Commercial and Corporate description Article
A franchise agreement is a contract between companies (the franchisor and the franchisee) with the objective of creating a uniform distribution network with limited investment. The franchise contract is mainly regulated in the Royal Decree 201/2010 regarding the commercial activity of franchising and data communication on the Spanish Registry of Franchisors, and article 62 of the Retail Commerce Regulation Act 7/1996 of the January 15th.
I. Franchise precontractual disclosure
It is not necessary to record the contract in writing, but Spanish legislation establishes certain standards of pre-contractual disclosure, obliging the franchisor to a duty of transparency. Therefore, the franchisor should provide this information to the franchisee at least 20 working days prior to the signing of the franchise contract, or to any other preliminary agreement, or payment, from the potential franchisee.
The information provided is necessary for the franchisee to decide freely about its integration in the franchise network. This precontractual disclosure is essential for the formation of the free consent required for the perfection of the franchise contract. The franchisor is obliged by Spanish law to supply at least the following information:
- Identification data of the franchisor, including the name, information of the registration in the registry of franchisors, description of the share capital in the last company balance, etc.
- Provide evidence of the ownership or licensing agreements (including its duration) on the trademarks used by the franchise, including any information regarding claims against the aforementioned ownership or use of the trademark.
- A general description of the business sector of activity of the franchise.
- The experience of the franchisor, including the date of creation of the franchise, its main evolution stages, and the development of the franchise network.
- Content and characteristics of the franchise, including a general overview of the business, and explanation of its know-how and the commercial and technical assistance provided by the franchisor. The franchisor should inform the franchisee of the estimated expenses and investment for the set-up of a standard establishment. If the franchisor delivers to the potential franchisee forecasts of sales figures or business operating results, there must be based on experiences or studies that are sufficiently substantiated.
- Structure and extension of the franchise network in Spain, including a description of the organization, and the number of establishments in Spain, distinguishing those operated directly by the franchisor from those that operate under the franchise transfer regime, with indication of their location, and the number of franchisees that have ceased to belong to the network in Spain in the last two years (including the cause of termination).
- Essential elements of the franchise agreement, including the rights and duties of each party, duration of the contract, termination and renewal clauses, economic terms and conditions, exclusivity clauses, and any limitations imposed on the franchisee for the development of the business.
II. Main clauses of a franchise agreement
Franchise agreements are atypical contracts ruled by the principle of contractual freedom of the parties. Franchisor and franchisee can establish the terms and conditions they agree as long as they are not contrary to Spanish legislation, public order or morals.
The franchise contract is a commercial agreement where the franchisor transfer rights for the marketing of products and/or services in exchange of a payment by the franchisee. The rights transferred by the franchisor should include at least one of the following:
- The use of a common commercial name, or other intellectual property rights and a uniform presentation of the premises or means of transport.
- Communication of technical knowledge or know-how, which must be owned by the franchisor, substantial and unique.
- Provision of commercial and technical assistance throughout the duration of the agreement.
a) Intellectual property and know-how
It is essential to detail the trademarks, copyright, know-how and corporate image of the franchise business model, which are subject to assignment in the franchise agreement. In the event of a conflict between the parties the franchisor should be able to provide evidence to determine the content of the protected intellectual property and know how (Judgment 7/2014 of the Provincial Court of Madrid of January 10th).
Trademark rights in Spain are acquired through registration with the Spanish trademarks and patents organization (OEPM) for Spanish trademarks, or the European Union Intellectual Property Office (EUIPO) for the European Union trademark (EUTM). The Spanish trademarks Act 17/2001 envisages the civil and criminal actions to enforce trademark rights, such as injunctive relief, actions seeking cessation, removal of effects, or compensation for damages. Spanish legislation also grants protection to unregistered trademarks. The know-how of the franchise can be protected as well, as a trade and industrial secret of the franchisor. The Spanish Unfair Competition Act 3/1991 of January 10th 1991 provides remedies against an unauthorised disclosure of the know-how of the franchisor. It is also possible to protect their materials, softwares and websites through the Copyright Spanish Act.
In the event of termination of the contract, the franchise contract usually imposes the devolution of all the materials and furniture containing the intellectual property and know-how of the franchisor and prohibits for the franchisee to take advantage of the know-how to replicate the business outside of the franchise network. Moreover, the Spanish Supreme Court has considered this behaviour by the franchisee as unfair competition, in its judgment 754/2005 of October 21st 2005.
b) Franchisor control and economic compensation
Although the parties are legally and economically independent, a franchise agreement normally establishes management control system to try to protect the goodwill and brands of the franchise, and to ensure the quality of the services and products provided by all the members of the franchise network.
The franchise agreement establishes a contractual relationship between the parties, characterized by the control and surveillance by the franchisor over the franchisee during the duration of the contract.
