Hamilton Pratt

Article 81 of the EC Treaty

Article 81 of the EC Treaty may regulate franchise agreements if the agreement:-

  • affects trade between member states of the EC and
  • has as its object or effect the prevention, restriction or distortion of competition within the Common Market.

On the face of it most franchise agreements are unlikely to affect trade between  Member States because they are almost invariably between undertakings in the same Member State, do not relate to exports or imports and cover only a small  part of the territory of one Member State.  However, the European Court has  held that if an agreement is capable of appreciably affecting patterns of trade and competition in the EC the fact that the parties to an agreement are situated  in  one Member State or the anti-competitive conduct takes place  in one  Member  State,  is  irrelevant.   Indeed,  specifically  in  relation  to franchise  agreements,  the  European  Court has held that  if  the  agreement prevents  a  franchisee  from  setting  up  in  business,  or  from  supplying franchisees,  in  other Member States then Article 81 is likely to apply.   If Article   81  applies  to  an   agreement  the  prohibited  restrictions   are unenforceable  and  parties to the agreement are subject to fines  unless  the agreement has been exempted.

The European Commission has published a block exemption for "vertical agreements". This Regulation exempts franchise agreements provided they do not contain any of the prohibited restrictions which the Regulation lists but where a franchisor's market share exceeds 30%, the franchise agreement cannot be exempted by the Regulation.  The prohibited restrictions for the purposes of the Regulations are those relating to resale price maintenance, restrictive covenants, prohibitions on sales outside a franchisee's territory or allocated customers and non-compete obligations.  If a franchise agreement contains prohibited restrictions it will not be exempted.

In addition the Commission has published a Notice which sets out the criteria.

The Notice sets out the quantative criteria for assessing whether there will be an appreciable effect on trade between Member States or on competition and as a result the Commission takes the view that “as a general rule” it will not open proceedings in cases covered by the Notice.  This does not mean that the Notice has the same effect as a block exemption, and indeed the Commission recognises that agreements which are covered by the Notice may nevertheless fall under Article 81(1), but in such cases the Commission will not impose fines and there is no need to notify agreements which fall within the Notice.  The Notice of Agreements of Minor Importance sets out the criteria for assessing whether an agreement is of minor importance as follows:

(a)  the undertakings who are party to the agreement must be undertakings engaged in the production or distribution of goods or in the provision of services generally;
(b)  the goods or services which are the subject of the agreement together with other goods or services provided by the contracting parties “which are considered by users to be equivalent in view of their characteristics, price and intended use” do not represent more than 10 per cent of the total market for such goods or services in the area of the Common Market affected by the agreement. The above market share requirements can be exceeded by “no more than one-tenth during two successive financial years” for the Notice to continue to apply.

For the purposes of calculating market shares, the respective market shares of not only the undertakings who are party to the agreement, but also undertakings which the parties directly or indirectly control and undertakings which directly or indirectly control the parties to the agreement, must be taken into consideration.

Further the Notice provides that small and medium sized undertakings (those with less than 250 employees and an annual turnover and a balance sheet value of less than 50 million and 43 million Euros respectively) are unlikely to be regulated by Article 81 because their agreements are unlikely to have an appreciable effect on trade between Member States.

Whilst many franchise networks will fall within the Notice the difficulty  with  relying  on the Notice  on  agreements  of minor importance  is  that  it is difficult to define with  certainty  the  relevant market  by  which  market shares are to be calculated and, of  course,  market shares can increase during the term of a franchise.