European Union: Which EU Jurisdictions Most Heavily Regulate Franchising?

Franchising in the EU is regulated by franchise specific laws in eight member states in a totally heterogeneous manner. The remaining 19 member states regulate franchising by the application of general law, again with little homogeneity. Unexpectedly, it is some of the member states without franchise specific legislation that most heavily regulate franchising. Those member states with Germanic legal traditions treat franchisees as quasi employees, quasi consumers and commercial agents. This article uses objective data - Franchise Regulation Evaluation Data ("FRED") - collected by the author, in a comparative manner, to identify which EU member states most heavily regulate franchising. It also bench marks regulation in the 27 EU member states against that in the USA and Australia.

Weight of regulation

In order to enable one to assess which member state most heavily regulates franchising in as objective a manner as is reasonably possible, each element of regulation has been identified and allotted a weighting based upon its potential impact on franchising. The resulting Franchise Regulation Evaluation Data cannot pretend to produce an unarguable, totally objective and definitive assessment of the level of franchise regulation in the EU member states. The allotment of weighting inevitably reflects the author's judgment as to the relative importance/impact of each element of regulation. However, it does enable one to compare the relative levels of regulation in a "big picture" manner, which in turn helps one understand the overall impact of the various approaches to the regulation of franchising in the EU.

Clearly, weight of regulation does not necessarily equate to effectiveness or appropriateness of regulation. Indeed the most heavily regulated member state is not, in the author's view the best regulated one.

The FRED Methodology

Every way in which franchising can be regulated has been identified. Each such element has been awarded a value based upon the impact that it potentially has upon franchising.

1. Pre-contractual duty to disclose information

Those countries which have franchise specific disclosure laws have been awarded points for each individual disclosure item they require. The list of disclosure items has been compiled by reference to the disclosure requirements in the USA under the FTC Rule and in Australia under the Australian Franchising Code of Conduct. Those disclosure items which franchisors can easily comply with such as the basic details of the franchisor or the business experience of its directors and managers have been given a value of one. More onerous requirements, such as the provision of details about the target market have been given a higher value depending on how difficult it is for a franchisor to comply with them.

Countries which do not have a specific pre-contractual disclosure law mostly have a general legal duty based upon the doctrine of misrepresentation and the concept of good faith. As a rigorous application of the doctrine of good faith can be at least as arduous as a full franchise specific disclosure requirement, it has been awarded a score equivalent to a full pre contractual disclosure law (60 points). Although the duty to make pre-contractual disclosure which is based on good faith usually applies to both parties, i.e. franchisor and franchisee, in reality it will only be the franchisor who will be required to make disclosure to a potential franchisee.

2. Mandatory pre-contractual cooling-off period

Countries with franchise specific legislation stipulate exact time frames when disclosure has to be made before entering into a franchise agreement. Although it is not very difficult for franchisors to comply with this requirement, from a procedural point of view compliance with this requirement will slow down the process of selling franchises considerably. For that reason it has been allotted a value of five points.

In Austria, Germany and the UK under certain conditions, franchisees have a right of revocation. Although this pre-contractual cooling off period will not apply to all franchisees and in all circumstances, it is an important feature of these jurisdictions and has therefore been included in the FRED.

3. Registration

Some countries require franchisors to register with governmental authorities and to update their records on a continuing basis. Compliance with this requirement can be both costly and burdensome. It has therefore been allocated a value of ten.

4. Other regulations applicable to franchising

Other items which have been identified in the above chapters and included in the FRED are:

1. franchisor's liability for the franchisee's actions;
2. obligation to have a piloted business before starting to sell franchises;
3. right of action for misrepresentation;
4. statutory protection of the franchisor's confidential information;
5. specific prohibition of unduly burdensome terms;
6. general duty of good faith which influences the ongoing franchise relationship;
7. franchise specific duty of good faith;
8. prohibition of post termination non-compete restrictions;
9. prohibition of excessive post term restrictions;
10. obligation to pay goodwill compensation to a franchisee upon termination.

With the exception of (f), (g), (i) and (j) all elements have been given a value of ten.

The duty of good faith has been awarded a maximum value of thirty, depending on how strongly it influences the ongoing relationship between the parties. Countries which follow the restrictive as well as the adaptive approach have been awarded full points, whereas countries which merely follow the restrictive approach have only been awarded fifteen points.

The total prohibition of post-termination non-compete restrictions has been awarded a value of ten. However, all jurisdictions require such restrictions to be reasonable. The reasonable prohibition of excessive post-term restrictive covenants has been awarded a value of five.

The most onerous (and inappropriate in the author's view) obligation imposed on franchisors, is paying franchisees compensation for the goodwill that the franchisee acquired for the franchisor during the term on termination. The calculation of the amount of compensation differs from country to country, but can be substantial. This requirement to pay compensation is based on an analogy with agency law and represents a substantial financial burden to the franchisor. It has therefore been valued at fifty.

Applying this methodology results in each country having an aggregate FRED score.

Observations from the FRED scores

The USA has a FRED Score of 118 and Australia one of 127 which places the two jurisdictions with the most complete franchise regulations in the middle of three distinct bands.

The top band of most heavily regulated EU member states, with scores of 170-160, are Austria (170), Germany (170), Portugal (165) and Greece (160). The influence of German law, particularly its interpretation of the duty of good faith, consumer law and commercial agency is very apparent and accounts for the high scores.

The mid tier band, with scores of between 130 and 105 include three member states with franchise specific regulations, Lithuania (130), Spain (124), and Estonia (105).

The lower tier with scores of between 90 and 15, includes 5 member states with franchise regulations. Italy (90), Belgium (90), Sweden (60), France (57) and Romania (53).

Conclusion

The research clearly suggest that the greatest regulatory burden is placed upon franchising by those EU member states that do not have franchise specific laws but instead adopt the Germanic approach of imposing a heavy duty of good faith on franchisors and treating franchisees as quasi employees, quasi consumers and commercial agents.

They place a heavier burden upon franchising than the two non-EU countries that are commonly acknowledged to have the most highly developed franchise specific regulatory systems in the world, the USA and Australia.

The most franchisor friendly EU members states would appear to be the common law jurisdictions of the EU, Ireland and Cyprus and, surprisingly, five of the eight member states that have franchise specific laws (Italy, Belgium, Sweden, France and Romania).

ANNEX – Franchise Regulatory Evaluation Data

(The highest score signifies the heavy regulatory burden imposed upon franchising).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.