Site Map
Franchise Advisory - New Block Exemption
The new vertical agreements block exemption has just been published. It will come into force on the 1 June 2010 and franchisors have a transitional period until 31 May 2011 in respect of agreements already in force on 31 May 2010 to satisfy the conditions of the new block exemption.
The great majority of franchise agreements in the UK are drafted so as to comply with the block exemption and we have no reason to believe that the changes proposed by the European Commission will alter that approach.
The new block exemption is very similar to the current version but, nevertheless, there are significant changes.
First, as with the existing block exemption franchisors with a 30% or more market share do not fall within the block exemption. Whether or not franchisors do have a market share in excess of 30% does, to a large extent depend on how the relevant market is defined but, in our opinion, adopting a common sense definition of relevant market, very few, if any, franchisors operating in the UK have a market share of more than 30%. What is new with the new block exemption is that it is not only the franchisor’s market share that has to be taken into account but also a franchisee’s market share. It is, of course, quite possible that a particularly successful franchisee has a market share of more than 30% in his territory and if this were to happen, then the agreement with that franchisee (but not with those franchisees who have a lower than 30% market share in their territory) would not fall within the block exemption. This adds a quite unnecessary element of uncertainty although, in practice, the effect may not be significant because the reality is that analysing markets and market share is a complex and expensive business which few franchisees would be willing to undertake.
Secondly, the definition of know how has been changed. The good news is that the requirement for the know how to be “substantial” has been watered down. The bad news is that previously, if elements of the know how were not generally known or easily accessible then the know how would be treated as “secret”. It now seems that each element of the know how has to be “not generally known or accessible”. The definition of know how is principally relevant for enforcing post termination non compete covenants because according to the block exemption post termination non compete covenants can only be imposed in so far as they are “indispensible to protect known how”.
The third significant change is that in certain very limited situations in relation to sales promotions it may be permissible to set prices.
There are still a significant number of areas that remain unclear. As with the existing block exemption the “guidelines” to the block exemption are an extremely important aid in understanding the thinking of the Commission. At the date of preparing this advisory, we have a copy of what we believe to be the final version of the guidelines that will be published although the guidelines have not, as yet, been published.
We are hoping to announce in the very near future a webinar in the week beginning 7th June organised jointly with the British Franchise Association and Central Law Training, to discuss the changes in the block exemption, the practical things that you have to do and where areas of uncertainty remain.
John Pratt and a German lawyer Karsten Metzlaff led the Legal Committee of the European Franchise Federation’s approach to the Commission on the new block exemption.
John H Pratt
April 2010