Proposal by Euro parliament: a realistic solution?
It is rare that the European Parliament has anything to say about franchising. Recently though, that august institution spoke up, in the form of a study published by one of its committees, looking at the impact of regulation on franchising in Europe. While it is not the official position of the parliament, it cannot safely be ignored.
The study sets out the economic aspects of franchising—noting, for example, that franchisors create more market value and economic value than their non-franchised counterparts. The authors make some familiar but nonetheless powerful arguments for the benefits franchising yields to franchisors, franchisees and economies.
They then set out the reasons why, they believe, franchising is not achieving its full potential in the European Union, ascribing that failure in large part to “the current regulatory environment.”
What is that regulatory environment? Here, a refresher course may be in order. Generally, European franchising regulation can be divided into two types: regulations focusing on macro-economic regimes such as competition law; and franchise-specific laws in only a few member states.
The macro-economic regulations remain more focused on “intra-brand” issues than in, for example, the United States. As a consequence, the study argues, that approach fails to recognize the value franchising can contribute to the single market.
As to the latter—franchise-specific laws—the study bemoans the fact that those laws lack uniformity, and therefore cause increasing costs and delays for franchisors.
The study notes the laws have developed in an uncoordinated manner, and asserts that has contributed to the “dysfunctionality” of franchise regulation in the EU.
The limits of self-regulation
The study characterizes the approach of the European Commission as essentially transferring the task of self-regulation to national franchise associations. That approach, however, is said to suffer handicaps:
In many EU member states, self-regulatory organizations do not exist at all; the existing organizations are largely funded by franchisors and thus, the study asserts, they do not truly represent franchising; and only a relatively few franchisors are said to be members of national franchise associations.
One may dispute some of these conclusions. Is it really surprising that franchising in Europe lags behind the statistics in the United States—for example, as a percentage of gross domestic product? Franchising was already a social and economic force in the U.S. for decades before it reached the EU countries in any meaningful way.
The one-language, one-culture character of the U.S. market makes the spread of an advertising-fueled marketing technique far more feasible than in 28 quite different societies. And, in any event, how does this relate to the need for legislation? It may not be possible to prove that franchising grew in the U.S. in spite of franchise legislation, but there is certainly no evidence that it thrived because of such legislation.
Is it really noteworthy that 83.5 percent of franchising’s turnover in the EU is concentrated in only 25 percent of the EU’s member states, as the report says? After all, the GDP of the largest 25 percent of the national economies represents almost 80 percent of the GDP of the entire EU. Why should franchising’s concentration be expected to differ materially?
Whatever doubts one may raise about the underpinnings of the study, we should welcome some of its conclusions. Certainly it would be desirable to bolster the confidence of small and medium sized enterprises and reform certain of the current laws that make it difficult for them to compete with large corporations.
Chief among them: relaxing the rather rigid prohibitions against resale price maintenance, which clearly disadvantage franchise enterprises in competition with vertically integrated companies; and adopting a less dogmatic approach to increasingly common multi-channel sales strategies.
A climactic proposal
Recognizing the common sense of these conclusions, however, one is nonetheless brought up short by the study’s climactic proposal: that a European Legal Act should be adopted, requiring both a pre-contractual disclosure regime and a body of substantive “relationship” restrictions, similar to those in a number of U.S. states. Of the 28 EU member states, a full 19 of them today have no disclosure laws, and 23 have no relationship laws. But under this proposal, all 28 now would have both.
Of course, franchise-specific laws are not the only restrictions on conduct the franchisor must consider. In every one of those countries, other bodies of law must be adhered to. But this proposal would go beyond the existing laws applicable to all enterprises, and superimpose very explicit disclosure and relationship laws in the 18 countries where neither type of law exists today.
But are franchisors in the EU itself truly prepared to submit themselves to such laws in 18 European countries where there are no such laws today? If there are franchisors who would view that as a desirable outcome, we think they are few and far between.
Surely the study raises issues worth discussing. But, if we may be presumptuous, we suggest it is not too much to ask that the authors should first do both their factual and their political homework. And what then?
Make no mistake about this process: We are only at the beginning of an exercise that could take a very long time. But no franchise company should take comfort in the time and uncertainties that may cloud its future.
Franchisors who do not involve themselves early in this process will have only themselves to blame if the European regulatory terrain becomes far rockier for franchising in the years ahead.
Philip Zeidman is a partner in DLA Piper’s Washington, D.C., office. Reach him at 202.799.4272 or firstname.lastname@example.org. Dr. Thomas Jansen
is a partner in the firm’s Munich office. Reach him at email@example.com