The franchisor’s need for candor

In a landmark decision handed down on October 18, the Commercial Chamber of the French Supreme Court (Cour de cassation) ruled that, as part of its pre-contractual information obligation, the franchisor is not obliged to provide the franchisee with a local market study, but if he does, it must be sincere, otherwise he will be held liable. (Cass. com. October 18, 2023, no. 22-19.329)

In this case, the forecasts in the franchisor’s local market study were deemed over-optimistic, and the franchisor was ordered to pay the franchisee, who was placed in receivership, €51,000 in damages.

It was held that the franchisee did not have sufficient expertise to assess potential sales, whereas the franchisor was fully aware of the sales achieved by his stores in comparable areas, based on staff numbers and sales.

This decision provides an opportunity to review the obligations of the parties under a franchise agreement, which is freely negotiated by the parties within the limits of the applicable legal framework.

 

1 – Pre-contractual information from the franchisor to the franchisee

Article L 330-3, paragraph 1st, of the French Commercial Code stipulates that :

Any person who makes a trade name, trademark or sign available to another person, requiring from that person an undertaking of exclusivity or quasi-exclusivity for the exercise of his activity, is required, prior to the signature of any contract concluded in the common interest of both parties, to to provide the other party with a document containing truthful information, enabling it to make an informed commitment.

The content of this pre-contractual information document (DIP) is governed by article R 330-1 of the same code.

In particular, the franchisor must provide a presentation of the general and local state of the market for the products or services to be covered by the contract, and of the prospects for the development of this market”.

However, the franchisor is under no obligation to provide the prospective franchisee with a local market survey, as the Cour de cassation has already ruled.

However, when such information is provided, article L 330-3 of the French Commercial Code requires the franchisor to give a true picture of the local market.

Similarly, any forecasts provided by the franchisor, even though he is not required to do so, must be true and fair. (Cass. com. May 12, 2021, no. 19-17.701).

 

2 – The franchisor’s other obligations

Obligation to pass on know-how

The franchisor must transmit know-how to the franchisee.

Know-how can be defined as a secret, substantial and identified body of non-patented practical information resulting from the franchisor’s experience.

For a franchisor to validly make know-how available, he or she must have developed and tested it beforehand. A franchise can only be set up if the franchisor has successfully operated its concept for a reasonable length of time in at least one establishment.

  • Please note:

Franchise agreements usually contain a non-reaffiliation clause preventing the franchisee from re-affiliating with a competing network once the agreement has been terminated.

However, this clause, which is often very restrictive for the franchisee, will only be valid if it concerns the goods or services covered by the contract, is limited to the premises from which the franchisee was operating, and is limited to one year. and that the franchisor provides proof of his know-how.

In the absence of proof of genuine know-how, the non-reaffiliation clause will have no effect.

Obligation to provide distinctive signs

The franchisor is also obliged to allow the franchisee to use its brand, and therefore to make distinctive signs available to the franchisee: a sign, a patent, a trademark, etc.

The franchisor must guarantee the franchisee the peaceful enjoyment of the distinctive signs transmitted to him, but must also protect his trademark by, for example, bringing infringement actions in the event of fraudulent use.

Obligation to provide ongoing assistance to the franchisee

The franchisor is also obliged to assist the franchisee until the end of the contract.

Usually, the franchise agreement sets out the terms and conditions for fulfilling this obligation, which can take several forms:

  • Training in brand use;
  • Technical and commercial support (joint advertising campaigns, etc.) ;
  • Setting up shared services such as a central purchasing unit or a single website, etc.

 

3 – Penalties

Should the franchisor fail to comply with the above obligations, the franchisee may ask for the franchise agreement to be annulled if the breach has vitiated his consent, or for the agreement to be rescinded.

The franchisor may also be held liable in the event of damage.

If he is held liable, he will have to pay damages in the amount of the loss suffered by the franchisee.

***

To ensure the validity of a franchise agreement, it must be drawn up in compliance with the legal regulations imposed by the French Commercial Code, as well as the European Code of Ethics for Franchising, which above all lays down certain rules of “good conduct” between franchisors and franchisees.

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