Franchising: definition & descriptions
• The European Franchise Federation promotes and defends the following definition of (business) Franchising because it details the essential elements of a franchise agreement. In particular it highlights the cornerstone of any franchise system which is the KNOW-HOW it has developed for that particular system. It is in a franchise’s know-how that lays the value of the business proposition and which makes a franchise business duplicable and transferable to independent entrepreneurs/operators working “at arm’s length” from the franchiser.
• European Code of Ethics for Franchising. The Code states:
“Franchising is a system of marketing goods and/or services and/or technology, which is based upon a close and ongoing collaboration between legally and financially separate and independent undertakings, the Franchisor and its individual Franchisees, whereby the Franchisor grants its individual Franchisee the right, and imposes the obligation, to conduct a business in accordance with the Franchisor's concept.
The right entitles and compels the individual Franchisee, in exchange for a direct or indirect financial consideration, to use the Franchisor's trade name, and/or trade mark and /or service mark, know-how, business and technical methods, procedural system, and other industrial and /or intellectual property rights, supported by continuing provision of commercial and technical assistance, within the framework and for the term of a written franchise agreement, concluded between parties for this purpose.
KNOW-HOW - the description below is adapted for franchising from the definition in:
COMMISSION REGULATION (EC) No 2790/1999 of 22 December 1999 on the application of Article 81(3) of the Treaty to categories of vertical agreements and concerted practices*
*replaced in 2010 by the COMMISSION REGULATION (EU) No 330/2010 of 20 April 2010 on the application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices which is accompanied by its Guidelines http://ec.europa.eu/competition/antitrust/legislation/vertical.html
Note: EC Regulations 330/2010 and 2790/1999 describe intellectual property rights’ (IPRs) as including industrial property rights, KNOW HOW, copyright and neighboring rights.
"Know-how" means a body of non-patented practical information, resulting from experience and testing by the Franchisor, which is secret, substantial and identified;
-"secret" means that the know-how, as a body or in the precise configuration and assembly of its components, is not generally known or easily accessible;
EFF interpretation: ‘secret’ must not be understood in a narrow sense whereby each individual component of the know-how should be totally unknown or unobtainable outside the Franchisor's business;
-"substantial" means that the know-how includes information which is indispensable to the franchisee for the use, sale or resale of the contract goods or services;
EFF interpretation: in particular for the presentation of goods for sale, the processing of goods in connection with the provision of services, methods of dealing with customers, and administration and financial management; the know-how is indispensable for the Franchisee because it constitutes the transfer of a tested and proven business system, devised to improve the competitive position of the Franchisee, in particular by improving the Franchisee's performance or helping it to enter a new market .
-"identified" means that the know-how must be described in a sufficiently comprehensive manner so as to make it possible to verify that it fulfils the criteria of secrecy and substantiality ;
EFF interpretation: the description of the know-how can be set out either in the franchise agreement, in a separate document or recorded in any other appropriate form.
• In a lot of franchise literature, particular in English, the business system described above is known as “business-format franchising”. Other languages use the terms “formula” or “system” in reference to format.
Source of the following description: Martin Mendelsohn, “Franchising Law”, Kluwer, 2004
“Business format franchising” is a type of commercial relationship based on a contractual agreement between two independent business parties, the franchisor (the seller of the business proposition) and the franchisee (the buyer of the business proposition), in which the franchisor grants the franchisee, for the term of the contract, the right to buy and operate the franchisor’s branded and formatted business system for a fee and according to the prescribed rules and procedures developed for the system by the franchisor.
The franchisor’s “business format franchise” necessarily comprises the following 5 essential elements:
1. A brand name (registered as a brand name and/or a trademark, etc.) which serves as the umbrella sign for the network, and a rallying sign for the consumer and public,
2. a licence to the use the brand, granted to the franchisee by the franchisor,
3. a business system – a business concept formatted into a duplicable value “package” founded on the franchisor’s tested Know How and his continued assistance during the term of the agreement,
4. payment by the franchisee of a financial consideration, either in a direct form, such as an entrance fee and/or a continuing fee (“royalty”), and/or an indirect form such as a mark-up on supplied goods,
5. the investment in, and ownership of, the assets of the franchised business by the franchisee.
• The French Franchise Federation characterises “business-format franchising” as the “reiteration/duplication of a successful formula”.
-reiteration/duplication implies that the formula has first been tested through a pilot outlet/setup by the franchisor or with his support, on a relevant market before being sold as a business proposition; that it has proven itself to be transferable and successfully operable an independent business entrepreneur/operator including “first-time” entrepreneurs;
-successful implies that the formula/system has been tested with success and affords tangible opportunities of success to its franchisees;
-the reality of the “network” and its dynamics, which does not translate into contractual terms, is nevertheless at the heart of any business-format franchise. The franchiser-franchisee relationship is bilateral on a contractual level, but on the operational level, the rights and obligations of each are embedded in the operations of a close-knit network of franchisees operating in complementarity and for the good of the whole network.
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