The franchise contract normally imposes constraints to the franchisee to comply with the business model of the franchise and allow the franchisor to control the compliance with the instructions and guidelines provided in the franchise manuals and regulations. It is common that franchises contracts establish the right of the franchisor to carry out inspections and visit the premises of the franchisee to verify the business standards and the uniformity of the franchise network. The infringement of this right of inspection would empower the franchisor to the termination of the contract (Judgment 437/2012 of the Provincial Court of Madrid, of September 4th).
Most franchise agreements calculate part of remuneration of the franchisor as a percentage on the sales, revenue, or profits of the franchisee, as an objective manner to evaluate its real benefits. Accordingly, it is usually established a right of information for the franchisor and the right to access and review the franchisee´s accounting documents, to verify the reality of the business results.
As for technical and commercial assistance, it requires a continuous communication between the franchisor and the franchisee. It is highly recommended for the franchisor to maintain evidence of the effective provision of such assistance, and to delimit the assistance that is included within the franchise, distinguishing it from any additional services that are provided in a free market. The judgment of the Supreme Court 164/1997 of March 4th accepts the right of the franchisee to terminate the agreement in case of an infringement of the obligations of commercial assistance and training.
Finally, regarding prices, the franchisor cannot impose minimum sales prices on the franchisees, but it can recommend them and impose maximum prices. Exceptionally it is possible to impose fixed resale prices by the franchisor for specific and limited campaigns to launch new products.
c) Exclusive rights and non-competition
The supply circuit must be specified in the contract, whether it concerns products or services, as well as whether the supply is ensured by the franchisor, by some referenced suppliers or by a purchasing or reference centre.
The exclusivity of the supply of products covered with the franchisor may be total or partial and should be justified. Spanish Regulation for the Defense of Competition (Royal Decree 261/2008) and the EU block exemptions Regulations provide for certain exemptions to the generic prohibition of agreements and concerted practices contained in the EU Treaties and Spanish legislation. The exclusivity and non-competition clauses of a franchise contract may benefit from the exemption of the general prohibition when they fulfill the conditions established in those regulations.
If a clause is not covered by these de minimis regulations it only means that the exemption does not apply, but it will be necessary to examine whether, in the specific case, the clause is proportionate and justified to protect the legitimate interests of the parties, and that it does not produce a restrictive effect on competition which is not sufficiently compensated by the benefits this clause generates for the efficiency of the contract and the market in general.
It is for example prohibited to restrict cross-supplies between franchisees with services and products from the network. An exclusive supply clause that exceeds 5 years, when the products, which the franchisee must necessarily buy exclusively, represent more than 80% of its total purchases, may also violate the non-competition regulations applicable in Spain, and be considered void.
A non-competition clause is valid, lawful, and enforceable in Spain. However, the Regulation (EU) No 330/2010 for the application of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices establishes certain requirements for this type of restrictive covenants.
The EU Regulation exempts from the prohibition of article 101.1 TFEU the non-competition clauses included in a franchise contract imposed on the franchisee that prohibit him from developing competitive activities with those of the franchise during the duration of the contract, when it is necessary to maintain the common identity and reputation of the franchised network; and also in the same premises where the franchised establishment was located and that do not extend beyond one year from the termination of the franchise agreement.
Non-competition clauses regarding passive sales outside the exclusive territory are not admitted. This means that the franchisee can sell products over the Internet even when the acquirer is outside its exclusive territory, provided that the franchisor is only fulfilling a request made by the client without the franchisee having been actively involved in promoting that request through emails, visits, or advertising campaigns outside the exclusive territory, etc.
d) Right of first refusal and pre-emptive rights
The franchisor is normally interested in controlling the transfer of the business or of the shares of the franchisee Company, given the intuitu personae and collaborative nature of this kind of agreements. Franchise agreements usually include the need to obtain the prior consent by the franchisor for the sale of the business, rights of first refusal and pre-emptive rights. These legal figures limit the freedom of sale of the franchisee to allow the franchisor to control who enters the franchise network and maintain the standards of quality and uniformity necessary to protect the goodwill of the business.
In the event of a closure of the franchisee establishment, the franchise contract and the rental contract of the premises usually include a right of assignment of the rental contract to the franchisor. This is particularly relevant in the case of iconic or relevant locations, that the franchisor is particularly interested to maintain as part of the image of the franchise.
III. No need of Registration in a Franchisor Registry
Royal Decree 201/2010 established a Franchisor Registry dependant of the Spanish General Directorate of Commercial Policy of the Ministry of Industry, Tourism and Trade. However Royal Decree-Law 20/2018, of December 7th, on urgent measures to boost economic competitiveness in the industry and commerce sector in Spain, eliminates the obligation to register in the Spanish Franchisor Registry within three months after the date of commencement of the activity. The new legislation also suppresses the sanctions to the franchisors for their lack of registration as well as the obligation to update any changes in the circumstances of the information registered and report the information regarding the closures or openings of their own or franchised establishments produced in the previous year.
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