This book provides a wide-ranging review of the European rules relating to distribution: exclusive purchase and exclusive supply, exclusive and selective distribution, motor vehicle distribution, franchises, commercial agents.

French Distribution Law

In spite of its commercial success, franchising is currently undergoing significant legal challenges. Like all the other types of distribution network, its efficiency is undermined by the general rules of competition and distribution law intended to regulate the difficult relationship between the large retail distribution sector and suppliers, the application of which is extensive and includes all …

Impact of general distribution law and rules specific to franchises. 

From a historic standpoint, the franchise model was born in the United States. In effect, the large size of the US territory encouraged producers to adopt a distribution system enabling them to efficiently increase their market shares while limiting investments and at the same time, the franchise system allowed entrepreneurs to develop their own activity while benefiting from proven techniques. This combination of favorable elements explains the continuous development of franchising.

Franchising first appeared in France in the 1970's. It has modernized retail trade faced with competition from hypermarkets in a spectacular fashion. This form of distribution and production is still very successful despite a slight decrease since the 1990's. According to the Fédération Française de la Franchise (FFF), in 2019 franchises made a total turnover of near EUR 88,5 billion in France there were 2,035 networks engaged in franchising and 92,132. With these figures, France is the leading country for franchises in Europe. Franchises have developed in the field of the sale of both goods and services: services related to aesthetic or leisure but also business or personal services (education, home assistance, improving housing, real estate). In parallel, trades that meet consumers' desires are still very inventive and carry on developing, particularly in the field of flowers, perfumery, ready-to-wear, underwear, accessories, specialty foods or theme restaurants.

Franchising is an economic model which is constantly evolving and constitutes a means of penetrating markets and globalization: approximately one-third of French networks are developing franchising abroad, in particular for homeware, personal goods, hairdressing, hotels, fast food and general food brands.

Economic significance of franchising.

Although EU Regulation No 4087/88, specific to franchising, is no longer in force, its Article 1(3) gives the fullest definition of franchising : “one undertaking, the franchisor, grants the other, the franchisee, in exchange for direct or indirect financial consideration, the right to exploit a franchise for the purposes of marketing specified types of goods and/or services; it includes at least obligations relating to a package of industrial or intellectual property rights relating to trade marks, trade names, shop signs, utility models, designs, copyrights, know-how or patents, to be exploited for the resale of goods or the provision of services to end users”.

This definition has not been included in the new-generation regulations which adopt a less categorical approach to franchises. The Guidelines on Vertical Restraints  define franchise agreements as vertical agreements that contain “licences of intellectual property rights relating in particular to trade marks or signs and know-how for the use and distribution of goods or services. In addition to the licence of IPRs, the franchisor usually provides the franchisee with commercial and technical assistance during the life of the agreement”. The license and this assistance are an integral part of the franchised business method. As a general rule, the franchisor receives a royalty from the franchisee for the use of this business method”. 

The previous definition of the Court of Justice was more precise: “an undertaking which has established itself as a distributor on a given market and thus developed certain business methods grants independent traders, for a fee, the right to establish themselves in other markets using its business name and the business methods which have made it successful. Rather than a method of distribution, it is a way for an undertaking to derive financial benefit from its expertise without investing its own capital. Moreover, the system gives traders who do not have the necessary experience access to methods which they could not have learned without considerable effort and allows them to benefit from the reputation of the franchisor's business name. Franchising agreements for the distribution of goods differ in that regard from dealerships or contracts which incorporate approved retailers into a selective distribution system, which do not involve the use of a single business name, the application of uniform business methods or the payment of royalties in return for the benefits granted” .

Franchising is a method of collaboration between a franchisor and one or more franchisees based on a master-agreement containing various contracts entered into by the franchisor and the franchisee: brand and/or business sign concessions, know-how licenses, contracts for the purchase of goods or services, assistance agreements. The parties' collaboration is essential. Therefore, franchises cannot be reduced to mere distribution agreements but on the contrary involve the exploitation of the franchisor's knowledge and experience.

