There is no legal definition of franchising under French law.

However, the European Code of Ethics for Franchising, which has no legal force (unless the parties expressly submit to it), defines franchising in Article 1 as “a system of marketing goods and/or services and/or technology, which is based upon a close and ongoing collaboration between legally and financially separate and independent undertakings, the Franchisor and its individual Franchisees, whereby the Franchisor grants its individual Franchisee the right, and imposes the obligation, to conduct a business in accordance with the Franchisor’s concept.

The right entitles and compels the individual Franchisee, in exchange for a direct or indirect financial consideration, to use the Franchisor’s trade name, and/or trade mark and /or service mark, know-how, business and technical methods, procedural system, and other industrial and /or intellectual property rights, supported by continuing provision of commercial and technical assistance, within the framework and for the term of a written franchise agreement, concluded between parties for this purpose.”

Traditionally, franchising is defined by the following three characteristics:

• the existence and transfer of know-how;
• the provision of distinctive signs;
• the provision of assistance.

Know-how is defined under European Union law by Regulation 2022/720 as “a package of non-patented practical information, resulting from experience and testing by the supplier, which is secret, substantial and identified; ‘secret’ means that the know-how is not generally known or easily accessible; ‘substantial’ means that the know-how is significant and useful to the buyer for the use, sale or resale of the contract goods or services; ‘identified’ means that the know-how is described in a sufficiently comprehensive manner so as to make it possible to verify that it fulfils the criteria of secrecy and substantiality.”

The franchisor must have tested and validated the concept, notably through a pilot point of sale, but this is not a legal requirement.

However, a franchisor who begins franchising activities by signing franchise agreements without possessing proven and profitable know-how exposes themselves to potential liability claims, seeking the annulment of the franchise agreements or the awarding of damages to the franchisees affected by this situation.

There is no obligation to register the franchise agreement.

Article L. 330-3 of the French Commercial Code establishes a pre-contractual information obligation for the franchisor. At least twenty days before concluding a franchise agreement, the franchisor must provide the franchise candidate with a pre-contractual information document containing the pre-contractual information listed in Article R. 330-1 of the French Commercial Code:

• the name and contact details of the company, the nature of its activities, and the identity of the business owner;
• information regarding the registration of trademarks;
• the bank domiciliation(s) of the company;
• the date of the company’s creation, along with a reminder of the main stages of its development;
• a presentation of the network of operators;
• the duration of the proposed contract, conditions for renewal, termination, and transfer, as well as the scope of exclusivities;
• the nature and amount of expenses and investments specific to the brand or trademark that the recipient of the contract proposal will incur before commencing operations.

Furthermore, Article 1112-1 of the French Civil Code requires a party who possesses information that is determinative for the consent of the other party to inform that party as long as the latter legitimately lacks knowledge of this information or relies on their contracting partner.

French law is particularly flexible on this point. All these combinations are therefore perfectly possible.

The franchisee may hold the franchisor liable in such cases. Limitation of liability clauses are valid under French law.

It is entirely legal to enter into a franchise agreement that is fully drafted by the franchisor and without negotiation of the clauses. This constitutes an adhesion contract within the meaning of Article 1110, paragraph 2 of the French Civil Code. In such cases, in the event of an interpretative doubt, the adhesion contract shall be interpreted against the party that proposed it, in accordance with Article 1190 of the French Civil Code.

Trademarks are legally protected once they have been validly registered.

Know-how is contractually protected by the franchise contract.

Trade secrets are legally protected by a special law.

French law does not contain specific provisions for franchising. Many of the applicable rules fall under the general law of contracts contained in the French Civil Code.

Certain provisions are specific to distribution contracts. This is the case for the pre-contractual information obligation set out in Article L. 330-3 of the French Commercial Code, which pertains to “any person who makes a trade name, trademark, or sign available to another person, requiring from them a commitment of exclusivity or quasi-exclusivity for the exercise of their activity.” Thus, the scope of application encompasses franchise contracts, although it is broader.

Like all economic actors, franchisors and franchisees must comply with French and European competition law.

