The Need to Regulate Franchising in the EU Abuse, Sharp Practice and Failure

This is critical analysis towards the second objective of the thesis and seeks to show that it is necessary to regulate franchising in the EU.

The growth of franchising seems to have brought with it a degree of sharp practice, abuse and commercial failure that has lead the authorities in some member states to conclude that specific regulation was required.

and Sophie Pécriaux (all three members of Socialist Party Member of the Belgian House of

Representatives) proposed a draft Parliamentary Bill “Regulating Franchise Agreements with a View to Improving Commercial Practices in this Sector” (The Belgian House of Representatives, 17 March 2004 Doc 51 0924/001 Second sitting of 51st _{Parliament). The sponsors of the bill declared that franchisors offer} their franchises on a “take it or leave it “basis and that there is a clear imbalance between the rights and obligations of the respective parties. They therefore proposed that franchise agreements should be regulated as regards pre-contractual disclosure, the void effect of certain provisions, the franchisor’s right of pre- emption, the period of the franchise agreement and the manner in which it can be terminated (The Belgian House of Representatives, 17 March 2004 Doc 51 0924/001 Second sitting of 51st _{Parliament– Summary).} 298 _{A Swedish franchise law was first mooted in a public report in 1987. Statens offentliga utredningar} (SOU) 1987:17 “Franchising”. However it was another 19 years before it was adopted by the Swedish parliament. It was largely the result of the dogged determination of a particular MP who during that period was able to ensure that no less than 12 bills proposing a franchise law were presented to the parliament and several public reports made. The mandate of the 1987 public report was to survey the extent of franchising in Sweden, and describe and analyse the advantages and drawbacks of franchising. Against this background the report considered the need for and possible content of a specific law on franchising. The areas of law focused on in the resulting report, were labour law, contract law, competition law, intellectual property and consumer law. The report proposed a definition of franchising and took the view that franchise agreements are often characterized by being one-sided, and consequently include clauses which might be considered to be unfair. However the overall conclusion of the report was that franchise agreements should be subject to general law of contract rather than franchise specific regulations. Nevertheless, the report did suggest a mandatory notice period of one year upon termination of the agreement by the franchisor, save in the case where the grounds for termination were misrepresentation by the franchisee. The report suggested that in order to protect consumers franchisees and franchisors should be obliged to notify the public that their business was part of a franchise and that employees of franchisees should have the right to negotiate directly with the employer’s organisation to which the franchisor was connected. Following the

Government’s decision to dismiss the 1987 Report, a series of private member’s Bills were proposed by Mr Stig Gustafson, which called for a new government study on the need for legislation to protect the weak franchisees, were raised in Parliament between 1992 and 2003 (Lagutskottets (LU): 1992/93:LU2, 1998/99:LU7, 2000/01:LU17, 2001/02:LU12, 2002/03:LU4 and 2003/04:LU7). However, these private member’s Bills were all rejected by Parliament.

299 _{A coalition of the Liberals, Socialists and Greens}

300 _{Pascal Hollander, “Possible Legislative Developments: Is Belgium Doomed to Become a Hell for}

There are many examples of abuse, sharp practice and failure in franchising in EU member states. In the UK, in 2007 there was an uproar in the press301 _{about the Self Video 24} franchise. Fifteen of the thirty franchisees were forced to cease trading due to their poor financial performance caused by lack of any support from the Franchisor, whilst the franchisor itself made an alleged £2 million profit302. Labour MP Brian Donohoe raised the matter in Commons stating that it was “a myth” that investing in a franchise was safe303_{. The} collapse of the Pierre Victoire restaurant chain in 1998 was another example of a franchise chain going into receivership, leaving 104 franchisees in dire financial straits304_{. Likewise the} collapse of the Pentos Group Plc – franchisor of the Athena and Rymans retail brands305. In Germany there has also been a number of franchise failures. For example, Foto Quelle, a mail order business with more than 1,000 franchises failed due to poor management; the master franchisee of Hooters in Berlin, Bradenburg, North Rhine Westfalia and Hesse (Wings of Germany) was declared bankrupt in 2006. In 2007 Kindervilla (children’s nurseries) was declared bankrupt, resulting in criminal proceedings in 2009 due to 20 franchisees having lost around €150,000 each; and Zwo24, a dry cleaning business failed in 2004 due to over ambitious expansion. The restaurant Wienerwald failed three different times. In 1982 with 1,600 restaurants due to over aggressive expansion; in 2003 due to adverse market conditions and in 2007 due to insufficient capitalisation. It is currently being relaunched for a fourth time306_.

In France, Law n° 89-1008 of December 31, 1989 was adopted due to the proliferation of abuse, sharp practice and commercial failure in franchising. Franchisors such as the Letter Station (which embezzled funds from some sixty franchisees in 1985), took advantage of franchising’s growing popularity, whilst several legitimate franchise such as VO 9, Allo- Video, Dermo Vital, Climat de France, Plein Pot, La Taste, Relais Bleus, La Sweaterie and Sporteus307 _{failed. These incidents seriously damaged the public image of franchising and led} the authorities to consider regulating franchise agreements.

A similar record of abuse308 _{led to the adoption of the Spanish franchise law}309_{. It was a}

301 _{The Mirror – Penman and Sommerlad “Fleeced by 24 Self Video Franchise” September 13 2007} 302 _ibid

303 _{Hansard HC Vol 450 Col 1493 (24 October 2006)} 304 _{Scotland on Sunday 23 May 2010}

305 _{Franchise World Feb/March 1994}

306 _{Marzheuser-Wood, B, 2009 “Franchising in Germany”, EfN Conference (London)}

307 _{Celeya. M, 2007, “Good Faith & Franchising under French Law”, EfN Conference (Paris).} 308 _{A number of so-called “empty franchises” (fraudulent schemes to extract money from unsuspecting} individuals) SAP Valencia of 21 May 1993 (AC\1993\1024).

309 _{Act 7/1996, 15 January 1996 regarding Retail Commerce Planning (the “LRCP”), as later developed by} Royal Decree 2485/1998, 13 November 1998, as updated by Royal Decree 419/2006 of 7 April 2006 which came into effect on 17 May 2006.

record of abuse that also led to the regulation of franchising in Italy. Although there was no particular big scandal or case of abuse which made the headlines. Many small players on the market were granting “franchises” without having any significant formula, brand, trademark, know-how or business format for the franchisee and without providing the potential franchisee with the information necessary to take an informed decision about the advantages of joining the franchisor’s network310_.

The much publicised dispute over the Singer Sewing Machines company’s termination of its franchisees led to the suggestion that franchising be specifically regulated being raised in the Swedish Parliament for the first time in its 1982/83 session311.

Franchising is therefore subject to abuse, sharp practice and failure and so needs to be regulated.