Franchise ordered to compensate franchisor for lost fee income.

A recent ruling focused on the question of whether the franchisor had rightly dissolved the franchise agreement and whether the franchisee was therefore liable for the damage. The court ruled that the franchisor was indeed allowed to dissolve the agreement because the franchisee had violated its exploitation obligation. The loss suffered by the franchisor as a result of this dissolution must be compensated by the franchisee to the franchisor.

This issue was about the following.

An entrepreneur has been operating a maternity care business since 2012 as a sole proprietorship and employs or has employed approximately 12 to 22 maternity nurses who provide maternity care to women who have just given birth. At the beginning of January 2018, she decided to join the franchise organization of the franchisor. For this purpose, a private company is established: Da Da BV

Franchisor is a company that has developed a franchise formula in which, among other things, it provides administrative services to maternity care organizations and provides training and certification. Franchisor has contracts with all health insurers. Under these care contracts, care provided is reimbursed at 100% of the Nza rate (instead of the usual 70%). This benefit is enjoyed by franchisees against payment of a franchise fee to the franchisor.

The franchisor has dissolved the agreement extrajudicially by letter dated 27 September 2019, because it argues that the franchisee had not fulfilled its exploitation obligation.

For the benefit of the operation by Da Da BV, the activities and maternity staff of its sole proprietorship would be transferred to Da Da BV. However, the franchisee has not complied with this, which means that Da Da BV has, in the more than a year and a half that the agreement lasted (from 1 January 2018 to 27 September 2019) has never provided maternity care herself. Without the final contribution of the sole proprietorship, Da Da BV remained an empty company without independent activities. In fact, Da Da BV was only used as a billing vehicle to obtain a higher reimbursement from the health insurers through the franchisor for the maternity care provided by the sole proprietorship. This is not in line with the intention of the agreement, according to the franchisor.

Da Da BV’s exploitation obligation is apparent from the franchise agreement and means that it must provide maternity care itself, with its own staff, according to the franchisor’s formula. The franchise agreement contains a provision that shows that maternity care may only be offered through the branch of the franchisee and that this will only take place under the franchisee’s own management and responsibility. The franchisee must also have sufficient staff.

The court rules as follows.

It has been established that Da Da BV has never provided maternity care itself. This while Da Da BV was founded to provide maternity care as a franchisor’s franchise. It follows from what the maternity care entrepreneur himself said at the hearing that it was the intention that the sole proprietorship would be transferred to Da Da BV, with which the operation of the maternity care agency would therefore take place in the franchise BV. She acknowledged at the hearing that she had always intended to (ultimately) transfer the sole proprietorship to Da Da BV. According to the court, this could also be clearly deduced from conversation reports.

The court ruled that the franchisor had validly dissolved the franchise agreement and ordered the franchisee to compensate the damage, consisting of the lost fee income. If the contract had been served until the end of the term (December 31, 2022), the franchisor would have received a total of € 139,706 in franchise fee according to its undisputed calculation. However, the court assumes that the franchisor has also saved costs through the dissolution and therefore deducts 25% of costs from this amount. The court bases this on its own estimate, because these costs have not been substantiated.

Conclusion

In my view, a logical outcome of the matter, since there was clearly non-compliance with the obligations of the franchise agreement by the franchisee. It is remarkable that the franchisee has not questioned the amount of the lost fee. After all, there was a turnover-dependent fee and it is apparently assumed that this turnover would have remained the same up to and including the end of the agreement, and there may be a few things to criticize about that. On the other hand, it is also remarkable that the franchisor has not further substantiated the actual costs. As a result, whether consciously or not, the risk has been taken that the court will have to estimate the relevant costs and thus overestimate them. If that is the case, the franchisor will still have to appeal.