In particular, the franchise agreement constitutes a vertical agreement falling within the scope of Regulation 2022/720 of May 10, 2022, on the application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices. The regulation notably targets several characterizing restrictions that invalidate the entire agreement’s benefit of exemption, as well as excluded restrictions that do not benefit from exemption.

Among the competition rules that regularly apply to franchising, we can first mention the prohibition of imposed prices, whether by direct or indirect means, which constitutes a characterizing restriction (Article 4(a) of the exemption regulation). In this regard, franchisees must be free to set their selling prices, and the franchisor may only establish a maximum selling price or make price recommendations.

The prohibition of online sales to franchisees also constitutes a characterizing restriction (Article 4(e) of the exemption regulation). However, the franchisor may impose certain restrictions aimed at preserving the uniformity of the network.

The exclusivities granted to franchisees must also comply with competition rules and must not prevent franchisees from engaging in active sales outside their territory.

When the franchisor distributes the products themselves, they are in a dual distribution situation and thus compete with their franchisees. In this case, the exemption is excluded when the exchange of information between the franchisor and the franchisees is not necessary for improving the production or distribution of the contractual products or services (Article 2 (5) of the exemption regulation).

The non-competition clause must be respected by the franchisee as long as it is valid.

The post-contractual non-competition clause is subject to strict validity conditions as stipulated by Article L. 341-2 of the French Commercial Code, and must:

• relate to goods and services that compete with those covered by the contract;
• be limited to the premises and locations from which the operator conducts their activity during the term of the contract;
• be essential for the protection of the substantial, specific, and secret know-how conveyed under the contract;
• not exceed a duration of one year following the expiration or termination of the contract.

As franchise agreements are subject to general contract law, the parties must comply with the general obligation of good faith set out in article 1104 of the French Civil Code.

As an independent merchant, the franchisee independently manages their employees and ensures compliance with applicable labor legislation. The requalification of the franchise agreement as an employment contract is very rare in practice, as this risk is recognized by all franchisors. According to case law, such a requalification requires the judge to establish a “subordination relationship” between the franchisor and the franchisee. The existence of such a relationship implies that the franchisee is considered to be under the authority of the franchisor, and that the franchisor has the power to give orders, control the execution of work, and sanction the franchisee’s breaches.

Article L. 134-1, paragraph 1, of the French Commercial Code states: “A commercial agent is a representative who, in an independent professional capacity, without being bound by a service contract, is permanently tasked with negotiating and, possibly, concluding contracts for the sale, purchase, rental, or provision of services, in the name and on behalf of producers, manufacturers, merchants, or other commercial agents. It may be a natural person or a legal entity.”

The commercial agent acts on behalf of a principal, whereas the franchisee must operate with total independence, in their own name and for their own account.

There may sometimes be a risk of requalifying the franchise agreement as a commercial agency agreement, which could result in the payment of a compensatory indemnity in the event of termination of the relationship with the principal (Article L. 134-12 of the French Commercial Code).

To avoid any requalification as a commercial agent, it is essential to maintain the independence of the franchisee: the franchisee must act on their own account, notably by managing their own supply chain and invoicing their customers directly.

There are no laws or regulations that affect the nature and payment of royalties to a foreign franchisor or the amount of interest that may be charged.

In practice, payments related to the franchise are most often made in the franchisor’s currency.

It is possible to include a clause addressing exchange rate risks.

The franchise agreement may include penalty clauses (or fixed indemnity clauses) in the event of a breach of essential contractual obligations.

The penalty clause serves a deterrent effect by dissuading franchisees from committing any breach of the contract and allowing for the imposition of a sanction that serves as an example to all other members of the network. Additionally, it enables the franchisor to know in advance the amount of compensation they may receive.

The penalty clause must specify the breach that may trigger its enforcement, and its amount may be revised by the judge if deemed manifestly excessive or trivial (Article 1231-5 of the French Civil Code).

Regarding the entrance fee, it is most often recorded by the franchisee as an operating expense and by the franchisor as operating income. The same applies to franchise royalties.

For the franchisor, both the entrance fee and franchise royalties are subject to corporate tax (IS) at the standard rate. Franchise royalties are deductible from taxable income. VAT is recoverable under normal conditions.