Franchises generally involve the transmission of commercial know-how, but may also relate to non-commercial activities such as agriculture, crafts or professional activities, real estate or other activities not related to trade. They always require the existence and transmission of know-how, the provision to the franchisee of all elements making the business identifiable to customers plus assistance throughout the contract. 

Regulation No 4087/88 of 30 November 1988, OJEC L 359 of 28 December 1988 ; currently replaced by Regulation No 2022/720 of 10 May 2022, OJEU L 134 of 11 May 2022, 4.

European Commission Notice No 2022/C 248/01, Guidelines on Vertical Restraints, OJEU C 248 of 30 June 2022, pt 165.

Case 161/84 Pronuptia [1986] ECR 353, LawLex200500004110JBJ.

Concept of franchise.

In addition to the concession of a commercial method, franchise agreements may sometimes contain obligations specific to selective or even exclusive distribution. The various contracts can nevertheless be distinguished from each other. Franchise agreements are also different from more integrated contracts such as commission-affiliation or commercial agency agreements. 

Franchises sometimes take some of the characters of exclusive distribution contracts, in particular territorial exclusivity. Similarly, in some cases exclusive distribution can come closer to franchise, for example where it contains a trademark license and includes assistance. The two contracts cannot however be confused. More than a distribution system, franchises constitute a proven method of transmission of know-how . They are not limited to the sale of goods but may also relate to services or industrial techniques. The characteristic elements of a franchise, although they may sometimes be present, are only secondary in exclusive distribution . Conversely, territorial exclusivity which is the dominant factor of exclusive distribution is facultative in franchises . Likewise, the payment obligations borne by franchisees are different from the exclusive distributor's financial obligations.

Even if the definition of selective distribution in the new-generation regulations  brings it closer to franchises at the risk of creating confusion, these two forms of distribution are different due to two fundamental factors which are only present in franchise agreements: the transmission of know-how and the licensing of intellectual property rights allowing the use of a common business name. Distributors are subject to selection in both cases but in selective distribution systems, selection only relies on the ability to sell a product which is sometimes quantitatively limited, whereas, for franchises, it relies on the obligation on franchisees to use the same commercial methods. The disclosure of know-how is not an essential element of selective distribution which does not require any common sign and does not generally provide for the payment of a fee.

3) Franchises and commission-based affiliation ("commission-affiliation").

Commission-based affiliation started through practice in the early 1990s in response to the constraints of the franchise as a form of distribution based on purchase-resale without the supplier controlling distributors' resale prices of distributors. This is a type of hybrid contractual arrangement in which the distributor's role is to sell the contract goods in his own name but for the account of the supplier (hence "commission") and under the supplier's trade name (hence "affiliation"). Commission-based affiliation agreements came about due to the need to address a problem inherent in franchising but is very similar to it in many ways: like franchisees, commission-based affiliates are independed entrepreneurs, sell contract goods under the trade name of the brand very often benefitting from the supplier's know-how. However, unlike franchisees, they do not buy to resell but sell for the account of the supplier who sets the retail prices to final customers and retains ownership of the goods until they are sold and assumes the risk of the ownership of stocks.

This type of contractual arrangement is nevertheless tricky to set up: the affiliate must not take any major commercial risks under the contract or may be deemed to be an independent trader and risk prosecution for retail price maintenance. In addition the commission-based affiliation has given rise to considerable litigation to reclassify such relationships as agency agreements, as the Chattawak saga has demonstrated .

CA Pau, 14 November 1991, LawLex200200005871JBJ, which states that the agreement which relates to the concession of a common business name, transmission of know-how and technical assistance is a franchise agreement.

The availability of distinctive signs and the duty of assistance characterize the franchise agreement, but are only ancillary in exclusive distribution.

CA Paris, 11 March 1988, LawLex200200002649JBJ territorial exclusivity is not a constituent element of the franchise agreement; Cass. com., 9 November 1993, LawLex200200004361JBJ.

Regulation No 2790/1999/EC of 22 December 1999 on the application of Article 81(3) of the Treaty to categories of vertical agreements and concerted, OJEC L 333 of 29.12.1999, 21; replaced by Regulation No 330/2010 of 20 April 2010 on the application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices, OJEU L 102 of 23 April 2010, 1; currently replaced by Regulation No 2022/720 of 10 May 2022.

