Russian Federation: Risks Connected To Antitrust Terms And Conditions Of Franchising Agreement In Russia

Risks connected to antitrust terms and conditions of franchising agreement in Russia

Franchising agreement is contractual arrangement which entitles one party - the franchisor - to control, direct and coordinate commercial activity of the other party – the franchisee. The concept of this agreement, rights and obligations of the parties, possible limitations and other features are governed by civil law. However, in some cases franchising agreements may fall under antitrust regulations. Moreover, limitations established by franchising agreements may be challenged for non-conformity with antitrust legislation even if they formally comply with the framework civil law requirements.

Admissible limitations on franchisee under civil law of Russia

In accordance with Russian civil legislation franchising agreements ("commercial concession agreements" in the terminology of the Russian Civil Code) may include terms and conditions that provide for limitations on the parties to the agreement. The law (article 1033 of Russian Civil Code) directly envisages that the following limitations may be imposed by franchising agreement on franchisee:

• Not to compete with franchisor at a certain territory using intellectual property of franchisor
• To refrain from conclusion of similar franchising agreements with competitors or potential competitors of the franchisor
• To sell goods and provide services in accordance with franchisor's instructions and for the price set forth by the franchisor as well as to refrain from using intellectual property, selling goods and providing services of other rightsholders, suppliers and service providers
• To sell goods and provide services within the territory agreed by the franchisor
• To agree on location of business premises and their decoration with the franchisor

At the same time, franchising agreement cannot include an obligation not to sell goods or provide services for purchasers located at the territory defined in the franchising agreement. Besides, point 3 of article 1033 of Russian Civil Code specifies that contractual restrictions can be considered invalid by court based on a claim of antitrust authority or any other interested person if such restrictions contradict to antitrust legislation taking into consideration conditions of the market and economic conditions of the parties involved.

Regulation of franchising agreement under antitrust legislation of Russia

Pursuant to the Federal Law No. 135 "On Protection of Competition" (hereinafter – "Federal Law On Protection of Competition") franchising agreement is classified as "vertical agreement". Point 2 article 11 of the Federal Law On Protection of Competition envisages that a "vertical agreement" is prohibited if it contains provisions regarding:

• ascertainment of price for resale (excepting establishment of maximum resale price) or
• prohibition on sale of the goods of supplier's competitors.

However, article 12 of the Federal Law On Protection of Competition provides that abovementioned prohibitions do not extend to franchising agreements.

Current Russian legislation does not contain an exhaustive list of eligible or inadmissible terms and conditions in respect to franchising agreement. Therefore, admissibility of contractual terms and conditions as well as current conditions of the market are subject to interpretation by antitrust authority on case-by-case basis.

Court practice

An important recent example is the case ? 05/01/10-63/2021 against JSC "Tarkett Rus" (producer of flooring materials having market dominance on linoleum market in Russia). JSC "Tarkett Rus" (hereinafter the "Defendant") structured its agreements with distributors based on a franchising model. Franchising agreements provided for the following restrictions:

• Distributor undertakes not to sell products with use of trade names or trademarks of other rightsholders.
• Distributor undertakes not to advertise, offer, store or sell products of other manufacturers.

For the breach of contractual obligations by the distributors the Defendant was entitled to impose a fine against the distributors.

Statements of the claimants

Defendant's competitors supposed that the Defendant used franchising type of agreement as a sham transaction only with the purpose to evade antitrust limitations. In fact, Defendant's distributors conducted business as separate legal entities under their own names and without reference to JSC "Tarkett Rus". Moreover, Distributors did not have unified standards or processes regulating sale of the goods as well as any other external evidence of performing business activity under franchising agreements, competitors claimed.

Arguments of the Defendant

The Defendant claimed that restrictions provided for by the franchising agreements are deemed as typical conditions for franchising type of commercial agreement. However, the Federal Law On Protection of Competition prohibits acts or omissions of entities having market dominance which result in limitation or restriction of competition, or infringement of interests of third parties in the field of commercial activity. The Defendant argued that mentioned prohibitions are not applicable to franchising agreement since they fall under exclusion envisaged by point 4 article 10 of the Federal Law On Protection of Competition which states that use of intellectual property rights, means of individualization of legal entities as well as products and services shall not fall under the mentioned prohibitions.

Interpretation of franchising agreement by the antitrust authority

The antitrust authority scrutinized legal facts and franchising documentation and came to conclusion that contractual arrangements between Defendant and the distributors had been executed in full conformity with legislative requirements attributed to franchising agreements. Thus, franchising agreements were not considered as sham agreements shadowing ordinary distribution contracts. Despite this fact the antitrust authority found that franchising agreements contained antitrust provisions which unfairly restrain competition and breach the Federal Law On Protection of Competition.

The antitrust authorities were not persuaded by the Defendant's arguments and underlined that despite of point 1 article 1033 of Russian Civil Code which specifies a list of permitted limitations of rights under franchising agreement, due to point 3 of the abovementioned article such limitations may not infringe provisions of the Federal Law On Protection of Competition. Moreover, the antitrust authorities pointed out that the abovementioned provisions of Russian Civil Code do not prohibit antitrust authorities to verify compliance with antitrust rules and regulations by the parties to franchising agreement as well as to decide on application of antitrust immunities.

Regarding application of exclusion on use of intellectual property rights, the antitrust authority underlined that franchising agreement specified restrictions on the use of intellectual property belonging to third parties and not to Defendant. Therefore, the abovementioned exclusion cannot be applicable to the Defendant.

Analysis of bonus program

The antitrust authority pointed out that Defendant supplied its products to distributors who effected further sales to retail stores. There were no direct agreements between Defendant and retail stores. Defendant established bonus program for retails stores which implied providing of bonuses by reduction of accounts receivables. The criterium for bonus payment was a share of Defendant's product represented in the store for sale. If the share is less than 65%, retail stores do not enjoy the bonus. If the share is more than 65% but less than 100%, the bonus amounts to 1%, and if the share is 100%, the bonus amounts to 8%. Moreover, Defendant coordinated the activity of retail stores and decided whether they meet requirements in order to enjoy bonuses. Antitrust authorities found that bonus provisions were aimed at eliminating competitors which violates the Federal Law On Protection of Competition.

Besides, the antitrust authority underlined that distributors used their own means of individualization as well as means of individualization of the Defendant and its competitors. However, this legal fact was not assessed by the antitrust authority in resolution part of the decision. Thus, it is difficult to evaluate its effect on the results of the case.

Decision of the antitrust authority

Considering the above circumstances, the antitrust authority decided that:

• Conditions of franchising agreements in the part of restrictions on sale of products of other manufactures violate the Federal Law On Protection of Competition;
• Bonus program of JSC "Tarkett Rus" is contrary to provisions of the Federal Law On Protection of Competition which prohibit coordination of the market by using dominant position on the market.

Antitrust authority issued an improvement notice against JSC "Tarkett Rus" demanding to eliminate these violations.

Conclusion

The case discussed above illustrates that franchising agreement limitations are subject to antitrust law prohibitions connected to market dominance. Therefore, by preparing such agreements it is recommended to assess their provisions in terms of compliance with the Federal Law On Protection of Competition.

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.