Properly develop your franchise network

1.1 What is the legal definition of franchise?

There is no legal definition of franchise in the Commercial Code.
The European Franchise Code of Ethics offers a definition that can be used to explain the fundamental principles governing franchise agreements.
According to doctrine and case law, a franchise can be defined as a commercial contract under which an independent entrepreneur (the franchisor) concedes to another independent entrepreneur (the franchisee) the right to use a set of rights with the aim of manufacturing and/or to market specific goods and/or services. Typically, these are rights relating to trademarks, trade names, patents and other distinctive signs.
It should be noted that in French law, the term "franchise" is a generic term that can cover different types of contractual relationships, such as concession, affiliation and franchise stricto sensu.

1.2 What texts regulate the conclusion of a franchise contract?

There is no text dealing specifically with franchising in French law. The conclusion of a franchise contract is mainly governed by the general principles of contract law, intellectual property law and competition law. However, as soon as the use of a trade name, trademark or sign is granted in exchange for an exclusivity commitment, Articles L. 330-3 and R. 330-1 of the Code of commerce (of public order) apply.
In addition, specific provisions (also of public order) apply to the retail trade in accordance with Article L. 341-1 of the Commercial Code.
Finally, the European Franchise Code of Ethics completes the applicable regulations and can be used as a guide in drafting a franchise contract.

1.3 Are there registration obligations with the administration for the franchisor?

To grant a license on a brand or a distinctive sign, the franchisor must register its brand with the National Institute of Industrial Property. The mark must be lawful, distinctive and available.
In addition, the setting up of a franchise network whose purpose is the exercise of a regulated activity - for example, activities related to health, the sale of beverages or real estate transactions - must be the subject of a registration procedure or meet certain conditions.

1.4 What are the pre-contractual information obligations for the franchisor?

The franchisor must communicate to its potential franchisee all the information allowing him to conclude the contract knowingly. In accordance with Articles L. 330-3 and R. 330-1 of the Commercial Code, the franchisor must provide the franchisee with a pre-contractual information document (DIP) at least 20 days before signing the contract or, where applicable, before the payment of any amount related to the contract. The DIP must contain complete information about the franchisor and the franchise network. The document must include exact information allowing the franchisee to conclude the contract in knowledge of the commercial, legal and financial conditions of the operation.
It is important to note that the reform of the law of obligations, which entered into force on October 1, 2016, introduces a new article 1112-1 in the Civil Code. This provision reinforces the franchisor's pre-contractual information obligation with regard to the franchisee. In accordance with article 1112-1 of the Civil Code, each of the parties must provide the other with any information that they may not be aware of and which could have an influence on their decision to conclude the contract or not.

1.5 Do the pre-contractual information obligations apply to sub-franchisees? If so, who has this obligation?

The obligation to provide a DIP applies to sub-franchisees. The franchisor (in this case, the master franchisee) must provide the sub-franchisees with the information allowing them to commit in full knowledge, at least 20 days before the signing of the contract or, if applicable, before any payment related to the contract .

1.6 Is the format for communicating pre-contractual information provided for by law? How often should these communications be made? Do these communications need to be renewed at regular intervals for existing franchisees?

The DIP must contain the information referred to in Articles L. 330-3 and R. 330-1 of the Commercial Code and, in particular:

1. Information related to the identity of the franchisor and its activities: name of the company, registered office, registration number in the Trade and Companies Register, corporate form, share capital, names of managers, etc. ;
2. Registered trademarks and, more generally, any information relating to the ownership of the trademark granted to the franchisee, trademark registration number and license agreement where applicable;
3. The bank details of the franchisor (name, address of banks etc.). This information may be limited to the five main bank domiciliations;
4. The date of incorporation of the franchisor's company and the main stages of its evolution and of the franchise network (over the last 5 years) including a focus on the personal experience of the founding director, etc. The annual accounts for the last two financial years must be included, information on the financial health and experience of the franchisor, a presentation of the general and local state of the market for the products or services to be covered by the contract and the prospects for development of this market. It should be noted that a presentation of the general and local state of the market is not a market study. If the franchisor includes market research in the DIP, it must be complete, truthful and accurate. The franchisor is therefore bound by this document;
5. A presentation of the operator network which includes:
   (i) The list of companies that are part of it with an indication for each of them of the agreed mode of operation,
   (ii) The address of companies established in France with which the franchisor is bound by contracts of the same nature as the one whose conclusion is envisaged; the date of conclusion or renewal of these contracts is specified;
   (iii) The number of companies which, being linked to the network by contracts of the same nature as the one whose conclusion is envisaged, have ceased to be part of the network during the year preceding that of the issue of the DIP. The DIP specifies whether the contract has expired or whether it has been terminated or cancelled.
6. Information relating to the franchise contract: duration, termination, renewal, transfer and all the investments planned to start the franchise and develop it (ie royalties, entry fee if applicable, all expenses related to the implementation design, training, hardware and software).
   In addition, if the payment of a sum of money is required before the signing of the contract, the advantages conferred in return for this sum must be specified in writing, as well as the reciprocal obligations of the parties in the event of withdrawal.
   The DIP must be updated for each potential franchisee. However, once the contract is signed, the franchisor is not required to renew these communications with respect to existing franchisees.

1.7 Are there any other conditions that must be fulfilled before a contract can be concluded?

In view of the case law rendered on the subject, it is recommended to test the concept before concluding a franchise contract. The standard recommendation is to manage at least three “pilot” companies for a period of at least two years. The goal is to assess the "franchisable" nature of the concept. This recommendation must be adapted to each type of concept and activity.

1.8 Is it compulsory to join a federation?

No. Nevertheless, it is recommended to join the French Franchise Federation.

1.9 Does joining such a federation require franchisors to comply with additional obligations?

The French Franchise Federation verifies whether the DIP and the franchise contract comply with the European Franchise Code of Ethics.

2.1 Which structure is generally used by franchisors?

Franchisors often use subsidiaries to develop their network. In this case, these different subsidiaries directly provide services to franchisees, such as supply chain, training sessions, logistical support, etc. In an international context, master franchises are very popular with operators. For example, if the franchisor is not a French company and has no experience in France, the franchisor can use a natural or legal person who has a good knowledge of the French market. In this case, the master franchisee will have to develop its own network of sub-franchisees. Another option for foreign franchisors is to create a joint venture in France with local partners in order to develop a network in France and ensure that all the conditions are met to develop the network. This type of partnership, which is booming in France, guarantees the foreign franchisor a solid presence in the country and strong operational support from its French partner.

2.2 Are there any registration formalities prior to exercising a franchise activity?

Any natural or legal person planning to start an independent professional activity must register. Depending on the form of the entity (new company registered in France, foreign company, specific commercial agent status, etc.), the new entity must meet specific conditions.

3.1 Overview of competition law rules applicable to franchising

A franchise network active in France must comply with both European regulations on anti-competitive practices (article 101 of the Treaty on the Functioning of the European Union) and French regulations which also prohibit anti-competitive practices such as concerted actions , agreements and abuse of a dominant position (articles L. 420-1 et seq. of the Commercial Code) and restrictive practices of competition (articles L. 442-1 et seq. of the Commercial Code).
In particular, franchise networks established in France must comply with Commission Regulation (EU) No 330/2010 of 20 April 2010 on the application of Article 101(3) of the Treaty on the functioning of European Union to categories of vertical agreements and concerted practices, which details the conditions under which vertical restraints are exempted.

3.2 Is a franchise agreement subject to a maximum duration?

Under French law, there is no maximum duration for a franchise agreement. The nature of the activity and the investments required to launch the activity are often taken into account in determining the initial duration of the contract.
However, if the franchise agreement contains an exclusive supply clause, the duration of the agreement will be limited. See next question.

3.3 Are exclusive supply clauses limited in time?

If the contract contains exclusive exclusive supply, its duration must be limited to 10 years in accordance with Article L. 330-1 of the Commercial Code. However, if the franchise network is subject to European Union law (which is the case for most supermarket chains, for example), the duration will be limited to 5 years, without tacit renewal.