Compliance with competition law prohibits the franchisor from preventing its franchisees from selling online, whether directly or indirectly.

However, the franchisor may offer the franchisee the opportunity to sell online through the website managed by the franchisor.

Moreover, the Guidelines associated with Regulation 2022/720 indicate that the franchisor may impose requirements regarding how goods and services must be sold online. Thus, the franchisor may set quality requirements related to the appearance and presentation of the website in order to maintain the uniformity and consistency of the network, or may require a minimum volume of offline sales. In the case of products from a high-end range or of significant technical complexity, the franchisor may also prohibit sales on online marketplaces. However, the franchisor’s requirements must not impede the franchisee’s effective use of the internet to sell goods or services.

The franchisor and the franchisee must comply with the provisions of French Law No. 78-17 of January 6, 1978, known as the “Data Protection and Freedom” law, and Regulation No. 2016/679 of the European Parliament and Council of April 27, 2016, known as the General Data Protection Regulation (GDPR), which came into effect on May 25, 2018.

Under these texts, the franchisor and the franchisee must ensure that customers are granted the rights to access, rectification, deletion, opposition, as well as the right to restrict the processing of their data, the right to data portability, and the right to issue directives regarding the fate of their data after their death.

The franchise agreement may include a right of approval under which any transfer of rights or ownership, as defined by the clause, cannot be made without the franchisor’s consent.

This clause is justified by the fact that the contract is concluded in consideration of the person of the franchisee.

In accordance with the principle of contractual freedom, the franchisee is free to request the renewal of the franchise agreement, but the franchisor is also free not to renew the contract.

The franchisee has no right to any end-of-contract indemnity.

Articles 1224 and following of the French Civil Code allow any party to terminate a contract in three scenarios:

• in the event of a breach of the resolutory clause of the contract,
• in the event of sufficiently serious non-performance notified by one party to the other, subject to subsequent judicial review,
• in the event of sufficiently serious non-performance determined subsequently by the judge.

The contract may stipulate a minimum notice period.

The franchise agreement specifies the contracting party that owns the customer database. French law is quite flexible on this specific point, allowing for various situations to arise in practice.

When the business assets belong to the franchisee, they remain the franchisee’s property upon expiration of the contract. When the business assets belong to the franchisor (as is the case with management leasing), they remain the franchisor’s property upon expiration of the contract.

The French Franchise Federation (FFF) is the most representative association of the franchise sector in France. Membership in the FFF is not mandatory. Franchise networks that are members of the FFF must commit to adhering to the European Code of Ethics for Franchising. From a commercial standpoint, belonging to the FFF is considered advantageous for a franchise network.

As a member of the European Union, France cannot, in principle, impose restrictions on the movement of capital from Member States or third countries to the European Union, pursuant to Article 63 of the Treaty on the Functioning of the European Union.

France is also subject to European rules regarding foreign direct investments since the entry into force of the regulation on screening foreign investments. This regulation aims to establish a European framework for cooperation in assessing foreign investments that may threaten security and public order in the Member States of the European Union. France must then notify and cooperate with the European Commission and other Member States regarding foreign investments in critical sectors.

Investments in France are generally free, except in sectors related to national defense or activities essential to safeguarding the country’s interests.

The parties are free to choose the law applicable to the franchise agreement, subject to French public policy provisions.

Three categories of procedures are possible.

1. Litigation before a state court, most often the commercial court designated in the franchise agreement.
2. Litigation by an arbitral tribunal, in accordance with common law.
3. Litigation through “Franchise Mediation,” also known as Network Mediation, which occurs when one party, either the franchisee or the franchisor (whether or not members of the FFF), encounters a dispute with their co-contractor regarding the formation, performance, or termination of the franchise agreement.

There are no legal requirements to draft the franchise agreement and disclosure documents in French. However, in the event of litigation, as the language of the proceedings is French, the courts may require a complete translation of the document.

Like most commercial contracts, the franchise agreement may be concluded by electronic signature, in accordance with Article 1367 of the French Civil Code.

We do not foresee any significant developments from a legal point of view.