The Czech legal system does not distinguish franchise as a stand-alone type of contract. Businesses wishing to use franchise must provide for their mutual rights and obligations in an unnamed contract. Designation of their relationship as a franchise may have an impact on the assessment of conduct of parties to an agreement, e.g. on pricing, under competition law. Franchising is used in the fast-food segment rather than in the automotive industry. Despite that, a Dutch court had to deal with issues related to the application of this business model to selling new cars. Specifically, the case concerned Opel, Citroën a Peugeot dealerships, providing an interesting guide for Czech practice.
Summary of the case
At the heart of the dispute was the legal position of Dutch authorised dealers of Opel, Citroën and Peugeot. All the three car makers are part of the international Stellantis Group. The dealers were independent companies selling cars of the three brands based on contracts that they had entered into directly with the respective manufacturers.
The contracts underlying to the dealers’ long-term operations in the market were made for an indefinite term. The dealers were entitled to sell new cars, offer additional services, and carry out authorised maintenance and repairs. However, the contracts were not just a framework agreement on the purchase and resale of cars, but also contained several specific requirements concerning the design of the premises, internal processes, technical employee training, and mandatory sales and after-sales targets. The distribution system placed great emphasis on uniformity and consistency of customer experience across the network. Such requirements are commonly seen within authorised dealer networks in the selective distribution system.
In 2021, after the individual car makers within the Stellantis Group terminated the existing dealership agreements, replacing them with new agency agreements after a transition period, the dispute emerged. (See our earlier blog article about the boom of the agency model in the automotive sector). However, the manufacturers did not include all existing dealers in the new sales system, sparking a dispute over the legitimacy of such a step.
The dealers objected to the car makers’ course of action arguing that their original contracts were effectively franchise agreements under Dutch law, which provides for specific conditions for them. The dealers asserted that their activities were strictly governed by a predetermined business model and rules set by the manufacturer, which fulfilled the defining features of a franchise.
Such a conclusion would be of major importance to the dealers whose cooperation with the Stellantis car companies had been terminated. In the context of selective distribution in the Netherlands, the difference between a franchise and a supplier-customer relationship is not a mere formality but has major implications for the scope of both parties’ rights and obligations, in particular in respect of damages claims upon termination of cooperation. For dealers, such a qualification would mean a hefty financial compensation.
Selective distribution or franchise?
The Dutch law sets out three basic features that must be fulfilled at the same time for a relationship to be defined as a franchise. The Amsterdam court based its reasoning on these very facts.
Under Dutch law, the essence of a franchise is that the franchisor allows the franchisee to do business based on a predefined business model. This model includes operational, business, and organisational elements that govern the way the franchisee must manage its business. In addition, the franchisee must pay the franchisor a fee, either directly or indirectly, for the right to use its formula.
Franchising is therefore a complex business concept that the franchisee adopts and operates in a unified system determined by the franchisor. Most importantly, the essence of a franchise relationship is the transfer of unique know-how and ongoing support. The franchisee essentially replicates the franchisor’s business success. However, the court stressed the fact that the mere existence of a uniform visual style and standardised rules is not sufficient to qualify a relationship as a franchise. The decisive factor is whether any business formula is actually transferred, or whether merely conditions for the resale of goods are imposed.
In their dispute with the Stellantis manufacturers, the Opel, Citroën and Peugeot dealers failed to show that their payments made to Stellantis constituted a fee for the use of a franchise formula, and not purely the price for the wholesale supply of cars under the supplier-subscriber relationship.
The court therefore concluded that agreements between the car makers and their business partners cannot be regarded as franchise agreements per se, despite the strict requirements and strong control by the manufacturers. Selective distribution and franchising are two independent ways of marketing goods, even though they may have some common features in practice.
Implications of the judgment for Czech practice
Although the Czech legal system does not specify franchise agreements as a stand-alone type of contract, the conclusions of the Dutch court may serve as a valuable guide for Czech practice. Franchise relationships can be set up based on objective criteria defined in foreign jurisdictions. Foreign experience can provide a standard of good practice that can help distinguish a true franchise from other forms of distribution, avoiding disputes over the legal qualification of the relationship.
From a competition law perspective, franchise, if properly qualified as a distribution relationship, may also bring specific practical advantages. Fixed retail resale pricing is generally considered a significant restriction of competition. However, in distribution systems in which the supplier uses a uniform distribution model, such as the franchise system, the imposition of fixed prices may be necessary to organise a coordinated short-term low-price campaign, usually lasting two to six weeks. If set up properly, a franchise relationship can facilitate the demonstration of compliance with the conditions for applying this exemption, and provide distribution network participants with greater flexibility in implementing joint marketing activities.
