In our previous newsletters, we discussed the introduction of the Dutch Franchise Act (see newsletter 16 May 2022 and 20 September 2022). (the “Act” or “Franchise Act”). This Act is effective as of 1 January 2021 and is of mandatory law. Some legal obligations were subject to an implementation deadline until 31 December 2022. This deadline has now expired.
The legal text is not clear on several points. This has led to several questions from national and international clients (especially franchise organisations) over the past 2 years. Unfortunately, not all of these questions can be answered with certainty. The Act is sometimes unclear, and so-called landmark cases on the interpretation are also lacking at this stage.
Nevertheless, we would like to take you through our views on the most frequently asked questions from our clients.
1. Our franchise organisation provides a pre-information document (PID) to prospective franchisees in full compliance with the new Act. Franchise agreements are renewed every five years. Do we also have to provide a PID every time before renewal?
This is not explicitly mentioned in the legal text. It is quite defensible that the pre-renewal phase cannot be considered similar to a a pre-contractual phase and that the precontractual information obligation (including the provision of the PID) does not apply here. A franchisee who has already operated the relevant location for five years knows the franchise organisation and the costs and revenues of operating on site. Therefore, there is often no need for a new PID. This may be different if substantial changes have been made, for example in the franchise agreement and/or cost structure.
Note that until there is clear case law on this point, it cannot be automatically assumed that providing the PID is not required prior to renewal.
2. Should we also provide a PID to franchisees with multiple outlets (multiple franchising), or only prior to the opening of the first Outlet?
The legislator has not explained this properly. In multiple franchising, the law only makes an exception to abide with the 4-week standstill period but not the provision of the PID itself. Therefore, when entering into a new franchise agreement with an existing franchisee for a subsequent outlet at a new location, it is safest to always provide a PID, even if the franchisee already knows the organisation and contracts. Especially if relevant information about the new establishment is known to franchisor (such as previous financial exploitation data or specific data on the area), this can be important. A standstill period of 4 weeks is not mandatory in multiple franchising.
3. We require our candidate franchisees to have an external local site survey done at his own expense before the standstill period (4 weeks). Do we have to refund these costs if the candidate ultimately decides not to open a franchise branch?
The Act states that it is not allowed to induce a prospective franchisee to make payments or investments during the standstill period. Although the Act does not state that this also applies to costs prior to to the provision of the PID, which is followed by the standstill period, we cannot be sure that these mandatory costs are allowed. The legislature aimed to prevent prospective franchisees from making large investments in advance, forcing them to eventually sign the franchise agreement. For example signing a mandatory lease agreement in advance is considered a high – and therefore prohibited – pre-investment.
An external location survey seems like a small investment for franchisees, and therefore not necessarily prohibited in the pre-contractual phase. However, whether the pre-investment qualifies as small or large will, in practice, depend on the overall financial value of the franchise.
4. We are a fast food franchise formula and have recently bought another fast food franchise formula (with a different name and look and feel). The operating area of some of these outlets overlap with the exclusive areas of our existing franchisees. Should we have asked our existing franchisees for permission first?
Prior consent may be required under circumstances, namely if the acquired formula is a so- called “Derivative Formula”. Determinant for the qualification Derivative Formula is that this formula in the perception of the public (mostly the consumer) shows many similarities with the original franchise formula and therefore evokes strong associations with the franchise formula. This will be the case when using the same or similar visual characteristics and/or trademarks. If the recently acquired formula does not have a similar appearance, no prior consent will be required.
That said, on the basis of franchisor’s mandatory general information duties, the franchisor does do well to be transparent and inform existing franchisees in a timely manner.
5. There is an association of franchisees. Can we submit to this association decisions for which the franchisees have the right of consent? And is consent of the franchisee association sufficient to comply with the Franchise Act?
The Act states that decisions requiring consent require at least a (simple) majority of all franchisees, or more than 50%, or the consent of only the franchisees affected if, for example, it affects only a demarcated group (e.g. small franchisees, or in a certain region). Whether it is possible to delegate this right of consent to an association depends on the decision-making process within the association, who is a member of it and how the mandate is arranged, and on the association’s articles of association, if any. It is important for all concerned that this is clear at the time of decision-making, to avoid decisions being open to challenge at a later date.
6. The franchise agreement is governed by a different legal system (not Dutch law). Should we still take into account the Franchise Act?
It depends. Indeed, if the franchise branches are located outside the Netherlands, the Franchise Act may be excluded from applicability even if Dutch law applies to the franchise agreement. However, if the franchise branches are located in the Netherlands, the Franchise Act has mandatory effect even if another law is declared applicable to the franchise agreement.
7. We work with partners or selective distributors. Then the Franchise Act does not apply, right?
There is currently no way to tell in advance whether the Franchise Act applies to a partner agreement or a selective distribution agreement. To assess this, it is important how the actual cooperation is shaped. It will have to be ascertained whether or not the actual cooperation qualifies as a franchise agreement under the Franchise Act and its Explanatory Memorandum. Case law is expected in the (near) future, in which the demarcation of franchising compared to other forms of cooperation will be clarified.
8. We think we have such a strong and well-known formula that at the end of the franchise agreement, the franchisee is not entitled to goodwill. Can we agree on that?
The legislator has opted for a system in which the franchisor and franchisee are obliged to include a provision in the franchise agreement with each other to determine the goodwill at the end of the agreement. The legislator explicitly gives an example, in the explanatory memorandum to the Act, that in the case of a strong brand and “hard formula”, the goodwill brought by the franchisee may be (very) limited, while in the case of soft franchising it may be an important (and therefore large) component. But the legislator has refrained from providing actual concrete calculation methodologies. As a result, there is currently much ambiguity about shaping this goodwill provision. Whether it is tenable to determine that the franchisee is not entitled to any goodwill at all will have to be seen in case law. In any event, it would be advisable in such case to ensure that the goodwill provision contains a clear explanation/motivation, why the franchisee will not be entitled to any goodwill compensation.