Court prohibits franchisor from rolling out alternative franchise formula

Recently, the president of the District Court of Arnhem ruled in an extremely important judgment in a dispute between a franchisor and its franchisees, representing 388 shops together. In addition to a franchise agreement, a further cooperation agreement has been concluded between the parties, which stipulates, among other things, that if the franchisor wants to offer new services, it will consult and decide on this with the franchisees. In addition, the franchisor can only make substantial changes to the policy or change the content of the franchise agreement with the consent of the franchisees’ association. The use of the formula name is also only permitted jointly.

There have been frequent consultations between the parties regarding a new franchise formula. Despite this consultation, no agreement has been reached between the franchisor and the franchisees’ association. Over time, however, the franchisor has begun to roll out the formula. However, this roll-out does not take place directly from the private company of the franchisor, but from another BV, which is part of the same group structure. Subsequently, the association of franchisees filed for interim measures to prohibit the roll-out of the alternative franchise formula of various BVs within the same conglomerate. In doing so, it argues that the franchisor violates its duty of care by violating the agreed exclusivity, as described above, thereby acting unlawfully and furthermore violating its obligation as franchisor to openness and transparency.

The president of the court awards the claim to the collective of franchisees after detailed reasons, considering that the further cooperation agreement concluded by the association of franchisees and the franchisor is not even of decisive importance. The fact that the group was aware of the exclusivity agreements that applied with regard to the possibilities of changing the franchise formula, or at least that it could have been, is already decisive: “In any case, it must be assumed that the franchisor has benefited from the default of eg X”. The entire conglomerate thus acted contrary to the agreement existing between the parties. The franchisor is then sentenced to an injunction, with a penalty of € 100,000 and € 10,000 for each day that the roll-out continues.

It is rare for a franchisee’s association to actually take its franchisor to court. In this case, however, that was realistic and understandably, the court therefore ruled that the franchisor cannot bypass the franchisees when rolling out an alternative formula. This therefore also applies if that franchisor tries to do so through another BV. This is even worse. The same can be argued for structural changes to the franchise formula and/or franchise agreement. Here too, careful consultation alone is not enough. In accordance with its duty of care, a franchisor must not directly or indirectly bring about a formula change that could knowingly and willfully disadvantage the franchisees. Through this unlawful act, it violates its duty of care and harms the balance that characterizes the franchise relationship. All that remains for the franchisor is a huge divestment. Incidentally, this is not the first practical example in which the franchisees have monitored the balance of the franchise agreement and the quality of the franchise relationship, where this would have been primarily the responsibility of the franchisor, thereby preventing major damage for many franchisees.

Remarkably enough, the franchisor does not assume equality of parties, but in this case goes like an elephant through the proverbial china shop.

Ludwig & Van Dam franchise attorneys, franchise legal advice

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