The franchise agreements must comply with Commission Regulation (EU) 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.
The Regulation applies to agreements for the sale and purchase of goods or services which are entered into between companies operating at different levels of production or distribution chains (“vertical agreements”) such as distribution, supply, franchising agreements.
As a matter of fact, Art. 101(3) of the Treaty prohibits agreements that may affect trade between European Union (EU) countries and which prevent, restrict or distort competition. Agreements which create sufficient benefits to outweigh the anti-competitive effects are exempt from this prohibition. The Regulation (EU) provides a safe harbour for vertical agreements which fulfil certain requirements.
The Regulation contains some restrictions that lead to the exclusion of the whole agreement from the benefit of the exemption, regardless of the market share held by the parties (“hardcore restrictions”),
Among these, one hardcore restriction concerns restrictions regarding the territory into which or the customers to whom the buyer may sell the contract goods or services. Suppliers may legally opt to restrict “active sales” by distributors to a specific territory or a customer group (exclusive agreements). However, they cannot limit distributors’ ability to make “passive sales”, i.e. unsolicited purchase orders issued by clients established in any territory.
The Commission has taken into account the development of the Internet as a force for online sales and for cross-border commerce, confirming that, in general, once authorised, distributors must be free to sell on their websites as they do in their traditional shops and physical points of sale.
According to the Commission, in fact, the policy of leaving the companies free to decide how to distribute the products, whether in traditional shops or on their websites, increases consumer choice and price competition.
The guidelines on vertical restraints that accompany the Regulations clarify that, in general, selling through a website is considered a form of passive sales, and therefore, this method of advertising and sales, must be considered allowed in principle.
However, it is possible to limit the website use if advertising via the Internet or using the Internet leads to active selling, for example, in the territories or to customer groups of other franchisees.
So, if a customer visits the franchisee’s website and contacts the franchisee, and if such contact leads to a sale, then this sale is considered passive, as such allowed.
If this can be considered a typical case, it is evident that in many other cases it will not be easy to determine whether the sale should be considered active (and therefore prohibited) or passive (which cannot be prohibited).
The guidelines accompanying the Regulation may provide useful insights to orientate and solve some of the most common cases. The Commission states that in general, efforts to be found specifically in a certain territory or by a certain customer group is active selling into that territory or to that customer group. Therefore, the sales solicited through territory-based banners on third party websites are a form of active sales into the territory where these banners are shown; such as paying a search engine or online advertisement provider to have advertisements displayed specifically to users in a particular territory.
On the other hand, it is not allowed to force the exclusive franchisee to prevent customers located in another territory from viewing its website or it’s not possible to automatically re-route its customers to the franchisor’s or other franchisees’ websites. This does not exclude the possibility of agreeing that the franchisee’s website shall also offer a number of links to websites of other franchisees and/or the franchisor.
It’s not possible to prescribe to the franchisee to terminate transactions after the customers have entered their credit card details showing a foreign address. Furthermore, franchisors cannot limit the quantities sold over the Internet or charge higher prices for products to be sold online, even if the franchisor can ask the franchisee to sell at least a certain absolute amount (in value or volume) of the products offline to ensure an efficient operation of its physical point of sales.
Considering that the Internet is a valid way for customers to contact the sellers, the franchisee should be allowed to offer different language options on its website. The franchisor, however, may require quality standards for the use of the website to resell the goods, just as it may require quality standards for a shop or for selling by catalogue or for advertising and promotion in general.
The guidelines provide further guidance as a useful clarification to assess the compatibility of the franchise agreements provisions with those of the Regulation, as it is not possible to discuss this further. We strongly suggest verification of this compatibility, not only when drafting new contracts but also to check the terms of the contracts already in force.
