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What are the implications of the new EU regulations on franchising?

What are the implications of the new EU regulations on franchising?

The EU must rethink its legal framework for franchising, or risk damaging our sector.

Words by Alisdair Gray, executive director at the European Franchise Federation

The European Franchise Federation (EFF) represents 17 national franchise associations, serving the interests of both franchisors and franchisees across Europe.

We are also the voice of the sector in Brussels, and 2021 is going to be a vital year for us, as every decade the EU has a look at the rulebook for franchising, and where it thinks changes need to be made. These will usually last for another ten years and cannot be changed easily.

The Vertical Block Exemption Regulation (VBER)

The EU looks at franchising through the lens of what is called a vertical agreement, so business to business relations up and down the supply chain. This is usually between a manufacturer and a retailer, but in our case, its franchisor to franchisee. The very grand title for this rulebook is the vertical block exemption regulation and guidelines – two separate documents – one very short, one very long – which tell the story of how franchising contracts are to be concluded across the European Union.

Some good things, and one very bad one

The European Commission published the draft VBER in late July, which did worry me at the time, because the Commission always loves to publish bad news just before the summer holidays. The theory being, everyone in Brussels has gone to the beach by that point, and no one is likely to complain too much!

But on first glance, we were quite pleased with a lot of aspects of the VBER which we think will make life easier for franchising. We were genuinely satisfied that after years of lobbying, the EU has recognized that franchising is a separate distribution system (from selective or exclusive distribution) with its own dynamics, requiring its own rules.

There is also a paragraph acknowledging that the protection of know-how for the entire duration of a franchise agreement and we certainly welcome that. This acknowledgment can only bring even greater legal certainty for the sector, and boost expansion across markets.

However, the sting in the VBER tail comes in a section that was not intended for franchising at all. It relates to the practice of dual distribution.

Dual distribution and franchising

Dual distribution occurs when a brand sells directly to the customer as well as through a distribution network, be it its own outlets or independent retailers. The practice has grown massively over the past decade, accelerated by online sales and Covid, as brands set up their own direct-to-consumer channels. It increases the direct horizontal competition between suppliers and their distribution networks and has raised concerns within the Commission over the potential for anticompetitive behavior.

The concern the Commission has is how information is shared within a dual distribution setup. It has been proposed that any information exchanged will need to be assessed under a different set of competition rules and this will apply to any network where the market share level is above 10%.

Now, the Commission considers franchising to fall under dual distribution. This is the key issue, as it is not clear if the market share level is at the national, regional or local level. So a franchise network could have 10% of the market in a large urban area and suddenly find itself obligated to carry out an expensive and complicated market share analysis.

In the worst case, this could mean not being able to share simple information with your franchisees regarding future plans or customer feedback – unless you were willing to submit a complicated legal analysis defending it.

How we are responding

Our message to the Commission is clear. This is a cost that someone will have to pay, initially the franchisor but eventually, it will be redistributed to franchisees and then onto the final consumer. There is no proven need for this restriction to apply to franchising and the possible gain, if any, in terms of enhanced competition does not equate to the cost and disruption for SMEs.

Our member associations have done a great job of finding real-life examples of how this will disrupt franchising, penalizing businesses and consumers. The EFF is lucky to be advised by a group of Europe’s leading franchise lawyers who have helped us shape our response to the draft VBER proposals. Our work continues to persuade the Commission to change course.

The game is far from over, but we are in the final straight and need to make sure we convince policymakers that franchising is carved out of the new dual distribution rules.

What more needs to be done going forward

This is where franchising still has some way to go in explaining itself as a business sector, how it works, what it does and what it doesn’t do. Franchisors are not competing with franchisees. We can say it until we are blue in the face, but we have to raise our game at European political level and make sure that policymakers appreciate how we operate and make sure that whenever rules are set, that our voice is heard and understood.

The author

Alisdair Gray is the executive director of the European Franchise Federation

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