3.4 Do the regulations prevent franchisors from imposing resale prices on their franchisees?

The imposition of minimum selling prices between independent contracting parties is prohibited under both French law and European Union law (Articles L. 420-1 and L. 442-5 of the Commercial Code and Article 101 of the Treaty on the Functioning of the European Union).

3.5 A franchisor must respect certain obligations when appointing new franchisees in territories adjoining those of existing franchisees?

No. However, if the franchisor grants territorial exclusivity to the franchisee, the franchisor must refrain from entering into direct or indirect competition with the franchisee in the area concerned by the exclusivity, i.e. the franchisor must not open another point of sale in the same area.

3.6 Are non-competition and non-solicitation clauses during the term of the contract and after its term lawful?

A non-competition obligation during the term of the contract is lawful. The non-competition obligation may be directly linked to the activity of the franchisor but may also be more specific and limited to a geographical area if the franchisee benefits from territorial exclusivity. In this case, the franchisor may restrict the freedom of the franchisee to solicit customers in territories in which no exclusivity has been granted to him.
Post-contractual non-competition obligations have been the subject of a recent reform which, in principle, deems post-contractual non-competition clauses to be unwritten (Article L. 341.2§1 of the French Commercial Code). By way of derogation from this principle, post-contractual non-competition clauses are valid if they meet the following four cumulative conditions:

1. They relate to goods and services in competition with those which are the subject of the contract mentioned in I;
2. They are limited to the land and premises from which the operator carries out its activity during the term of the contract mentioned in I;
3. They are essential for the protection of the substantial, specific and secret know-how transmitted within the framework of the contract mentioned in I;
4. Their duration does not exceed one year after the expiry or termination of one of the contracts mentioned in Article L. 341-1.

4.1 How are trademarks protected?

To be protected, trademarks must be registered. We speak of “attributive deposit”. Ownership of the mark is not acquired through use: it is registration that confers on the applicant a right of ownership of the mark (articles L. 712-1 and L. 713-1 of the Code of Intellectual property). The mark must be lawful, distinctive and available for registration. Registration is valid for 10 years, renewable indefinitely.
If the depositor registers a trademark with the National Institute of Industrial Property, national protection will be granted to him. If the registration is made before the Office for the Harmonization of the Internal Market, the franchisor will benefit from protection throughout the European Union.
It should be noted that inadequate brand protection can have dramatic consequences for a franchisor as brands represent an essential asset to their business. Therefore, it is strongly recommended to register its trademarks in accordance with the activities envisaged.

4.2 Are the copyrights (concerning the operating manual or the software developed by the franchisor and granted to the franchisee) protected by law?

Copyright protects works of the mind presenting an original character. Therefore, copyright is adequate protection if the franchisor is able to document, for example, that the operating manual and software are original (legal expression of the author's creativity). Copyright and trademark allow the franchisor to protect the signs of rallying customers (trademarks or factory, trade names, distinctive signs, graphic charter, architectural concept, etc.). Copyright does not protect ideas as such.

1. 5.1 What actions can be taken against a franchisor who fails to comply with his pre-contractual information obligation? Can the franchisee request the termination of the franchise agreement and/or damages?

   Two types of recourse can be implemented against the franchisor who does not respect his obligation of pre-contractual information (ie the obligations resulting from articles L. 330-3 and R. 330-1 of the Commercial Code):

   1. Termination (cancellation) of the contract.
      The resolution of the contract is generally pronounced by the courts when the franchisee is able to prove that the information communicated by the franchisor (the mandatory information but also other key information transmitted by the franchisor) is inaccurate, false or misleading and has allowed to fraudulently obtain the franchisee's consent. This rule is reinforced by the recent reform of the law of obligations which provides that each party to the contract must provide its co-contracting party with all the information which is decisive for its consent when, legitimately, the latter is unaware of this information or trusts to its co-contractor. The resolution of the franchise contract is a cumbersome procedure which can have irrevocable consequences on the existence of the network. In addition, any violation of Article L. 330-3 of the Commercial Code is punishable by a fifth-category fine.
   2. Obtaining damages from the franchisor.
      Even when the courts consider that the pre-contractual information provided by the franchisor does not justify the termination of the contract, the franchisor may incur liability. The courts can thus order compensation for the prejudice suffered by the franchisee resulting from the absence or incomplete nature of the pre-contractual information communicated. The franchisee must provide proof that knowledge of the missing information would have led him to sign the contract under different conditions. In addition, the parties may include in the contract the rights and remedies of their choice, within the limits of the law.

