Martine de Koning*

Kennedy Van der Laan, Amsterdam

martine.de.koning@kvdl.com

In the Netherlands, historically there has been no statutory law on franchising. Franchising disputes relied on a wide range of case law and statutory contract law – intellectual property laws, competition laws and other civil laws.^[1] In 2019 and early 2020, steps were taken to adopt a franchise act in the Netherlands that aimed at protecting the rights of the franchisees. The Dutch Franchise Act went into effect 1 January 2021.^[2] This article provides an overview of the main topics covered by the new Franchise Act.

Introduction of definitions

The Franchise Act introduces definitions such as ‘franchisor,’ ‘franchisee,’ ‘franchise agreement’ and ‘franchise system.’ The definition of a franchise system is broad and comprises the operational, commercial and organisational system for the production or sale of goods or services that is determinant for the uniform identity and reputation of the franchise businesses in the network where this system is applied, including trademarks, intellectual property rights and know-how.^[3] It is relevant that the definition of franchise agreement includes a reference to the licensing by the franchisor of the franchise system to a franchisee for a (direct or indirect) monetary remuneration.^[4]

No carve-outs

There are no carve-outs or specific rules for specific types of franchise systems or franchisors or franchisees (for example, small or large franchisees or master franchisees). The Franchise Act contains ‘open norms’ which allow for the precise facts and circumstances of the case to be weighed in.

The concept of a ‘good franchisor’ and a ‘good franchisee’

The parties must behave as a good franchisor and a good franchisee respectively.^[5] This means that the parties must be ‘reasonable and fair towards each other’.^[6] It applies to the pre-contractual phase (for example, the selection of the candidate franchisee and the negotiation of the franchise agreement) as well as to the franchise relationship. What is expected and required from both parties will depend on the precise facts of the case, such as the type of franchise system, the industry and the size of the franchise chain.^[7]

Disclosure in the pre-contractual phase

The franchisee must be informed in a timely and specific manner about a number of subjects.^[8] The franchisor must provide all information that can reasonably be expected to be of importance for the franchisee in relation to entering into the franchise agreement, including the franchise agreement itself, the information regarding the required financial contributions and investments by the franchisee, the way and frequency in which parties consult each other, financial data regarding the franchise location that is to be operated by the franchisee, and the extent to which the franchisor, whether or not through a derived franchise system, may compete with the franchisee.^[9] The obligation to provide financial data does not require that the franchisor provide a forecast of turnover or profits at that location, merely that the franchisor shares historical financial data available to the franchisor regarding the location (or a comparable location pointing out why this location is comparable).

The franchisee’s obligation to investigate

The franchisee must, within the bounds of reasonableness and fairness, take the necessary precautions to avoid entering into the franchise agreement under the influence of misinterpretations.^[10] This means, for example, that the franchisee must properly study the information it received from the franchisor and, if necessary, timely consult expert support (for example, advice from lawyers, financial consultants, IT consultants or accountants).^[11]

Cooling off period

To prevent a prospective franchisee from agreeing to a franchise agreement, of which the content, obligations and risks cannot be properly reviewed, a period of four weeks applies between the time of receipt of all relevant information including a copy of the franchise agreement and the intended time of execution of the franchise agreement.^[12] During this period, the draft franchise agreement and agreements inextricably linked to it may not be changed to the detriment of the franchisee.^[13] The franchisor also may not require the prospective franchisee to make any investments or payments during this period.^[14]

Content of the franchise agreement

The act contains substantive regulations on the content of the franchise agreement.^[15] In principle, the franchisor has ongoing information disclosure obligations and must annually report on spending of contributions or fees paid by the franchisee to the franchisor for a specific purpose (for example, contributions to a marketing fund).^[16]

Technical and commercial support

The franchisor must provide the franchisee with the technical and commercial support that can reasonably be expected from it given the nature and scope of the franchise system.^[17]

Non-compete clause

The scope of non-compete clauses shall be limited to one year after the end of the franchise agreement and to the geographic area within which the franchisee was allowed to operate a business under the licensed franchise concept.^[18]

Goodwill

The franchise agreement must include a provision indicating if any goodwill is accrued in the franchise business of the franchisee and, if so, what its value is and whether any such goodwill is attributable to the franchisor. The franchise agreement must stipulate to what extent the franchisor will compensate the franchisee for accrued goodwill that is reasonably attributed to the franchisee^[19] in case the franchisor takes over the franchise business after termination of the franchise agreement.^[20] It does not matter whether the franchisor acquires the franchisee’s business to operate it, or if the franchisor assigns it after the acquisition to a new franchisee with whom the franchisor concludes a franchise agreement.

Consent to franchise system changes

The Franchise Act aims to restrict the use of clauses in the franchise agreement that allow the franchisor to make unilateral changes to the franchise system or agreement.^[21] To this end, the Franchise Act states that the franchisor requires the prior consent of a majority of the franchisees established in the Netherlands, or each of the franchisees that are established in the Netherlands that are affected by the change, in order to make changes to the franchise system or to exploit directly (or via third parties) a ‘derived franchise system’.^[22] This consent requirement applies if: (1) the franchisor requires investments from the franchisee in connection with the proposed changes; (2) the amendment of the franchise agreement involves an obligation to pay, reimburse, or other financial contribution to the detriment of the franchisee; or (3) the franchisor requires the franchisee to bear other types of costs, or if it can reasonably be expected that the intended change will lead to a loss of turnover of the business of the franchisee.^[23] The franchise agreement may contain a threshold, below which there is no need for prior consent, but the threshold may not be set too high.^[24]

Mandatory law

Franchise agreements cannot deviate from the provisions in the Franchise Act to the detriment of any franchisee that is established in the Netherlands, regardless of the law that governs the franchise agreement.^[25] However, deviation by contract from the Franchise Act is enforceable against franchisees established outside the Netherlands, even when Dutch law is applicable to the franchise agreement.^[26] Foreign franchisors, therefore, must amend their franchise agreements with franchisees that are established in the Netherlands to ensure compliance with the overriding mandatory provisions of the Franchise Act. Franchisors that include a choice for Dutch law in their cross-border agreements, are advised to exclude the applicability of the Dutch Franchise Act in their agreements with franchisees established outside the Netherlands.

Consequences of a violation of the Franchise Act

Clauses that violate the rules on goodwill and non-compete clauses are null and void (for example, these clauses are deemed to have never existed). For all other violations of the act, the franchisee has a right of nullification, which in fact requires an action by the franchisee.

Transition

Franchise agreements executed after 1 January 2021 must comply with the requirements in the Franchise Act. For agreements that were executed before the act’s effective date, there is a limited transition period for compliance with Articles 920 and 921 only, the statutory provisions on goodwill, non-compete and prior consent. In such cases, the transition period is two years, unless the agreement expires or is terminated earlier, in which case the transition period ends on the end date of the agreement.