights. Moral rights, such as the rights of disclosure, attribution, and withdrawal of the works, are inalienable and therefore cannot be licensed or transferred.

Copyright holders can protect their rights in civil courts, in particular for infringement.

French law does not provide a specific statutory regime for franchising. Instead, French franchise law derives mainly from case-law, with the relevant aspects of contract and commercial law applied from the French Civil Code and Commercial Code. The following apply to franchising activity in France:

• Article L. 330-3, Commercial Code. For more information see Question 4.
• Articles L. 420-1 et seq. of the Commercial Code. For more information see Question 10.
• Commission Regulation (EU) no. 330/2010 of 20 April 2010 on the application of Article 101(3) of the TFEU to categories of vertical agreements and concerted practices (‘Block Exemption Regulation’). For more information see Question 10.

Case law is also relevant, particularly with respect to ‘know-how’ as there is no codified definition of this term.

To be characterized as a franchise agreement, there must exist: i) a trade mark license; ii) the communication of specific know-how; and iii) assistance provided to the franchisee by the franchisor. Thus, these same terms should be included in the franchise agreement.

Particularly relevant to the ongoing relationship is the franchisor’s duty to transfer of know-how and provide assistance to the franchisee, which should be done throughout the business relationship.

Franchise agreements in France are subject to both EU and French competition law, which are substantively very similar. French law will apply where EU law is not applicable.

The following French and EU law are applicable to franchising activities:

• Articles L. 420-1 et seq. of the Commercial Code
• Commission Regulation (EU) no. 330/2010 of 20 April 2010 on the application of Article 101(3) of the TFEU to categories of vertical agreements and concerted practices (“Block Exemption Regulation”)

ARTICLES L. 420-1 ET SEQ. OF THE COMMERCIAL CODE

Restrictions on anti-competitive practices are set forth in Articles L. 420-1 et seq. of the Commercial Code, which addresses the following that are relevant to franchising:

Territorial exclusivity

Territorial exclusivity clauses are permitted under French law so long as they benefit consumers.

French courts have held that a territorial exclusivity clause is not violated by website sales in the protected territory. Accordingly, a franchisor is free to concurrently sell the products online in the protected territory without being in violation of the exclusivity clause.

However, EU law does allow the restriction of online sales of luxury goods on third-party platforms, such as a marketplace, so long as it is primarily to preserve the luxury image of those goods. Such restriction must also be applied uniformly across the network, and must be proportionate in the light of the objective pursued.

Restrictions on the sources of supply

The franchisor may impose an exclusive source of supply on the franchisee subject to the following restrictions:

• Under EU law, the duration of the contract must be limited to a maximum of five years, but may be further renewed by a new contract. The duration of the exclusivity clause must not exceed that of the franchise contract. French law allows for a duration of 10 years, however, it must also not limit or jeopardize the free competition of the market.
• Compliance with the pre-contractual disclosure requirements of Article L. 330-3 of the Commercial Code
• The franchisor cannot have sole discretion regarding the quantity or the quality of the products

To justify an exclusive source of supply clause, it must also be shown that it is necessary to protect the identity and reputation of the network, and would be otherwise impossible for the franchisor to apply and regulate quality control (i.e. due to a large network and high costs).

Discrimination by the franchisor among franchisees

Generally, although a franchisor can freely select franchisees, it should recruit them according to objective criteria to avoid any discrimination.

Article L. 420-1 prohibits agreements that have the aim or may have the effect of preventing, restricting or distorting free competition in a market, particularly when they are intended to:

• Limit access to the market or the free exercise of competition by other companies;
• Obstruct price fixing through market forces by artificially promoting the increase or reduction of prices;
• Limit or control production, opportunities, investments, or technical progress;
• Distribute markets or sources of supply

Such practice is punishable only if it can have an appreciable effect on the market.

Article L. 420-2 prohibits the abusive exploitation by a company in dominant position, and the abusive exploitation of a company in an economically dependent position. Such abuses may include refusal to sell or discriminatory conditions of sale.

The provisions on the abusive exploitation of an economically subordinate company is seldom applied to franchise agreements, as franchising considered a normal form of distribution and the franchisee freely chooses to enter into the franchise network.

Pricing

French and EU law prohibit the franchisor from directly or indirectly imposing minimum resale prices. The franchisor may provide recommended resale prices, so long as it does not lead to uniform resale prices throughout the network, and is not used as a mechanism of directly or indirectly imposing minimum resale prices.

Maximum price fixing is allowed in order to maintain the homogeneity of the network.

