Franchise agreement

A franchise agreement is the contract by which a business, the franchisor, makes available to an independent trader, the franchisee, a trade mark or shop sign, proven know-how and continuing assistance, in return for payment. French law contains no statutory definition of franchising. The agreement is governed by the general law of obligations, by Article L. 330-3 of the French Commercial Code for pre-contractual disclosure and by competition law, in particular Regulation (EU) 2022/720 on vertical agreements.

The three components of the agreement

A franchise is identified by the combination of three elements. The first is a licence of distinctive signs, which allows the franchisee to use the network’s trade mark and shop sign on defined terms. The second is the transfer of secret, substantial and identified know-how, which must give the franchisee a genuine competitive advantage. The third is the technical or commercial assistance provided throughout the term of the agreement. Where there is no genuine know-how, the agreement is exposed to nullity for lack of consideration.

Pre-contractual disclosure

Article L. 330-3 of the Commercial Code requires any person who makes available a trade name, trade mark or shop sign while requiring an exclusive or quasi-exclusive commitment to provide, at least twenty days before signature, a document giving truthful information that enables the candidate to commit with full knowledge of the facts. The content of this document is set by decree and covers, among other things, the age of the business, the state of the network and the terms of renewal and termination. Breach of this obligation does not automatically render the agreement void, but it provides grounds for nullity where the franchisee’s consent was vitiated.

The network’s intellectual property

The franchisor must own, or be a duly authorised licensee of, the rights it grants. It must keep the trade mark in force, defend it against third parties and warrant the franchisee against eviction. The trade mark licence granted to the franchisee is enforceable against third parties only once recorded in the national register. Know-how, protected as a trade secret, calls for confidentiality clauses, a non-disclosure obligation surviving the end of the agreement and a non-compete clause within the limits of Article L. 341-2 of the Commercial Code and Regulation (EU) 2022/720.

Permitted restrictions of competition

A franchise agreement by its nature contains vertical restraints. Regulation (EU) 2022/720 exempts them where the market shares of the supplier and of the buyer each do not exceed thirty per cent and the agreement contains no hardcore restriction, such as resale price maintenance or a ban on passive sales. Obligations necessary to protect the know-how and the identity of the network are inherent in franchising.

Key points

A franchise combines a licence of distinctive signs, know-how and assistance. The pre-contractual disclosure document must be delivered at least twenty days before signature. Check the franchisor’s title to its trade marks, the recording of the licence in the register and the compliance of the exclusivity and non-compete clauses with competition law before joining or setting up a network.

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This glossary entry is general in scope and does not constitute legal advice.

Dhenne Avocats is a patent litigation firm. Matters outside that field, such as trade marks, designs, copyright and IT contracts, are handled by practitioners the firm works with regularly, and by the firm itself when they arise in a patent dispute.

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