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 .
Other messages
How do I keep my location? – June 6, 2019 – mr. K. Bastian
Location is of great importance to franchisors and franchisees, especially in the retail sector.
Supermarket letter – 25
Supermarket Newsletter No. 25
The benchmark for franchise forecasts – dated 29 May 2019 – mr. AW Dolphin
On 19 March 2019, the Den Bosch Court of Appeal, ECLI:NL:GHSHE:2019:1037, listed the case law of the Supreme Court on prognosis in franchising.
Franchise arbitration: too high a threshold? – mr. M. Munnik
When entering into an agreement, it is possible for the parties - contrary to the law - to designate a competent court. This also applies to the franchise agreement. Of this possibility
Franchise appeal for error due to incorrect forecasts and lack of support rejected – dated April 25, 2019 – mr. K. Bastian
The Court of Appeal of 's-Hertogenbosch ruled (ECLI:NL:GHSHE:2019:697) on the question whether the mere fact that forecasts did not materialize justifies the conclusion that the franchisee has been shortchanged...
Article De Nationale Franchise Gids: “Increasing protection against recruiting franchisees” – dated 2 April 2019 – mr. AW Dolphin
It is becoming increasingly apparent that recruited franchisees can be protected on the basis of the Acquisition Fraud Act.