Last week Italy became the latest nation to adopt a law regulating the sale of franchises and the conduct of franchisors and franchisees. Two other European countries, France and Spain, already have such laws.
The Italian law is principally a form of disclosure legislation, but with some provisions that would normally appear in a "relationship" law. It imposes obligations upon franchisees as well as franchisors and affects pre-contractual conduct as well as the fundamental elements of the relationship.
The law had been debated within the Italian parliament for more than a year, and the version which was finally adopted underwent significant change during the course of debate and negotiation. Those changes brought substantial improvements to international franchisors considering entering the Italian market. But the law as adopted retains a number of troublesome or problematic provisions which will likely prompt franchisors to give careful consideration to the nature of the burdens imposed upon them. The Franchise and Distribution practice group of Piper Rudnick LLP will shortly prepare a more detailed examination of the new law. In the interim, this summary is designed to alert our clients and colleagues to some of the more salient features of the legislation. –
Changes Beneficial to International Companies
As originally proposed, the Italian legislation would have prevented a non-European franchisor from entering Europe via franchising in Italy. Any franchisor planning to do so would have been required first to test its system in another European Union country for a minimum period of time, with a minimum number of units, a portion of which to be operated by "pilot franchisees." Franchisors from the United States and from other European countries joined those from Italy in arguing to legislators that the proposal was manifestly unworkable; that it was treating other EU markets like guinea pigs; and that it barred Italian consumers from access to the products and services of well-known non-European franchisors. That proposal has been dropped in the version as adopted.
The original provisions called for the franchisor to provide "a business plan forecast-based, if possible, on the experience of franchisees in a similar position." Since few non-Italian franchisors would be willing to "forecast" the experience in Italy based on the experience of franchisees "in a similar position" elsewhere, this requirement would have caused many franchisors to hesitate before entering the country. That provision has been removed.
Among the required disclosures by a franchisor to a prospective franchisee are a list of franchisees currently operating; information on franchisees who have left the system; and information on judicial or arbitral proceedings initiated against the franchisor both by franchisees and other private parties, or by public authorities. Fortunately, however, the drafters have recognized that this information is far more difficult to provide and, in the case of non-Italian franchisors, of more attenuated relevance. As a consequence, the franchisor is permitted to limit the disclosed information to its activities in the Italian market. Within ninety days, a regulation will be issued outlining the information to be required in the case of franchisors based elsewhere who have not previously operated in Italy. This level of sensitivity to the different position in which non-Italian franchisors find themselves reflects a greater sophistication and appreciation of the realities of international franchising than was demonstrated in the earlier debates on the legislation.
Aspects of the Italian Franchise Law
A principal provision of the new law is a requirement of pre-contractual disclosure to prospective franchisees. The elements of disclosure are rather typical and represent a selection of the more fundamental information required by traditional U.S. disclosure laws. That list is considerably more limited than in the United States.
A second element of the law is a set of requirements as to provisions of the agreement itself. In fact, however, these are largely of a "disclosure" nature themselves. In other words, the requirement is simply that certain elements of the relationship be explicitly articulated in writing. Thus, the agreement must express the "terms and conditions for renewal, termination or assignment, if any." Few of these provisions will trouble experienced franchisors.
The Law Also Raises Serious Questions for Franchisors
In a number of respects, however, the new law raises questions and issues for franchisors. Among them:
- There is a strong suggestion that it will be necessary for a franchisor to acknowledge that at least some portion of the "know-how" has been contributed by the franchisee, perhaps presaging an obligation to accord to the franchisee certain rights of ownership of that intellectual property.
- The franchisor must "guarantee the franchisee a minimum term which would allow the amortization of the investment," but which in no event is less than three years. The notion that there could be a much longer term required, and the ominous ring of the term "guarantee," will be offensive to many franchisors.
- There are several passages in the law which impose obligations (on franchisees as well as franchisors) of a rather vague nature; for example, the franchisor "must behave toward the prospective franchisee according to the standards of loyalty, fairness and good faith."
- The information which must be provided is not limited to that which is explicitly detailed in the statute. The franchisor is required, in addition, to provide the prospective franchisee with "any data and information... necessary or useful." The open-ended nature of obligations of this sort will surely be vexing to many companies considering entering the marketplace.
The Law Applies Now
The statute will apply, immediately upon publication in the Official Gazette, to all new contracts. Contracts already in force must be made compliant with the statute within one year (although much of the statute would appear to be inapplicable to existing agreements, since directed at pre-contractual conduct).
Italy has created a major new law for a major marketplace. There is much here for international franchisors and their lawyers to study, and one can expect a stream of commentary to come.
Note: Our firm wishes to express its appreciation for the translations of the new law which we have received from the Milan office of DLA; Frignani e Association Studio Legal; the European Franchise Federation; and the U.S. Commercial Service, Italy. We expect to be in further consultation with these and other sources of information; and, as noted, will shortly prepare a more detailed examination of the new statute.
This article is intended to provide information on recent legal developments. It should not be construed as legal advice or legal opinion on specific facts. Pursuant to applicable Rules of Professional Conduct, it may constitute advertising.
