Accountability for franchise, marketing and IT fees

A ruling from the Midden-Nederland court of October 18, 2023 was recently published, ECLI:NL:RBMNE:2023:7737. The franchisee was required to pay various types of fees to the franchisor under the franchise agreement. Does the franchisor have to justify which costs are covered by this?

The franchisee has left invoices for fees unpaid, partly because the franchisor allegedly failed in its obligation to provide information. The franchisor claims payment of those invoices from the court.

It follows from the franchise agreement that the franchisee owes the franchisor three fees:

1) a fee of 5% of the turnover achieved for the granted right to exploit the formula (hereinafter: the franchise fee);

2) a fee of 2.5% of the realized turnover for collective advertising, marketing and promotional activities (hereinafter: the advertising fee) and;

3) a fee of 1% of the realized turnover for the automation (hereinafter: the IT fee);

The court rules that the Franchise Act has an information obligation on the basis of which the franchisor annually informs the franchisee to what extent the surcharges or other financial contributions – which the franchisee has made in the previous financial year in accordance with the franchisor’s requirement – cover the costs or investments that the franchisor intends or has intended to cover with these contributions. See article 7:916 paragraph 2 of the Dutch Civil Code. If there is an information obligation for the franchisor regarding payment obligations, but this is not fulfilled by the franchisor, then the court finds that the franchisee is not bound by those payment obligations. The court checks the payment obligations.

Ad 1) With regard to the franchise fee, the franchiser has no obligation to provide information, so the franchisee owes this fee. This is also indicated in legislative history. See House of Representatives, session year 2019–2020, 35 392, no. 6, p 36. It says the following:

“Article 7:916, second paragraph, of the Dutch Civil Code obliges the franchisor to account for the expenditure of certain financial contributions that it has requested from the franchisees, separately from the franchise fee, to cover certain costs or make investments for the benefit of the franchisee. franchise chain.”

Ad 2) With regard to the advertising fee, the franchisor stated at the hearing that it had engaged a professional advertising agency. However, the franchisor has not substantiated what costs were associated with this and what other advertising activities it had done.

Ad 3) The franchisor has also not provided insight into the costs with regard to the IT fee.

The franchise fee is not subject to accountability by the franchisor and is therefore due in this case. With regard to the advertising fee and IT fee, the franchisor may be expected to provide the necessary information. After all, these fees relate to actual costs incurred. Now that the franchisor has not fulfilled the information obligation, the franchisee does not owe the advertising fee and IT fee.

The foregoing shows that it is important which denominator the franchisor gives to a specific compensation. The question is what the judgment in this matter would have been if the franchisor had asked for one (undifferentiated) fee of (5% + 2.5% + 1% =) 8.5% as a franchise fee, with the same collective advertising and automation would have been delivered to the franchisee.