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German court case: antitrust law issues in connection with franchise systems

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Germany

Antitrust law issues in connection with franchise systems

In LG M√ľnchen I, partial judgment of 26.10.2018 – 37 O 10335/15 = BeckRS 2018, 27572, the German court considered antitrust law issues in connection with franchise systems. 

  • Facts of the case

The defendant operated a franchise model under which the plaintiffs were franchisees. Depending on the turnover of the individual franchisees, the franchise agreements imposed an obligation to pay a certain advertising fee, which was used by the defendant, among other things, to advertise individual products of the company at low prices. The plaintiffs were of the opinion that they would suffer a financial loss as a result of this and filed an action for an injunction with regard to the use of their contribution to advertising costs for the disputed low-price advertising campaign.

  • Legal issues

As is the case in most countries, there are legal regulations in Germany to prevent the formation of cartels and market monopolies. A characteristic of a franchise system is that the participating companies act independently of each other, which distinguishes them from a company that is merely divided into different branches. Since, despite the independence of the individual franchise partners, the participating companies operate under a common name and are partly organised in the same structures, there is an increased risk of cartel formation through, for example, territorial exclusivity agreements and understandings which restrict price competition between the franchisees.

A similar effect to actual price agreements can be achieved by the franchisor giving pure price recommendations. This can put pressure on franchisees in such a way that they can feel obliged to sell the goods at the recommended price in order to compete with the other entrepreneurs of the franchise system.

As far as such a recommended price is a result of a contractual price agreement (which is inadmissible under antitrust law), this would constitute an infringement of competition. However, the assumption of an infringement of competition by a recommended price must be treated with caution and must not be prematurely affirmed. In each case, the individual case is decisive and the recommended price must create a de facto binding effect in order to be an infringement. Anything else can only be seen as an adjustment pressure within the framework of the franchise market, which is part of the nature of competition.

  • Was there infringement of competition in this case?

It was not immediately clear whether in the present case sufficient pressure was exerted in the context of this advertising campaign so that the price recommendation of the franchisor created a de facto binding effect.

However, the court confirmed that the advertisements did create a de facto binding effect. Although the court clarified that the advertising of a product at a special price in itself is not yet sufficient to assume the de facto binding effect, the circumstances of the individual case and the concrete form of the advertising campaign were decisive. In particular, the advertisement only insufficiently pointed out that not all companies of the franchise system participated in the low-price campaign. At the end of the advertisement there was an indication that the campaign was only taking place "in all participating restaurants" and that this was a "recommended retail price" but this notice was hidden in the small-print.

The average customer who had seen the advertisements, therefore, would expect the advertised prices from all companies in the franchise-chain, including those who, like the plaintiff, do not participate in the low-price campaign. It followed that the applicant was not only exposed to pure competitive pressure from its competitors but must also distance itself from the advertising associated with it if it wishes to charge a higher price which differs from that in the advertisement. This could result in disappointed customers and so to avoid this the plaintiff may have to also adjust its price in line with the recommendation in the advertisement. This procedure created a de facto binding effect with regard to the price and so the action was upheld.

Co-authored by Ennio Schwind

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Antitrust