Practices directly or indirectly causing uniform pricing along the franchise network can be penalized or result in the invalidation of the contract. Such practices include requiring a franchisee to strictly adopt the franchisor’s commercial and marketing policies, or pre-labeling products for resale.

The Business Relationship

The abrupt termination of an established business relationship without sufficient prior notice is prohibited.

The sufficiency of prior notice will be deemed on the basis of several criteria, including the duration of the business relationship, and the level of economic dependence of the terminated party.

In such cases, the court may order damages, or even order continuation of the contractual obligations for a limited period of time.

EU BLOCK EXEMPTION REGULATION

The framework of EU competition law is contained in Commission Regulation (EU) no. 330/2010 of 20 April 2010 on the application of Article 101(3) of the TFEU to categories of vertical agreements and concerted practices, known commonly as the “Block Exemption Regulation”. This regulation is applicable to franchising agreements, of which the following provisions particularly relevant:

• Article 101(1) of the TFEU, which prohibits agreements that may affect trade between EU member states and have as their object or effect the prevention, restriction, or distortion of competition within the EU. Article 101(3) provides for the possibility of exemption for agreements that create sufficient benefits to outweigh the anti-competitive effects.
• Article 102, which prohibits the abuse by one or more businesses in a dominant market position within the EU in such a way that may affect trade between EU member states.

Non-Compete Clauses

In-term covenants not to compete are enforceable.

A post-term covenant to not compete is enforceable, provided that it meets the following criteria set forth by Article L. 341-2 of the Commercial Code:

• It concerns only the goods and services that are the subject of the contract;
• It is limited to the location and premises where the franchisor carries out the activities of the contract;
• It is necessary in order to protect the transfer of substantial and secret know-how transmitted under the contact; and,
• It does not exceed one year post-termination of the contract.

Non-Solicitation Clauses

In-term non-solicitation clauses are enforceable so long as they are in place to ensure territorial exclusivity.

Post-term non-solicitation clauses are not enforceable because the franchisee, as the owner of its client database, is entitled to use it after termination of the agreement. However, such post-term solicitations cannot be made with the use of the franchisor’s trademarks.

Article A441-1 of the Commercial Code requires the franchisee to inform consumers that it acts as an independent undertaking. This information must appear on all information documents, particularly advertising.

It is unlikely that a franchisee could be treated as a consumer, as the notion of consumer is only applicable to natural persons who act for purposes that do not fall within the scope of commercial or industrial activity. This distinguishes the consumer from a trader or legal persons, such as a business entity.

Article 1104 of the French Civil Code expressly requires that all contracts be carried out under a general principle of good faith.

A franchise agreement is by principle an independent undertaking. However, it may be reclassified as an employment agreement if the franchisee is not actually independent of the franchisor, i.e. a subordinate relationship between the franchisor and the franchisee is demonstrated. However, given the difficulty of establishing such subordination, reclassification is quite rare. There is a lack of significant precedent in this area.

If the courts requalify a franchisee as an employee, certain labour protections may come into effect. Nonetheless, even in the absence of such requalification, a franchisee could potentially benefit from the protective provisions applicable to managers of subsidiaries or branches pursuant to sections L.7321-1 and L.7321-2 of the Labour and Employment Code.

Therefore, in order to avoid such requalification, it is crucial that the franchisee be treated as an independent contractor and act as such. The franchisee must manage the business and employees independently. The franchisor must never act as the employer of the franchisee or its employees, and must refrain from any action that could suggest that the franchise network is a single economic entity.

The key difference between a franchisee and an agent is that the franchisee is a totally independent business acting in its own name and on its own behalf, while an agent acts in the name and on behalf of its principal.

The rules governing agency relationships are set forth in Articles L. 134-1 et seq. of the Commercial Code, and are very favourable to the agent, particularly with respect to payments upon termination.

Therefore, it is important to be careful to avoid the inadvertent establishment of an agency relationship. Namely, the franchisor should be careful to avoid having the franchisee act on its behalf. Nevertheless, establishing such an agency relationship between a franchisor and franchisee is quite difficult and rare.

See question 18 below with respect to taxation of royalties.

Also relevant is Article L. 420-2, which prohibits discriminatory conditions of sale.

Penalties for the breach of restrictive covenants during the life of the contract can be imposed, however, they must be applied uniformly across the network.

Franchises are subject to the common rules of taxation.