   5.2 In the presence of sub-franchisees, how is the liability distributed between the franchisor and the master franchisee in the event of a breach of the obligation of pre-contractual information?

   In the event of a breach of the pre-contractual information obligation (false declaration or incomplete declaration, concealment), the franchisor bears the same liability as in the case referred to in the previous question. In addition, the master franchisee must also comply with the mandatory provisions of Articles L. 330-3 and R. 330-1 of the Commercial Code with regard to its sub-franchisees.

   5.3 Can a franchisor exclude or limit its liability in the event of misrepresentation via a waiver clause stipulated in the franchise agreement?

   Such a clause is prohibited. The law imposing on the franchisor a pre-contractual information obligation is a police law. Any clause limiting the liability incurred by the franchisor in the event of a breach of this obligation would be deemed unwritten.

   5.4 Do the regulations permit franchisees to bring class actions and, if so, are class action waivers lawful?

   In accordance with Decree No. 2014-1081 of September 24, 2014, class actions are limited to disputes involving consumers. The action is initiated by a consumer association. Class actions are not applicable in franchisor-franchisee relationships. However, this does not prevent a group of dissatisfied franchisees from launching coordinated individual actions in court.

In principle, any person registered with the trade and companies register who wishes to carry out an industrial, commercial or craft activity can sign a commercial lease. Generally, the standard duration of a commercial lease is 9 years, with the option for the lessee to terminate the lease at the end of each three-year period. The parties may agree on a longer period. In this case, it is possible to make the lessee waive his right to three-year termination.
It is strongly recommended that the franchisor and the franchisee carefully analyze the stipulations of the commercial lease insofar as it represents a major asset of the franchisee.

7.1 If an online order is placed by a customer located outside the exclusive territory of the franchisee, can the franchise agreement require the franchisee to redirect the customer to the franchisee located in the customer's area?

In accordance with European law, such a clause is deemed unwritten. In addition, any clause prohibiting passive sales is deemed unwritten.

7.2 Are there any restrictions as to the legality of clauses requiring a former franchisee to transfer his domain name to the new franchisee?

Such a clause is legal.

No. However, the courts may increase or decrease a manifestly derisory or excessive indemnity on which the parties have agreed. In addition, if a franchisor abruptly terminates a franchise agreement (without giving sufficient notice), it may be ordered to pay its franchisees damages (article L. 442-6 I 5° of the French Commercial Code).
The liability of the franchisor may be engaged if the following conditions are met:

• Existence of an established business relationship. The relationship must be stable and continuous;
• Existence of a (partial or total) termination of the relationship;
• Sudden nature of the termination, that is to say that the termination was carried out without respecting a notice period adapted to the duration of the relationship and in accordance with the minimum period determined with reference to trade practices by inter-professional agreements. In addition, reference should be made to case law which takes into account the concept of economic dependence to determine the period of notice.

9.1 Is there a risk that the franchisor will be considered a co-employer of the franchisee's employers?

A franchise contract can be reclassified as an employment contract if the franchisee is not, in practice, independent of the franchisor, ie a relationship of subordination between franchisor and franchisee is demonstrated. Therefore, it is crucial that the franchisee be treated as an independent contractor and act as such. The franchisee must manage his business and his employees independently. In this regard, the franchisor must never behave as the employer of the franchisee's employees and must refrain from any act that could suggest that the franchise network is one and the same economic entity. In such a situation, the risk will be considerably increased and the employees of the franchisee will be able to assert their rights directly with the franchisor.