CA Paris, 13 September 2006, LawLex200600002457JBJ; Cass. com., 26 February 2008, LawLex200800000254JBJ; CA Paris, 9 April 2009, LawLex200900003047JBJ; Cass. com., 29 June 2010, LawLex201000000797JBJ.

Distinction between franchises and other distribution agreements.

Although franchising imposes heavy obligations on each of the parties, it nevertheless has many advantages. In effect, the franchisor may set up a network that includes numerous distributors at a limited cost. It may thus obtain a national name relatively quickly while strictly controlling the distribution of its products or services. Furthermore, franchising can sometimes bring in considerable revenue in the form of up-front entry fees, royalties or pooling of the advertising budget.

Conversely, franchising enables the franchisee to benefit from the reputation, image and know-how of its co-contractor. Proven techniques are made available thus sparing the franchisee the uncertainties inherent in the creation of a new business. The customer-base is practically already guaranteed, particularly because the franchisor organizes advertising campaigns on a regular basis. Territorial exclusivity may give it a distribution monopoly while purchasing exclusivity guarantees the regularity of its supplies.

Franchising has experienced a mixed development according to the sector and is not exempt from Schumpeter's theory of creative destruction. Franchising is growing in the food, home furnishings, fast food, personal services and automotive sectors, while it is reaching maturity in the personal goods sector. 

Many economic theories have been put forward to justify the advantages of franchising and to explain its development. Firstly, the rarity of resources explains the use of franchising. It may reduce the overseeing costs - which are high when units are owned outright - since the franchisee will have a major interest in the profitability of the franchise. However, these advantages evolve according to the age of the franchised network is mixed: the franchisor will be increasingly tempted to control the strategic units. It has been demonstrated that where network is mixed, i.e. containing both owned units and franchised units, it has wider coverage and it is better adpated to  the conditions of competition. The development of a franchise network also depends on the strategic choice of the franchisor to choose a market for which it can achieve rapid and full integration through the franchise. The agency theory also explains the development of franchising: franchise agreements allow the franchisor to control and increase its market shares, manage the control costs and increase profitability through franchisor/franchisee profit-sharing. Numerous studies on the factors involved in the failure of franchise networks point to the major role played by network management.

In practice, all those factors come together and the facts are often more complex than theoretical models which try to explain them. The choices made are not homogeneous. Many networks are mixed with franchisor-owned units going far beyond the pilot units designed to test know-how. Branches are often set up in strategic sectors and franchises are established in expensive areas.

Advantage of franchising.

According to the Court of Justice, “it is necessary to distinguish between (i) service franchises, under which the franchisee offers a service under the business name or symbol and sometimes the trade-mark of the franchisor, in accordance with the franchisor's instructions, (ii) production franchises, under which the franchisee manufactures products according to the instructions of the franchisor and sells them under the franchisor's trade-mark, and (iii) distribution franchises, under which the franchisee simply sells certain products in a shop which bears the franchisor's business name or symbol” .

Industrial or production franchises consist of “manufacturing licences based on patents and/or technical know-how, combined with trade-mark licences” . The franchisee manufactures the products it sells under the franchisor's trademark according to the franchisor's industrial processes. Industrial franchising combines patent and trademark licenses, transfer of know-how and supply in raw materials. The block exemption regulation specific to technology transfer agreements applies in such cases since the repeal of the Regulation of 30 November 1988 .

The distribution franchise is the most common type of franchise. The franchisee sells products that have been manufactured or selected by the franchisor under its name and applying its commercial methods. Distribution franchises concern both retail trade and hypermarkets which obtain supplies from a central purchasing group linked to the franchisor. However, it does not make up a homogeneous category. Whereas “producers' franchises” have as their object the sale of products manufactured by the franchisor or at least produced on its behalf and bearing its trademark, “distributors' franchises” sell products manufactured by third parties but selected by the franchisor and the franchise. Agreements whereby the franchisor receives a mandate to purchase the goods necessary for its trade from the franchisee may be considered as ancillary to the franchise agreement .

