Infringement of exclusive service area by franchisor in connection with formula change dated February 27, 2017

On 30 January 2017, the interim relief judge of the District Court of Noord-Holland, ECLI:NL:RBNHO:2017:688 (Intertoys/franchisee), was asked how to deal with the franchisee’s exclusive service area in the event of a formula change. 

Infringement of the exclusive service area 

A branch of the comparable Bart Smit formula was located within the exclusive service area that the franchisor had assigned to the franchisee. Both the Intertoys formula and the Bart Smit formula belong to the same franchising group. The branch with the Bart Smit formula would carry the Intertoys formula. The franchisee of the existing Intertoys branch protested against this, now that it had been agreed that the franchisee would have the exclusive right to operate the formula in the catchment area concerned. 

Article 10 paragraph 2 of the franchise agreement requires the franchisee’s permission to allow third parties to use the Intertoys system within the franchisee’s exclusive service area, or to allow the franchisee to compete in this area in some other way. In the opinion of the preliminary relief judge, this also includes the conversion of a Bart Smit store located within it into an Intertoys store. 

The preliminary relief judge rules that, in the context of the right to fulfillment of the franchise agreement, Intertoys can, in principle, be required not to perform any acts that are in conflict with the exclusivity clause. The main reason for this is that the right of the franchisee has economic value. The value of the franchise agreement is pre-eminently determined by the exclusivity clause, which thus constitutes one of the core provisions – if not the core provision – of the franchise agreement. 

Formula change 

The defense put forward is that there is a need to replace the Bart Smit formula with the Intertoys formula in order to create a single viable toy store formula and that this serves the purpose of commercially combining the strengths of the two formulas. However, this is insufficient to legitimize violation of Article 10 paragraph 2 of the franchise agreement, according to the preliminary relief judge. However, a commercial necessity of this restructuring – if sufficiently demonstrated – could mean that a franchisee cannot, according to standards of reasonableness and fairness, withhold permission for such an infringement. 

It is therefore conceivable that reasonableness and fairness in a franchise relationship entail that a franchisee conforms to the course and results of a collective process of consultation and decision-making by/with all franchisees involved, set up by the franchisor. However, this requires that the process is also conducted collectively from the outset and is properly structured, in other words that a compensation policy is established in consultation with a representative of the collective of franchisees in which the voice of the affected franchisees weighs heavily. Transparency should be the starting point here; a fait accompli policy should be avoided. The preliminary relief judge is of the opinion that the process followed in this case does not meet these conditions. In the preliminary opinion, therefore, there was no question of an exception to the main rule of respect for the exclusive catchment area.

Formula changes remain thorny issues in which due diligence is of paramount importance. 

mr. AW Dolphijn – Franchise lawyer 

Ludwig & Van Dam Franchise attorneys, franchise legal advice. 

Do you want to respond? Go to dolphijn@ludwigvandam.nl .