After quite a long run-up the Under-Secretary of Economic Affairs and Climate, Mona Keijzer, presented, on 12 December 2018, a new draft bill on franchise to the franchise sectory for the purposes of consultation.
The consultation term has ended 31 January 2019. There is good news for the sector: it has become an independent act which does not relate anymore to the widely criticized Dutch Franchise Code. More good news: the bill focuses to a high degree on the precontractual information obligations, by which franchisees are protected from taking this on (too) lightly without understanding the consequences. We can only be pleased with this.
Unfortunately, it is not all good news, this bill is reason for some major concerns.
By far the biggest concern is that the current bill grants franchisees a veto right. This veto right may impede franchisors from innovating the formula or from deploying new initiatives next to the formula (through a ‘derived formula’, or not) which “has or may have a high impact on the operation of the franchise formula by the franchisee”. Since this extremely restricts the franchisor in the control of his own business, one would think that “high impact” would be interpreted very restrictively and remain restricted to exceptional cases. Nothing is farther from the truth; the Explanatory Memorandum states as example transition to a new house-style which requires essential investments or efforts from the franchisee. And so, this article seems to be the deathblow to and contrary to franchise. After all, one of the core duties of the franchisor is to safeguard the formula and develop it further. The business of the franchisor could come to a full standstill by reason of these restrictions.
The purport of the Explanatory Memorandum is quite pessimistic regarding franchise and the malpractices that allegedly exist, whereas this is not substantiated in any manner by objective study. The ‘malpractices’ as reported seem to stem, for the biggest part, from talks with stakeholders and advisers in the market. It is recommended to have a thorough study carried out into this before drawing such far-reaching conclusions.
Furthermore it is very unclear how the draft Franchise Bill relates to jurisprudence of the Dutch Supreme Court and High Courts; will this all be set aside by the new Franchise Bill, or will this continue to be leading, together with the rules laid down in the draft Franchise Bill? In the Explanatory Memorandum, hardly any attention is paid to this important question, that leads to a lot of uncertainty.
Other major concerns are:
1) There is no clear definition of what is understood by franchise, nor is there any demarcation in regard of dealer, distribution, agency or (brand) license agreements. In the Explanatory Memorandum this is not discussed at all. As a result, legal uncertainty is promoted. Furthermore, it cannot be ruled out that other forms of collaboration – such as for instance autodealerships – will be equated in the future by the Dutch court with franchise, whereas such parties are not represented or actively involved in the current consultation and legislation process.
2) The obligation resting upon franchisors to apply “terms and conditions common in the trade” to compulsory purchase of goods or services. The Explanatory Memorandum reads that the surcharge as calculated – which may be part of the franchise fees – should be in a reasonable proportion to the plus-value the franchisor has for the franchisee. This is rather arbitrary. A lot of this kind of information, such as the earnings model is not public, is confidential and usually competition-sensitive. Furthermore, one formula or industry cannot simply be compared with the other. It will be very hard to set a benchmark under these circumstances. How to decide next what a reasonable proportion is and what common terms and conditions are?
3) It is assumed that the franchise business involves standard goodwill which should be compensated by the franchisor “upon termination” of the franchise agreement. Not a single reserve is made in this in the event that the franchisee ends the relationship, contrary for instance to what happens with the agency agreement and also with the employment agreement. Furthermore, the bill does not include any condition involving that against payment of goodwill the franchise business is taken over by the franchisor. And so, in theory, goodwill fees might be paid, whereas – be it under a different name or formula – the franchisee continues the business.
4) At the stroke of a pen, over 20 years of Dutch case law regarding the giving of prognoses in franchise relations is dismissed, a topic the Dutch Supreme Court recently still gave an explicit opinion on. In the Franchise Bill it actually becomes compulsory – at least this is the common interpretation - for the franchisor to give prognoses. This whereas in practice this is very hard to do, whereas franchisees are usually the best placed to assess local developments, since they are precisely the ones to know the local market very well.
5) The obligation for sharing all data, including complete manuals, with candidate franchisees in the precontractual stage, reaches very far. Nor is any link made between knowhow and the recently introduced Act on Protection of Trade Secrets. The (mandatory) obligation to share handbooks and operational guidelines with a potential franchisee, seems to go against the Act on Protection of Trade Secrets, as it will be very hard to propect knowhow under such circumstance. As a result, there is no protection which prevents (candidate) franchisees from sharing this information and knowhow (usually highly confidential and valuable business information) with third parties.
There is another catch, i.e. it is laid down in regard of specific information duties that they can be further specified by a decree to be issued which will not be subject to parliamentary review. The objections expressed in the previous consultation process also hold for this.
Another concern is that the draft Franchise Bill is – as a whole - mandatory law in the sense that no deviation can be made to the disadvantage of the franchisee. If the franchisor does not comply with certain rules laid down in the draft Franchise Bill, the franchisee has the right for three years (!) to rescind the franchise agreement.
If the Franchise Bill in its current form is adopted, franchise organizations will hardly be able to compete with retail chains. In that case, the franchise organizations will be bound hand and foot by veto rights of franchisees. One could wonder whether this is justified, certainly in the current rapidly changing market, where recently several reputed Dutch retail companies (like V&D, Miss Etam, Perry Sport, MS Mode and Witteveen) had to call it quits in the face of more innovative competitors. The era of digital and omnichannel does not have any mercy for retailers who cannot effectively innovate and thus miss the boat.
It is understandable that Keijzer et al. tried to meet all the concerns and wishes of interested parties in the franchise sector, in the complex self-regulatory and later legislation process of these last years. However, we hope that they will understand that there are several important matters to address and change in the draft Franchise Bill to let franchise be a future-proof and appealing form of collaboration. In this, the model as has existed for over 10 years in Belgium, i.e. a(n exhaustive) legal regime regarding precontractual information duties may serve as guideline. Furthermore, it would be very logical to make a distinction between major professional franchisees (for whom protective legislation does not have any justification) and small franchisees.
Tessa de Mönnink, IDI Country Expert for franchising in Netherlands