Lastly, service franchises have multiplied in many activity sectors, such as hotels and motor vehicle repair. The franchisee offers a service under the name, trade name, even trademark of the franchisor, and complies with the latter's methods and know-how.

In practice, differences between these forms of franchise are not so marked. For example, industrial franchises frequently include distribution franchises. Some franchise agreements guarantee both the distribution of products and the provision of services.

2) Master franchising or contract on an area (contrat de zone)

The technique of master franchising which is widely used in the United States has seen increasing development in Europe. Franchising is geared down by resorting to a main franchisee, referred to as the master franchisee. The master franchisee has exclusivity over the franchise for a generally large territory from which it chooses franchisees. The franchisor may thus more easily develop its distribution network, including in regions where sociological or linguistic particularities would need an expensive adjustment of its know-how. The master franchisee is in charge of developing a pilot experience to adjust the master franchisor's methods. It may then select franchisees and set up a distribution network. The franchisor is not a party to the contract between the master franchisee and the sub-franchisees. It has thus been held that the franchisor was not liable for the breaches of the master franchisee . 

The contract on an area (contrat de zone) enables the holder of a trademark and know-how to grant exclusivity on their exploitation in a determined territory. It must be distinguished from master franchising as the contracting party must itself exploit the sales outlets, by setting up branches there. It is therefore prohibited from reassigning the exclusivity.

3) Stand or allocated location franchises (corner franchises)

The stand or location franchise, also referred to as franchise corner agreement, is an agreement whereby the franchisee assigns part of its trade area to the distribution of products produced or selected by the franchisor. It should not however be mixed up with the rental of space. In effect, the corner franchisee must benefit from assistance in return for which it pays a fee related to the promotion of the network. Stand franchises and franchise agreements should not be confused despite their having common characteristics. The franchisee does not exercise its business in specific premises but in a larger area, often a hypermarket or a mall. Furthermore, it cannot use the franchisor's business name outside the sales outlet but only has an inside business name, generally near the location assigned to it.

Stand franchising most often grants exclusivity to the franchisee within the sales area where it is active. The franchisor is prevented from appointing other distributors there . The franchisor does not benefit from sales exclusivity for its products. The franchise activity is therefore exercised within a business involving a variety of goods, generally competing ones. Nevertheless, it is generally limited by the prohibition on the franchisee to display or sell products that are likely to undermine the franchisor's brand image. The extend of know-how made available to the franchisee is more limited in stand franchises than in traditional franchises and involves only assistance “regarding purchase and fashion trends” which may sometimes extend to the lay-out of the sales outlet .

Regulation No 4087/88/EEC of 30 November 1988, OJEC L 359 of 28 December 1988, pt 4.

Regulation No 316/2014 of 21 March 2014 on the application of Article 101(3) TFEU to categories of technology transfer agreements, recital 6: “This Regulation should cover only technology transfer agreements between a licensor and a licensee. It should cover such agreements even if conditions are stipulated for more than one level of trade, by, for instance, requiring the licensee to set up a particular distribution system and specifying the obligations the licensee must or may impose on resellers of the products produced under the licence. However, such conditions and obligations should comply with the competition rules applicable to supply and distribution agreements set out In Commission Regulation (EU) No 330/2010 [Editor's note: now replaced by Regulation No 2022/720 of 10 May 2022].Supply and distribution agreements concluded between a licensee and its buyers should not be exempted by this Regulation”.

CA Paris, 18 June 1992, LawLex200200005934JBJ.

Cass. com., 9 March 1993, LawLex200200005986JBJ: the termination of a franchise agreement is attributable to the franchisor who breaches its essential exclusivity obligation by allowing the sale of its products in the area assigned to the franchisee.

Commission Decision No 89/94/EEC of 2 December 1988, Charles Jourdan, LawLex200500004474JBJ.

Types of franchise.

