Recently the courts have had to settle disputes either in connection to a) the classification of civil legal relations between the parties to a franchise agreement, or b) to validity of the franchise agreements / their breaches.
Taking into account the above, we present you with summaries from several relevant case law rulings of Lithuanian courts, which we hope will be beneficial to our foreign colleagues.
Ruling of the Court of Appeal of Lithuania, dated 10 April 2018, Case No e2A-39-464/2018
The court has solved a dispute relating to inter alia the issue of legal classification of the concluded agreement. The court analyzed whether the agreement is a sale-purchase agreement of a property complex or a franchise agreement, and held that, if one party to the franchise agreement (franchisor) undertakes to transfer to the other party (franchisee) the exclusive rights of the franchisor as a whole (the right to the company name, the right to the trademark of goods or services, the right to protected commercial (industrial) information, etc.) for business purposes, for a specified time and for a certain remuneration, and the franchisee undertakes to pay to the franchisor the said contractually agreed remuneration, if these rights are transferred together with the right to use tangible assets of the company – premises, equipment, etc., such agreement shall be regarded as a mixed agreement that has the features of both a franchise agreement and a company lease agreement, since the transfer of tangible assets does not fall within the scope and conception of a franchise agreement. This aspect is relevant when deciding what kind of rights and responsibilities are available to each party to the agreement and what remedies are available to the parties in the event of a dispute.
Ruling of the Court of Appeal of Lithuania, dated 13 April 2016, Case No 2A-47-186/2016
The court has heard a dispute arising from the classification of legal relations between the parties. In this case the terms and conditions of the agreement concluded between the parties established that the defendant (franchisor) has control over the applicant’s (franchisee’s) showrooms’ working hours, decoration, including furniture, number of staff, job functions of staff, their clothing; if the applicant’s (franchisee’s) showroom does not meet the standards set by the defendant (franchisor), the defendant (franchisor) may issue binding instructions, including ones relating to closing and relocation of the showroom. The applicant (franchisee) may set up certain showrooms on its own initiative only upon the agreement with the defendant (franchisor). The defendant (franchisor) also supervises the qualifications of the applicant’s (franchisee’s) employees and is entitled to indicate which of the applicant’s (franchisee’s) employees are incapable of performing obligations under the agreement concluded between the parties; although the franchisee is entitled to delegate the performance of the agreement to other companies, written consent of the franchisor is required to do so; under the concluded agreements, the defendant (franchisor) also decides on the suitability of the employees of the applicant (franchisee) to work in the relevant business customer unit, their employment and dismissal, amount of their remuneration, their motivation system and other working conditions; the applicant (franchisee) also undertook to execute the instructions of the defendant (franchisor) regarding the activities of the business customer units. On the basis of the above features of the legal relationship in question, the court held that the agreements between the parties have features of both: a) commercial agency and b) franchise agreements, which are dominated by the element of legal relations of commercial agency. However, the features of legal relations of the dispute, such as the rules on decoration of the applicant’s (franchisee’s) showrooms, arrangement of goods, advertising, etc., by their essence correspond to the business model of franchise; thus, the court classified these agreements in question to be mixed agreements.
Ruling of the Court of Appeal of Lithuania, dated 9 November 2015, Case No 2A-12-407/2015
In this case the court examined a question whether the actions of the defendant (franchisor) constitute a breach of the franchise agreement. In the examined case the franchise agreement concluded between the parties established the right of the franchisee to operate gas stations marked by the trademark owned by the franchisor. The agreement also established the right of the defendant (franchisor) to enter into: a) other franchise agreements or b) agreements on gas stations’ lease with other third parties entailing the use of the system created by the franchisor or c) the right of the franchisor to directly engage in the retail sales of oil products. The judicial panel was looking into the matter whether the actions of the defendant (franchisor) in connection to replacement of the trademark of almost all gas stations owned by the defendant (franchisor) with a new trademark does constitute a breach of the franchise agreement between the parties, when such actions indirectly reduced the amount of sales of both the franchisee and the franchisor. Since the essence of the franchise agreement is that the franchisee is granted certain exclusive rights held by the franchisor and as a result of this, the franchisee is not required to make any investments into the trademark, know-how development, improvement and promotion, but only pay the franchisor for such exclusive rights. Further, the agreement between the parties also established the defendant’s (franchisor’s) obligation to put all its efforts into maintaining the reputation of the system (which under the franchise agreement consists of trademarks and know-how owned by the franchisor) as well as into maintaining the market demand for the products sold under the franchise; Therefore, since substantial reduction of the network of gas stations operated under the trademark owned by the franchisor has diminished the recognizability and reputation of this trademark, as well as the demand for products provided by the business system, the court held that the defendant (franchisor) was in breach of provisions of the said franchise agreement.
