Franchise Solicitors Hamilton Pratt Logo


Commission's New Notice on Agreements of Minor Importance

Franchise Solicitor John Pratt

The European Commission regularly publishes pronouncements on competition law issues. When such pronouncements are in the form of a regulation they are legally binding and when in the form of a directive they require Member States to enact legislation. Notices are indications of the Commission's views but are not binding on national courts. In practice, however, the Commission's views are considered important.

Its new Notice on agreements of minor importance sets out rules for assessing whether agreements between businesses are outside the scope of the general prohibition of anti competitive practices under EU competition law and, therefore, also under UK competition law.

Article 101 of the Treaty on the Functioning of the European Union (TFEU) prohibits agreements that have the object or effect of appreciably restricting competition. The new notice, as with the previous notice, indicates that businesses whose market share does not exceed 10% (for agreements between competitors) or 15% (for agreements between non competitors which is the most likely situation for franchise agreements) do not give rise to an appreciable restriction on competition and are therefore not regulated by competition laws. In practice the great majority of franchisors in the UK are likely to have a market share of less than 15% - although much depends on how the relevant market is defined. The new notice, however, includes a very important change. It clarifies that agreements that have as their object the restriction of competition (restrictions by object) cannot be considered minor and always give rise to an appreciable restriction of competition in breach of Article 101(1) of the TFEU and also, therefore, the UK's Competition Act. This change reflects the Commission's view of the Court of Justice's Expedia decision.

Nevertheless, in addition to an appreciable effect on competition there must also be an effect on trade between Member States or for the purposes of the UK's Competition Act, an effect on trade within the United Kingdom. The new Notice does not deal with what constitutes an effect on trade because that was analysed by the Commission in another notice that it published in 2004 which indicated that agreements between parties with an aggregate market share below 5% and an annual turnover equal to or below 40 million Euros are outside the scope of EU competition law because they are considered to have no effect on trade. This means that agreements which contain a restriction by object may still fall outside the scope of Article 101 TFEU (and the Competition Act) on the grounds that they have no effect on trade. It is not clear, at least in the United Kingdom, the extent to which the Commission's view on an effect on trade between Member States would influence a UK court's analysis of whether an agreement has an effect on trade within the United Kingdom and it may be that an effect on trade will generally be found if there is an appreciable effect on competition.

The new Notice is significant because if franchisors include hardcore restrictions, as defined in the Vertical Agreements Block Exemption in their franchise agreements, franchisees wishing to argue that their franchise agreement breaches EU or UK competition law will not have to prove an effect on competition which usually requires detailed and expensive market share analysis. In other words it will be much easier for franchisees to bring claims and, of course, there is the possibility that in future franchisees will be able to bring class actions in relation to breaches of competition law. This means that franchisors should, at all costs, not seek to impose resale prices or to prevent franchisees from active selling into territories that have not been exclusively reserved for the franchisor or its franchisees or restrict passive selling (which includes the use of the internet) by franchisees outside their territory (or all three!)

In addition to the notice, the Commission has produced a Commission Staff Working Document which explains its position in more detail.

July 2014
John Pratt
For Hamilton Pratt

Hamilton Pratt | Franchise House | 3A Tournament Court | Tournament Fields | Warwick | CV34 6LG

Tel: 01926 838 900 | 01926 258 799