Carpe Diem AS (Carpe Diem) and Sito AS (Sito) are two franchisees operating McDonald's restaurants in Norway. Franchisor is McDonald's Norway AS. Since 2010, the McDonald's-restaurants in Norway had sold hamburgers and cheeseburgers for 10 kroner (about 1 euro), which resulted in a loss for each hamburger/cheeseburger sold. The decision to set the recommended price to €1 was made by McCoop in order to increase profitability and the number of guests. Both franchisor and the franchisees are member of McKoop. Mc-Coop is run by a board – ExCom – consisting of four franchisees and the CEO of McDonald's Norway.
Carpe Diem and Sito were of the opinion that McDonald's Norway had acted in a disloyal way, giving rise to liability by acting in breach of the Norwegian Competition Act and the principles in the franchise agreement by imposing on them the obligation to sell hamburgers and cheeseburgers for €1. They claimed that they had lost several million kroner as a direct result of this, both since they lost money on each hamburger/cheeseburger sold and because the low price resulted in reduced sales of menus with a higher margin. McDonald's Norway benefited from the arrangement as the overall turnover increased.
Oslo tingrett (the first instance) ruled against the franchisees in November 2015. The franchisees appealed to Borgarting lagmannsrett (the appeal court), which came to the same conclusion. The decision is final, as the appeal to the Norwegian Supreme Court was not admitted.
As will be evident from the presentation of the case below, the decision shows that a franchisee under Norwegian law cannot remain passive when the franchisor implements pricing strategies (or other arrangements) that have a negative impact on the franchisee, in particular when the parties have organized themselves in a way that gives the franchisees a role in the decision making process. If the franchisee fails to voice its opposition it will be seen as the franchisee has taken part in the decision, even when it is reason to believe that the franchisee refrained from reacting because of possible sanctions from the franchisor.
The case also shows that breach of article 10 of the Competition Act (similar to article 101 TFEU) does not in itself qualify for damages to a contracting party.
The facts of the case
As stated above, the decision to set the recommended price to €1 was made by McKoop to increase guest count and profitability. This decision was based on recommendations from the franchisor and its advisors.
In general, the franchisees were of the opinion that the price was set too low. The price was also discussed in meetings. However, no franchisee increased the price above the recommended price before the summer of 2014 and none of the franchisees voted to increase the price in meetings in McKoop or ExCom. The franchisees asked for financial support from McDonald's Norway in order to maintain the low price in the fall of 2013, but this was rejected by McDonald's Norway.
The parties gave contradictory versions before the court regarding the openness and room for discussions between franchisor and franchisees. Representatives from McDonald's claimed that there was an open dialogue and room for diverging opinions, whereas existing and former franchisees witnessing on behalf of the claimants held that there was a culture of hiding disagreements. The minutes from the board meetings did not contain any information about possible disagreements regarding the price, a fact that the court sees as a sign of the latter. The court continues to paint a picture of a "fear culture" that prevented franchisees and members of ExCom to voice their concerns.
At the same time, the court is of the opinion that McDonald's must have been well aware of the franchisee's opinion.
The good results in 2012 reduced tension, but this increased again in 2013 when the results decreased. The franchisees again wanted to increase the price and expressed this in a meeting between the franchisee group (NLG) and ExCom, but the minutes from the next ExCom meeting (August 2013) does not contain any sign that the price was discussed. However, it was discussed in the ExCom-meeting in September the same year, as the franchisees once again asked for a contribution from the franchisor to uphold the low price. This was once more rejected. Later the same year the marketing plan (including the continuation of the low price for hamburgers/cheeseburgers) was unanimously decided by McKoop.
In January 2014 the franchisees decided to increase the prices above the recommended price, regardless of the marketing plan. This was communicated to McDonald's Norway, who reacted strongly. The franchisor also warned the franchisees against discussing price, as this would be in conflict with the Norwegian Competition Act, whereby the franchisees responded that it was in fact McDonald's Norway that was in breach of the Competition Act by in fact fixing the resale price on hamburgers and cheeseburgers.
At this stage, the franchisees felt free to set their own resale prices on the hamburgers/cheeseburger. Carpe Diem and Sito decided to claim damages from McDonald's Norway, and began court proceedings before Oslo tingrett. As stated above, Oslo tingrett ruled in favor of the franchisor, resulting in an appeal from the two franchisees.
The decision by the Appeal Court
The Appeal court concluded that McDonald's Norway did not act in a disloyal way or in breach of the contract. Thus, the claim for damages was rejected. The decision was based on the following considerations:
As to the alleged breach of the Competition Act, the court finds that McDonald's Norway together with the franchisees have in fact fixed the price at €1 and that this is a breach of article 10 of the Norwegian Competition Act. Article 10 is similar to article 101, TFEU. However, the court is of the opinion that such a breach in itself cannot give rise to damages. The purpose of article 10 of the Competition Act is to protect third parties against illegal price fixing, not one of the parties in such a scheme. The question of damages must be considered in a broader sense, where the decisive factor is if McDonald's Norway has acted in breach of the general duty of loyalty towards the franchisees.
The appeal court found that McDonald's Norway had a dominating and leading role when fixing the price of the hamburger/cheeseburger, but that the fixing of the price was based on thorough preparations and full openness. The franchisees had every opportunity to voice their opinion through McKoop, ExCom and NLF. Both parties had the necessary insight, ability and practical opportunity to safeguard their own interests. The fact that the price fixing created an uneven balance in the parties' margins was a result of McDonald's Norway's commercial considerations and its dominating role as franchisor. Since the franchisees did not react stronger, it was reasonable for McDonald's Norway to believe that the franchisees accepted the risks related to a low pricing of hamburgers/cheeseburgers.
The appeal court clearly states and that the franchisees should have objected if they were of the opinion that the arrangement would be contrary to their interest and cause considerable damage. The franchisee must bear the risk of failing to do so.
It follows from fundamental principles of contract that a resourceful company must safeguard its own interests in a situation when the other party is about to act in such a way as to cause material damage. One cannot participate in the way the franchisees did with regard to the price fixing and thereafter claim damages when it can be concluded that the negative consequences of the reduced price of the hamburger/cheeseburger were more severe than expected.