Ruling of the Klaipėda Regional Court, dated 8 October 2015, Case No e2A-1330-112/2015
The court heard a dispute concerning a question whether the franchise agreement should be deemed concluded and valid if the franchisor was not granted the exclusive right to the trademark, due to the fact that such trademark was not registered and respectively was not protected. The court considered the fact that the defendant (franchisee), by paying a monthly fee to the franchisor, generally acknowledged that it was using the catering model created by the applicant (franchisor) and the trademark that it had created but not properly registered, and the whole set of circumstances in this case provided the basis to assert that the defendant (franchisee) recognized the agreement, its terms and conditions not only by signing it, but also by actually fulfilling its provisions. The court held that after the applicant (franchisor) had applied for legal registration of the trademark, the defendant (franchisee) continued to use both, the applicant’s (franchisor’s) model of catering work and its trademark. The fact that the applicant (franchisor) had not transferred the exclusive rights to the trademark to the defendant (franchisee) which happened because he did not possess them at the time, did not deprive the defendant (franchisee) of the possibility to take over the pizzeria business – the catering model created by the applicant (franchisor) – and to receive income from it. Referring to the fact that the subject matter of a franchise agreement can be exclusive rights (including: right to a respective trademark, company name, right to protected commercial (industrial) information, etc.), as a complex, and since the subject matter of a franchise agreement is a) the right to use the respective company’s business model, and b) its trademark by paying a remuneration for this, the court held that the parties’ obligations under the agreement i.e. i) to transfer exclusive rights to the trademark and ii) to transfer rights to the pizzeria business (as owned by the applicant (franchisor), to the defendant (franchisee) – became two separate and independent obligations. Therefore, the invalidity of one of them, i.e. the invalidity of the obligation to transfer exclusive rights to the trademark, should not result in validity or invalidity of the other obligation of the applicant (franchisor) i.e. to transfer the rights to the catering model created by the applicant (franchisor) to the franchisee. Therefore, the court declared the agreement valid and binding.
Ruling of the Panevėžys Regional Court, dated 30 September 2014, Case No 2A-581-755/2014
The court heard a dispute concerning the sub-franchise legal relationship. The case examined what kind of restrictions on the franchisee’s (sub-franchisee’s) rights (conditions restricting competition) can the parties include into the franchise agreement. The court stated that a franchise agreement may establish the franchisee’s right to allow other persons to exercise all or part of the exclusive rights granted to it under the structure of a sub-franchise. However, the terms and conditions of the sub-franchise must be in advance discussed and provided for in the main franchise agreement or subsequently agreed upon with the franchisor. The court held that the franchise agreement may also establish the obligation of the franchisee to grant certain rights to third parties under the terms of a sub-franchise agreement. With respect to this, the court held that, if the parties to the franchise agreement fulfill the requirement to include into the agreement only those competition-restricting conditions that are not prohibited by competition law, the franchise agreement may contain the following limitations of the parties’ rights: 1) obligation of the franchisor not to grant the same set of exclusive rights to other persons in the same territory which was already granted to the franchisee or the obligation of the franchisor not to perform the same activities in the same territory that was granted to the franchisee; 2) obligation of the franchisee not to compete with the franchisor in the territory and business field defined in the agreement, in which the franchisee is exercising its rights granted under the franchise; 3) prohibition to the franchisee to enter into franchise agreements concerning similar rights with competitors (potential competitors) of the franchisor; 4) obligation of the franchisee to coordinate the arrangement of commercial premises defined in the agreement with the franchisor, as well as their exterior and interior decoration.
Robert Juodka, IDI Country Expert for franchising in Lithuania