French law has no general rules specific to franchising. Article L. 330-3 of the Commercial Code only establishes the franchisee's pre-contract information obligation and is not only applicable to franchise agreements. This is also the case of new Articles L. 341-1 and L. 341-2 of the Commercial Code introduced by the Macron Law , which provides for the harmonization of the duration of contracts between distribution groups and retailers and lays down the principle of legal indivisibility of those contracts. Furthermore, at the request of the Conseil national de la consommation (National Consumer Council) , an order of 21 February 1991, now codified in Article L. 441-1 of the Commercial Code, has codified the provision of information to consumers by providing that “any person who sells products or provides services related to a franchise agreement to a franchisor must inform the consumer of its capacity as independent business, in a legible and visible way, on all information documents, particularly advertisements both inside and outside the sales outlet” . A DGCCRF memorandum of 21 May 1991  has specified the conditions of application of the order. The duty to inform consumers only covers professionals linked to a franchisor by a franchise agreement. The mere provision of the name of the store owner is not sufficient. The concept of independence must be expressly mentioned. The status of the franchisee must be given in all advertising documents, invoices and order forms. This status must furthermore be notified to the consumer even before he/she enters the store, which implies external display using signs and notices. The breach of these obligations may, under the appearance theory, be the basis of legal action against the franchisor. An action for invalidity by a consumer against a franchisor was thus held admissible despite the consumer being a third party because the contract documents did not make it possible to know the reality of its contractual relations with the franchisee .

Lastly, at the professional level, a Code of Ethics for Franchising, a code of best practices and good conduct for users of franchises in Europe, has been adopted by the European Franchise Federation that includes Germany, the Netherlands, United Kingdom, Norway, Sweden and France, in concert with the European Commission. It defines franchising as “a system of marketing goods and/or services and/or technology, which is based upon a close and ongoing collaboration between legally and financially separate and independent undertakings, the Franchisor and its individual Franchisees, whereby the Franchisor grants its individual Franchisee the right, and imposes the obligation, to conduct a business in accordance with the Franchisor's concept”. The franchisee therefore has not only the right but also the obligation, in consideration for a direct or indirect financial contribution, to use the name, trademark and various intellectual property rights of the franchisor. For that purpose it benefits from commercial and/or technical assistance. Although the legal value of such codes has been debated, it may however be accepted where the parties refer to them in their contract .

The Association française de normalisation (French Standardization Association) has also developed a standard applicable to franchising . Although its purpose is not to offer a standard-form contract, it specifies the concept of franchising by insisting on the holding of intellectual property rights and the transmission of know-how . 

Law No 2015-990 of 6 August 2015 for growth, activity and equality of economic opportunities, JORF No 181 of 7 August 2015, 13537.

Competition Council Opinion No 89-A-02 of 31 January 1989, LawLex200200002077JBJ.

The action for annulment lodged by the Fédération française de la franchise which challenged the competence of the Minister in charge of the Economy was dismissed: Cons. d'Ét., 13 November 1991, No 125.530.

Memorandum (note de service), DGCCRF, No 5724, 21 May 1991.

Cass. com., 17 October 1995, LawLex200200004348JBJ: the franchisor may be required with respect to customers of the franchisee to make them believe that it is their true contracting party.

See Ministerial Reply No 14618; for a negative application, see CA Paris, 7 March 2018, LawLex201800000393JBJ.

A method of collaboration between a franchisor, on the one hand, and one or more franchisees, on the other hand. Franchising also implies, for the franchisor, the ownership or enjoyment of one or more rallying signs for customers (such as corporate name, trade name, business name, trademark or service mark etc.) and the holding of know-how that may be transferred to franchisees and characterizes as a collection of products and/or services: having an original and specific character; exploited according to previously tested techniques.

Absence of general regulation.

In spite of its commercial success, franchising is currently undergoing significant legal challenges. Like all the other types of distribution network, its efficiency is undermined by the general rules of competition and distribution law intended to regulate the difficult relationship between the large retail distribution sector and suppliers, the application of which is extensive and includes all distribution agreements.

The introduction of binding provisions of general scope designed to resolve the particular case of the mass food retail distribution sector has led to an unnecessary intransigence affecting the whole of the French economy and in particular franchise agreements.

