Member Article

A distribution franchise agreement allows a producer of goods or services (the “Franchisor”) to transfer to another entity (the “Franchisee”), in return of a fee, the commercialisation of such products under the Franchisor’s trade mark(s) and distinctive signs, in conformity with its uniform business method and upon the provision, by the Franchisor to the Franchisee, of technical know how and regular assistance. The main idea behind such type of agreements is to allow the Franchisor to expand its business without investing its own capital, in a controlled way, ensuring, through the imposition of strict obligations identical for all Franchisees, that its image and the quality of its goods or services are preserved. To gain time and reduce the capital involved in the development of their brand in a new country/geographical zone, Franchisors are often advised to enter into a Master Franchise Agreement. By doing so, they will benefit from the local experience of the chosen “Master Franchisor” which will be transferred the exclusive right to develop the franchise in that particular territory. It will thus be responsible for opening up franchise units by recruiting the individual subfranchisees and providing them with support and training both initially and on an ongoing basis. It may also open and operate franchise units itself. The number of units to be opened may be fixed in advance between the parties as an objective to be achieved by the Master Franchisor within a given period. Like in most EU Member States (except France and Spain for instance), there are no specific legal provisions regulating franchise agreements in Portugal. The general legal provisions on contracts (Civil and Commercial Codes) and on standard contractual clauses (Decree-Law No. 446/85 of 25 October, as amended) shall apply. In so far as these agreements contain licences of intellectual property rights and detailed clauses governing the scope of the Franchisee’s use of the Franchisor’s trademarks and know-how, the Industrial Property Code is applicable. Decree-Law nº 383/89 of 6 November as amended, on the objective responsibility of the producer and Decree-Law nº 178/86 of 3 July as amended, on Agency (in particular provisions on termination and clientele indemnity), may also be of relevance. Because they often contain restrictions to competition (exclusivity, selectivity and non-compete clauses for example), franchise agreements may raise various issues under competition law and be ultimately considered as null and void (see Article 81(1) and (2) of the EC Treaty and corresponding Article 4(1) and (2) of Law 18/2003 of 11 June). Therefore, a competition law analysis in the light of Regulation nº 2790/1999 of the European Commission (the “Vertical Agreements Block Exemption” that provides for exemption of such type agreements) is strongly advised. Such analysis appears all the more necessary further to the recent declaration by Mr. Abel Mateus, chairman of the Competition Authority, that commercial distribution is likely to be investigated by the Authority. The preliminary step in conducting such analysis is always to assess whether the market shares of the parties do not exceed certain minimum thresholds. If it is the case, the agreement may be covered by the De Minimis Notice and escape the Article 81(1) prohibition. If it is not, it shall be determined whether the Block Exemption applies. There are two main conditions for achieving exemption under the Vertical Agreements Block Exemption. First, the supplier’s market share on the relevant product/services market shall be inferior to 30% (the buyer’s market share will have to be taken into account only where the agreement contains an exclusive supply obligation). As a provider of a business method, the franchisor shall calculate its market share by taking into account the providers of other competing franchised business methods and also the suppliers of substitutable goods or services that do not operate under franchising-type structures. Second, the agreement must not contain any “hardcore restrictions”. These refer for example to clauses in which the Franchisor intends to fix its Franchisees’ resale price or to those aiming at conferring absolute territorial protection to the Franchisees. Overall, clauses that tend to protect the “essential elements” of the franchise agreement such as the maintenance of the identity and reputation of the Franchisor’s network or the protection of the Franchisor’s know-how or trade-mark should in general not fall under Article 81(1). A Franchisor may for example, impose non-compete obligations on its Franchisees to prevent them from entering into a second franchise agreement with a competing franchisor or from selling competing products or even products that are not supplied by the Franchisor or by its selected suppliers. It may also require its Franchisees not to use or disclose secrets or substantial know-how, even after the expiry of the agreement. Franchising has proved to be a very successful way to distribute products especially in Portugal. Companies should however always make sure that their franchise agreements are in line with competition law and other relevant provisions.