In Netherlands, franchisors must be ‘good’—whatever that means
Illustration by Jonathan Hankin
When last this column addressed the subject of franchise regulation in the Netherlands, it was in the context of a proposed self-regulatory code (September 2016.)
The current Dutch government has taken a very comprehensive approach: sweeping draft legislation governing franchise agreements. Have the lessons of the prior experience been learned? Hardly. Let’s look at pre-sale disclosure.
What? Rather than the sort of explicit disclosure document to which U.S. franchisors are accustomed, the law airily requires “all information” the franchisor knows or “can reasonably expect to be relevant or to become relevant … with a view to the conclusion and performance of the agreement,” in such a way that the franchisee “can reasonably be deemed capable of understanding the consequences of concluding the franchise agreement, including the operational and financial consequences.”
Beyond these general concepts, the law specifies only quite basic elements of disclosure, but with an odd addition: “The substantiation of decisions of the franchisor that may have considerable financial consequences for the franchisee.”
When? At least four weeks before concluding the agreement, but it’s not that simple. The proposed law separately requires that the franchisor must provide the basic information referred to and “all information necessary about financial position that may be reasonably relevant ... prior to concluding” the agreement.
The provision of the general, unspecified information must be “in good time[!]” and both before “entering into and during the term of a franchise agreement.” These requirements are ambiguous and potentially expensive and burdensome. There is no provision for the sort of exemption one would expect, to narrow the protection to those prospective franchisees truly in need of it.
Who? That may seem an odd question to raise about a disclosure requirement. It is included here because all of these provisions apply equally to both parties, as difficult as it may be to envision the sort of disclosure a prospective franchisee would make pursuant to these requirements.
The provisions of the draft law are by no means limited to pre-sale disclosure. Here is a summary of a few of the others.
Some relate to the obligations of the franchisee, and limit the right of the franchisor to stipulate those obligations.
For example, any obligation of the franchisee to buy products from the franchisor or a designated third party will only be valid “if the usual conditions in commerce apply to this purchasing obligation.”
And, any post-term limitations on the franchisee’s freedom to work may not be longer than one year, or in a territory larger than that “within which the franchisee could commercialize the franchise formula,” essentially, the know-how.
Some relate to obligations of the parties and introduce some unusual or undefined concepts.
For example, the franchisee is to provide the “assistance, commercial and technical support reasonably necessary for the franchisee to be able to commercialize” the marks and know-how.
And, both parties are required to meet a standard which, to the best of my knowledge, appears nowhere else in the world: “The franchisor and the franchisee shall behave as a good franchisor and a good franchisee.”
Other provisions shift decision-making authority in a head-scratching fashion. Under the law of contracts, no franchise agreement may be amended without the consent of the franchisee. It is puzzling, therefore, to understand either the intent of certain provisions or how they will operate in practice.
For example, any amendment that “has or may have considerable consequences for the commercialization of the franchise formula by the franchisee” shall be subject to the prior consent of a two thirds majority of the representative body of the franchisees (What is that? A requirement of a franchisee association?) “if present.” (What does that mean? Of those voting?)
And, in the alternative it must have the consent of “the franchisee toward whom the franchisor wishes to implement the amendment and who experiences or threatens to experience the consequences thereof.”
The proposed law would limit not only amendments but any acts of the franchisor concerning the marks and know-how or for the “commercialization of a derived formula.” (That is a “uniform commercial formula that corresponds to the franchise formula by one or more distinctive characteristics recognizable to the public and used for the production of goods and services which are wholly or largely the same as the goods or services the franchise formula relates to.”)
This appears to be an effort to address a franchisor’s development of closely similar, competitive goods or services outside the framework of the franchise. The proposed law would prohibit such conduct without the consent of—again—a two-thirds majority of a “representative body of the franchisees” or an affected (or “threatened”) franchisee.
Enough. You get the point. The drafters’ explanatory memorandum conjures up a very negative picture of franchising which most in the industry would simply not recognize. Based on that “perception,” the drafters propose legislative “remedies” wildly out of proportion to any demonstrated abuses, and grounded in an apparent misunderstanding as to how franchising works.
One would have thought the experience with the proposed code in the Netherlands would have served as a lesson. One would have been wrong. And foreign franchisors, developing their plans for international expansion and accustomed to thinking of the Netherlands as a welcoming environment, will surely need to reappraise that assessment.
Philip Zeidman is a partner in DLA Piper’s Washington, D.C., office. Reach him at 202.799.4272 or firstname.lastname@example.org.