The law governing the termination of established commercial relationships has led, in this area as well as others, to the extension of notice periods incompatible with economic efficiency and the need to adapt to the constraints of competitiveness since suppliers are not effectively protected against the de-listing of their products by large retail distributors .

The rules covering significant imbalance, like for other types of distribution agreements, weaken franchise agreements by creating considerable legal uncertainty but they have not led to a better balance in the relations between retail groups and suppliers.

The reform of affiliation agreements establishes a new regime of post-contractual non-compete clauses which is stricter than European Union law in this area, which violates the principle of precedence.

Under the ordinary distribution and competition law there are therefore a lot of unnecessary constraints for franchise networks. 

The situation has again worsened with the reform of contract law resulting from the Ordinance of 10 February 2016. Although the new law of contracts contains a number of welcome innovations and largely codifies the case law, it is unfortunately also marked by a number of preconceived ideas about legal protectionism and mutual fairness ("solidarisme contractuel") which generate legal uncertainty and inefficiency. Franchise agreements concluded after 1 October 2016 will be weakened.

The franchisee, who is assumed to be the weaker party in the contract, will be more easily able to get out of commitments made, notably by claiming that correct information was not supplied, that his consent was vitiated because of the abusive exploitation of his state of dependence vis-a-vis the franchisor, that the franchise agreement is in fact a standard form agreement ("contrat  d'adhesion") creating an imbalance between the rights and obligations of the parties or that the franchisor has not provided any justification for the price of the contract goods or variations thereof.

The law with regard to franchises resulting from the application of the new law of contracts clearly does not make French law more attractive and will likely result in parties ensuring that international franchise agreements are made subject to foreign laws, with jurisdiction or arbitration conferred on foreign courts or arbitrators which are more respectful of the autonomy of the parties' intentions and the principle of the binding force of contracts.

In addition to that issue which applies to all distribution networks in fact we must add a further legal constraint specific to franchises. Even if there is no legislation specifically concerning franchises, with the pre-contract information requirement laid down by the Doubin Law not limited to franchise agreement but applicable to all contracts concluded in the common interest of both parties with the provision of distinctive signs and the stipulation of an obligation of exclusivity or quasi-exclusivity, the franchises are increasingly characterized by a specific set of legal rules that ultimately do not appear to be in their interest. Also, in the context of merger control, franchise networks are increasingly viewed as a single undertaking, which makes concentration operations between franchisees more and more difficult where there is a franchise brand with a strong presence in the same catchment area, even if the stores are operated by various independent traders.

The most worrying development in the law on franchises concerns labor law. In addition to the risk of reclassification, employment law tends to identify franchise networks as single entities, like integrated companies, although they are made up of independent traders. The reclassification obligation within the network is a strong indication of this trend. This culminated in the introduction of employees' representative committees ("instance de dialogue social") in each franchise network , treating franchisees' stores as branches of the franchise when in fact they are independent businesses, the success of which depends on their managerial autonomy. The introduction of the reform was heavily criticized by legal commentators and by franchisors and franchisees. It reflects a strong trend in franchising law to treat the network as an integrated company contrary to the very foundations of the franchise. Luckily, those criticisms were taken on board: the employee representative committee was repealed by Law No 2018-217 of 29 March 2018 .

The large retail chains regularly subject their suppliers to calls for tender which renders their relationss precarious and prevents suppliers from benefitting from the protection afforded under Article L. 441-6, I, 5° of the Commercial Code.

Article 64 of Law No 2016-1088 8 August 2016 known as the Law on Work (Loi Travail) or El Khomri Law (after Myriam El Khomri, Minister for Employment) resulting from amendment No 1721 introduced during debates in the General Assembly, on first reading of the law on new liberties and new protection for undertakings and employees and adopted Article 29 bis A of the draft law.

Article 7 of Law No 2018-217 of 29 March 2018 ratifying various ordinances issued on the basis of enabling Law No 2017-1340 of 15 September 2017 to implement by ordinance the measures for the reinforcing of social dialogue, OJ, 31 March 2018.

French Distribution Law

336. Impact of general distribution law and rules specific to franchises.

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Les notions juridiques connexes

336. Impact of general distribution law and rules specific to franchises.

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