Franchising and vertical clauses of restraint to protect IPRs including Know-How
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 and its GUIDELINES on Vertical Restraints
(Text with EEA relevance) (2010/C 130/01) http://ec.europa.eu/competition/antitrust/legislation/vertical.html
Often, franchise agreements include various clauses of restriction with the view of protecting its IPRs.
IPRs are described as including industrial property rights, KNOW HOW, copyright and neighboring rights.
Such clauses are governed by Competition law which determines the conditions under which such clauses are licit and in what circumstances. Indeed, for Competition law, in an open and free economy, contractual arrangements must not constitute a barrier to free trade. Competition law & authorities control this. However, the protection for example of brands and IPRs, know-how, territorial or customer groups may be protected by clauses of restriction in due respect of particular conditions.
For the purposes of Competition law, a franchise agreement is viewed as principally a distribution agreement (which includes IPRs, but in which IPRs are accessory to the distribution component which constitutes the principal object of the agreement) as well as a vertical agreement.
The Regulation 330/2010 defines:
- A ‘vertical agreement’ as an agreement or concerted practice entered into between two or more undertakings each of which operates, for the purposes of the agreement or the concerted practice, at a different level of the production or distribution chain, and relating to the conditions under which the parties may purchase, sell or resell certain goods or services;
-A ‘vertical restraint’ as a restriction of competition in a vertical agreement falling -within the scope of Article 101(1) of the Treaty. Examples of vertical restraints are (i) non-compete clauses, (ii) exclusive distribution.The Guidelines in its section on Franchising, state (p. 39, #190, (a)), “The more important the transfer of know-how, the more likely it is that the restraints create efficiencies and/or are indispensable to protect the know-how and that the vertical restraints fulfil the conditions of Article 101(3)”
4.1.The term “franchise” is a term that dates back to the 13th & 14th centuries in Europe. To be granted a franchise was to be granted a liberty, a privilege to do something. In Medieval Europe, towns developed as agglomerations in which traders and shopkeepers were granted rights/privileges/”franchises” to operate with relative independence from obligations usually due to the feudal authorities. Likewise, some of the first territories colonised in northern America – in the name of the English or French kings - were developed on the basis of franchises granted to the first colonisers to open and develop new territories.A variation of the meaning today refers to being granted or benefitting from an exemption or immunity from an obligation. For example, in health systems that are subsidised by a public authority, the patient and State share the costs of the medical acts, with the patient usually paying for a “base” portion of the total costs. The subsidising authority exempts itself from that “base” portion, the franchise, and subsidises the remaining portion. Similarly, it is common in most vehicle insurance contracts that the person insured will be responsible for paying a portion of (franchise) of whatever costs are engaged (ie. repair costs following an accident). The “franchise” is designed to the benefit the insurance company.
Note: Industrial franchising (wholesale or retail)
Manufacturers may licence their product(s), recipes or processing methods to wholesalers who will produce or process the products and sell them on a particular market. Contractual procedures and standards will often be included with the licence. In turn, the products may be sold to other intermediaries, wholesalers or retailers.
This scheme is closer to an industrial licence agreement than to “business-format franchising” unless a separate franchise agreement is adjoined to the industrial licence agreement.
An example is the production/bottling/ Coca-Cola licence agreement. An industrial licence may be combined with a distinct distribution agreement that may be a franchise agreement.
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