The standard taxation rate on royalties is 28% up to profits of 500,000€, and 33.33% thereafter. For the fiscal year beginning 1 January 2020, the rate of 28% will become the new standard for all profits. The rate will further decrease to 26.5% in January 2021 and 25% in January 2022.

This rate may be increased up to 75% where the foreign franchisor resides in a tax haven, or decreased as low as 0% where the franchisor is the resident of a country with a bilateral agreement to avoid double taxation.

There is no legal right of renewal. A franchisor therefore can freely refuse to renew a franchise agreement upon expiration.

There is also no regulation governing termination indemnities, however, courts may increase or decrease a patently low or excessive compensation agreed to by the parties. In addition, courts may order damages upon the sudden or abusive termination of a franchise agreement.

The FFF is the principle franchising association, but membership is not mandatory.

Membership is advisable, as it provides training on franchising in France, and through its network representing 45% of French franchises, serves as an interface between public authorities, network creators, entrepreneurs and investors.

N/A.

N/A.

French law does not discriminate between domestic and foreign-owned businesses.

Nevertheless, foreign franchisors may opt to use separate entities when entering the French market for reasons relating to liability and tax issues, however, such reasons are not specific to franchising.

The French Monetary and Financial Code does provide certain restrictions on foreign investments in activities involved in the exercise of public authority, or in certain sensitive business activities (i.e., trade of weapons trade, gambling), in which case investors must obtain prior authorisation from the competent ministry.

No.

No. However, the choice of foreign law will not excuse the parties from compliance with mandatory provisions of law, such as the disclosure requirement.

Domestic agreements are generally subject to judicial proceedings. Litigation is generally the lower cost option for dispute resolution in France.

There is a mandatory preliminary conciliation/mediation process, which applies to all commercial disputes. The initial claim must state such conciliation efforts, , otherwise they can be ordered in the absence of a sufficient showing thereof. This requirement does not apply in emergency situations, such as injunctions.

Two alternative methods of dispute resolution popular among franchisors are mediation and arbitration. Both provide the benefit of confidentiality.

Arbitration is a popular choice for commercial disputes in France. There are several specialized arbitration institutions in France, such as the International Chamber of Commerce (‘ICC’), which is headquartered in Paris. Arbitral awards made in France or sought to be enforced in France should in most cases not run into issues with enforceability. This is due to the fact that France is a signatory to the New York Convention, which requires signatory states to recognize and enforce foreign arbitral awards made in other signatory states.

Arbitration may be a viable option for cases involving foreign parties or where the contract is subject to foreign law. It allows parties more choice regarding the procedure, and is perceived as a more neutral forum for parties of different nationalities.

Mediation is also available at various organisations, including the FFF and the ICC. Mediation can be a quick and cost-effective option for appropriate disputes.

No. Class action suits are limited to B to C relationships.

No. However, it is advisable to translate the document to French to support the evidence that the franchisee was provided with sufficient information before signing the agreement. In the event of litigation, the Commercial Court and Court of Appeal now have an international section where they allow documents and pleading in English.

Yes, so long as it provides a reliable means of identification and meets the legal requirements for a signature.

Franchise agreements can be kept in electronic format.

Although not specific to franchising, the gradual decrease of capital gains taxes will be relevant to all business in France, and may in fact make France a more attractive location for franchising. The corporate tax rate for large companies has dropped from 33.33% to 28%, and it will be progressively reduced to 25% by 2022.

Also relevant to franchising is the GDPR. Any franchise conducting business in France or collecting the information of French consumers may be subject to the GDPR regulations. Franchisors and franchisees should be careful to determine whether they fall into a Data Controller and Data Processor relationship, in which case they will have to draft a Data Protection Agreement.

Several key lessons have been learned from the COVID-19 crisis:

• Acceleration and expansion of the franchise business model through digitalization:
  • The processes and technologies that were previously seen as experimental, such as online purchasing, mobile technology, and omnichannel marketing, are now being more widely implemented due to the challenges posed by the pandemic.
  • In the food service sector, food delivery has been the sole means of survival for some restaurants, including ones which had not used such measures before. This has developed to such a point that the “dark kitchen” model has been seen as a new segment to be pursued by some franchisors.
  • In the education sector, e-learning and online classes have been growing constantly since the beginning of the crisis.
• The increasing concern about our planet triggered by this pandemic may compel franchisors to understand the need to give added meaning to their concept in order to show customers that they have truly taken environmental warnings into consideration.
• Consumer behavior has been changing and will continue to change. Franchisors, together with their counsels and lawyers, will have to adapt and learn to think differently.