Germany is a mature franchising market, with a good number of indigenous franchises ranging across more than 42 different sectors, from retail and fast food through hotels, education, car rental and domestic services to energy, health care and telecommunications. The three biggest sectors are services (39 per cent), retail (31 per cent), and hotels and gastronomy (20 per cent).
There are currently more than 950 active franchise systems and 156,662 franchise businesses in Germany, employing more than 686,166 employees, according to the German Franchising Association.2 The current annual turnover of the German franchise sector is estimated at about €99.2 billion.
Domestic franchise chains, such as Apollo-Optik, Arko Kaffee und Confiserie and BabyOne sit side by side with the likes of McDonald’s, Hertz, Intercontinental Hotels and Mail Boxes Etc.
The German Franchise Association and the German Franchisee Association are both active, and the German Franchise Association is a member of the European Franchise Federation and of the World Franchise Council.
II MARKET ENTRY
Although the General Trade Act imposes some sector-specific regulations, Germany is a market economy, which typically imposes no restrictions on foreign franchisors as regards the granting of master franchise or development rights.
ii Foreign exchange and tax
There are no foreign exchange controls or restrictions on foreign currency payments applicable to cross-border franchising in Germany. It is prudent to ensure that franchise documentation states the currency in which payments should be made and the rate and time of currency conversion. Likewise, it is preferable to describe ongoing fees as service fees rather than royalties, as these can be more advantageously dealt with tax-wise.
Germany has double-taxation treaties in place with most countries and the terms of the relevant treaty should always be taken into account when structuring international payment flows.
III INTELLECTUAL PROPERTY
i Brand protection and search
The key intellectual property rights involved are trademarks, designs, domain names, copyright and database rights (patent rights are usually not relevant). Although copyright is not registrable in Germany, trademarks are, and franchisors can choose whether to register them as domestic German or European Union trademarks (EUTM) or international registrations. The registration fee for an application for a German registration is €300 with a discount of €10 should the registration be made online. A fast-tracked examination is available for an additional fee of €200. If more than three classes of goods and services are requested, a fee of €100 for each additional class will be charged.
Not surprisingly, however, most franchisors opt for EUTM registrations rather than German domestic registrations, although domestic registration is more common if it is a German-language mark used solely for a domestic German business. Franchisors can extend their trademarks to Germany as part of an international registration or subsequent designation, as Germany is a party to the Madrid Protocol.
Germany is a first-to-file jurisdiction, although unregistered marks can be acquired by way of usage if they have acquired a reputation in Germany, and Article 6 of the Paris Protocol also ensures that ‘well-known marks’ can be protected even if there is no evidence of use in Germany. The German Unfair Competition Act provides supplementary protection to trademarks.
In addition to pure trademark protection, the German Trademark Act also grants special protection for trade designations, which could be business names or titles of works. Their protection does not require a registration, but rather a certain level of usage of the trade designation by the proprietor.
As trade designations are not contained within the trademark register, special search tools are required to identify existing prior third-party rights.
Trademark proprietors are entitled to commence enforcement proceedings based upon their trademark rights. It is possible to obtain a preliminary injunction in Germany, even without an oral hearing, within a very short time, but any delay in issuing proceedings can mean that this right may fall away. Both parties must be represented before the court by a lawyer admitted to the German Bar.