9.2 Is there a risk that the franchisor will be held civilly liable for the acts or omissions of the franchisee's employees in the exercise of the franchisee's activity? If so, is it possible to limit this risk?

As indicated above, the franchisee is independent of the franchisor. In principle, the franchisee is solely responsible for the acts or omissions of its employees in the exercise of its activity. However, as a precaution, it is recommended to provide in the franchise contract that the franchisee undertakes to inform third parties and his employees of his status as an independent entrepreneur.

10.1 Is there a risk that the franchisee will be considered as the commercial agent of the franchisor? If so, is it possible to limit this risk?

In French law, the title given to the contract by the parties does not bind the judge. In other words, if the contract is entitled “franchise contract”, the judge can requalify it as a commercial agent contract if the “franchisee” actually acts as a commercial agent. In principle, the franchisee acts in his own name and on his own behalf and pursues his activity independently. A reclassification as a commercial agency contract is possible if, on the contrary, the franchisee acts in the name and on behalf of the franchisor.

The duty of good faith is a general principle of law. This principle applies particularly to relations between franchisor and franchisee insofar as the franchise is considered to be a contract of common interest.
The recent reform of contract law reinforces the obligation to perform contracts in good faith and to act in good faith during the pre-contractual negotiation phase.

The general principles of civil and commercial law govern the execution of the contract between the franchisor and the franchisee, once the latter has been signed.

The general principles of civil and commercial law govern the execution of the contract between the franchisor and the franchisee, once the latter has been signed.

13.1 Does the franchisor have an obligation to inform the franchisee at the end of the franchise contract?

In the event of the renewal of an existing franchise contract expiring (ie the signing of a new franchise contract), a new DIP (articles L. 330-3 and R. 330-1 of the Commercial Code) must be provided to the franchisee by the franchisor, even in the case of long contractual relationships. It seems that in the event of extension of the existing contract by amendment, no pre-contractual information obligation is imposed on the franchisor.
However, these assertions must be qualified. Indeed, the case law is not unanimous on the matter. As a precaution, franchisors should be recommended to provide a new DIP to franchisees in both cases (renewal and extension).

13.2 Does the franchisee automatically benefit from a right to renewal at the end of the contract?

If the franchise contract does not provide for an extension or renewal clause, the franchisor has no obligation to extend or renew the contract. However, the parties remain free to include such a clause. In addition, in the event that the franchisor does not intend to renew the contract, the latter must be careful not to encourage the franchisee to make significant investments before the expiry of the contract.

13.3 Is the franchisee whose contract is not renewed justified in benefiting from an indemnity repairing the prejudice he suffers on the occasion of the non-renewal of the contract?

If the franchise contract does not provide for an obligation to automatically renew the contract, the franchisor is free not to conclude a new contract. However, if the termination of the contract is abrupt and not proportionate to the duration or the quality of the relationship (for example, in the case where the franchisee has made significant investments for the implementation of a new concept), the liability of the franchisor may be sought.

14.1 Is a franchisor authorized to restrict the freedom of a franchisee to sell, transfer or assign his activity?

Such restrictions are possible. The franchise contract is concluded intuitu personae ie in consideration of the person of the franchisor but, above all, in consideration of the person of the franchisee. Granting a right of first refusal in favor of the franchisor is common practice.

14.2 If the contract is terminated by the franchisor due to fault on the part of the franchisee, does French law recognize the right of the franchisor to take over the management of the franchisee's activity? Are there formalities to be observed for such a right to be applicable?

French law does not recognize such a right. In this regard, it should be noted that in the event of termination of a master franchise contract, the principle of the relative effect of contracts prevents the sub-franchisees from being directly linked to the master franchisor. Sub-franchise contracts are not automatically transferred to the master franchisor. To do this, it is necessary to use the contractual mechanism of subrogation. Thus, the master franchisor finds himself subrogated in the rights and obligations of the master franchisee with regard to the sub-franchisees. This mechanism must be accepted by the sub-franchisees via the introduction of a clause to this effect in the franchise contract. A contractual relationship is then created directly between the franchisor and the sub-franchisees.