In many franchise formulas, especially in retail, the franchisor also acts as a wholesaler and the franchisee has the obligation to purchase (largely) his goods from the franchisor. On the one hand, this serves to guarantee the quality and uniqueness of the products and, on the other hand, an additional source of income is created by calculating the chain margin. For some time now, there has been a discussion among various franchise formulas about charging this chain margin. This often focuses on the objection that the franchisor earns on its wholesale function, while this is at the expense of the margin to be passed on to the consumer by the franchisees.
On 9 September 2019, the District Court of the Northern Netherlands issued an interesting ruling on this discussion in a dispute between retail chain Op=Op and a collective of franchisees. The collective accused the franchisor of making money on the supply of goods to the franchisees and of charging overpriced, non-market prices to its franchisees. The decisive factor for this would be that the franchisees are cheaper if they buy their goods elsewhere themselves. The franchisor disputes this and argues that it always supplies and has supplied in line with the market, as evidenced by the comparison with other suppliers and various statements by suppliers, that the franchisor always receives the highest discounts. In this context, regular deliveries should not be confused with the (incidental) purchase of batches, for which lower prices can be negotiated.
The court follows this position. Franchisees have not sufficiently substantiated that the franchisor has not charged market prices to the franchisees.
Franchisees should, given the substantiated dispute of the franchisor, have substantiated the fact that other suppliers continuously use a lower price than the franchisor. The mere fact that other suppliers had cheaper prices at different times (and usually for a limited number of products) is not sufficient for this.
With regard to the accusation that the franchisor charges surcharges on the goods supplied to franchisees, the court considers that the franchise agreement does not contain an obligation that obliges the franchisor to deliver the goods at the same price as for which it purchased them itself. The fact is and remains in this context that the parties have explicitly agreed that every supplier, including the franchisor, must deliver at competitive prices. The court concludes that, as long as the franchisor supplies at market prices, it does not fall short by applying surcharges. Incidentally, it should be concluded from this that this would be different if the use of surcharges on the goods would lead to excessively high prices that are not in line with the market. It appears from the above that this is not the case, or at least that the franchisees have not succeeded in their proof assignment in this regard.
An interesting detail is that in the judgment the court expresses its opinion on the manner in which franchisees have litigated. With the remarks “although plaintiffs have been very broad” and “because of the unbridled position”, the court hints that it believes that franchisees have blown quite high things, which has not been appreciated by the court. Moreover, both the remarks and the judgment of the court show that it does not pay to take wild, unsubstantiated positions, but that it is advisable to limit oneself, well motivated and substantiated, to the main point.
Incidentally, the various media (including Het Financieele Dagblad, 1 September 2015) have shown that this group of franchisees has also filed a criminal report against the franchisor. Given the outcome of the civil procedure, it is questionable whether it still has any chance of success, as questions may be cast on the basis of the declaration. In any case, it does not exactly benefit the relationship between the franchisor and the franchisees.
mr. D. Uijlenbroek – Franchise lawyer
Ludwig & Van Dam Franchise attorneys, franchise legal advice.
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