German litigation lawyers usually work on an hourly fee arrangement – conditional fees are generally not compliant with German Bar rules. In German litigation, the English rule applies, so attorneys’ fees are usually paid by the losing party to the winning party. The amount to be refunded is, however, limited by the Attorney’s Remuneration Act and, as a result, the winning party may end up bearing part of its own attorney’s fees
iii Data protection, social media and e-commerce
The rules of data protection law play an important role in any dealings with the personal data of end users (and employees); these rules have a significant impact, for example, when franchisors run loyalty programmes and promotional campaigns. The German Federal Data Protection Act (GDPA), which is based on the EU Data Protection Directive 95/46/EC, will be largely replaced by the General Data Protection Regulation (Regulation (EU) 2016/779 (GDPR) from 25 May 2018 onward. Any processing of personal data by the franchisee (and franchisor) must be based on the consent of the data subject or legal justification under law. Wherever a data controller transfers data outside the EU or EEA, for example, into the United States, measures to ensure an adequate level of data protection compliance must be met. Following the ‘Safe Harbor’ ruling of the European Court of Justice,3 data controllers must now resort to other suitable means for transferring personal data into the United States, such as data subject consent, the EU Model Contract Clauses, Binding Corporate Rules (for transfers within corporate organisations) or the EU–US Privacy Shield Framework (the Privacy Shield). The Privacy Shield replaces the former Safe Harbor Framework, and is intended to ensure greater transparency, accountability, effectiveness and judicial safeguards with regard to European privacy standards when transferring personal data to the United States.4 Where a data controller instructs a data processor to process data on its behalf and subject to its instructions within the EU, the parties have to enter into a commissioned data processing agreement. Under the GDPR, the data processor will assume genuine liability towards the data subject and the authorities for complying with data protection law, whereas under the current GDPA only the data controller is responsible towards the data subject and the authorities.
Notably, each regional state in Germany has its own data protection authority, which can take slightly different views on interpreting and enforcing the law. Under the GDPR, the possible scope of interpretation will narrow down given its universal application throughout the EU and EEA; the yet to be established European Data Protection Board will have an important role in giving further guidance; the GDPR also provides for other forms of secondary law that may take consideration of particular industry and sector practices, such as codes of conduct (Articles 40, 41 GDPR) and certifications (Articles 42, 43 GDPR). Further to that, there are also various sector-specific regulations, such as those that apply to providers of telemedia services under the German Telemedia Act, which is relevant for online marketing and user-tracking activities, or to internet service providers. Lack of compliance with data protection laws can lead to serious consequences, including monetary fines and cease-and-desist orders, as well as reputational issues and negative publicity in Germany.
Social media monitoring as well as active marketing through social media raises considerable issues under German privacy rules, which is why use of these channels is typically less developed than in other European jurisdictions. Accordingly, taking proper legal advice on a case-by-case basis is required for activities in this field.
German regulations on e-commerce mainly derive from EU legislation, such as the directives on distance selling5 and on consumer rights.6 E-commerce providers need to observe a variety of information obligations; failure to comply with these obligations can trigger extended rights of withdrawal for consumers, as well as possible competitor actions.
On the basis of unfair competition law, competitors as well as competition associations, qualified consumer protection associations and chambers of industry and commerce, or craft chambers, can launch cease-and-desist actions against market players that do not ‘play by the rules’ with regard to compliance with requirements on electronic contracting, information obligations, unlawful advertising or even, in certain circumstances, presenting clauses in standard terms of business that are partially or entirely unenforceable. Given the quick reaction times and the speed of courts in granting injunctions (including ex parte injunctions), businesses need to pay particular attention to the potential pitfalls in the area of unfair competition law.
IV FRANCHISE LAW
There is no franchise law as such in Germany; provisions concerning franchising can instead be found in the general codes of law such as the Civil and Commercial Codes. These provisions, inter alia, impose pre-contractual disclosure obligations and a heavy expectation of good faith on all parties, making claims of profit to potential franchisees particularly risky.
ii Pre-contractual disclosure
Pre-contractual disclosure obligations are imposed on the principle of culpa in contrahendo, which is codified in Section 311(2) of the Civil Code. In addition, the law concerning misrepresentation is also relevant.
During the negotiations, both parties – not just the franchisor – must tell the truth, make no false promises and disclose all material facts to each other. This is especially true as regards those facts that will have a material impact on the success of the franchise and that may induce the potential franchisee to become part of the network. Earnings claims are particularly difficult and must be based on reliable and relevant empirical data – estimates must be clearly labelled as such. It is even possible that should the franchisor’s directors or agents make dishonest or misleading statements to potential franchisees, they could be held personally liable according to Section 311(3) of the Civil Code.
Franchisors should therefore be very cautious in marketing their franchises in Germany. Any failure to comply with the principle of culpa in contrahendo will mean that a contract could be set aside, and any fees paid may have to be repaid in full. There is a statutory period of limitation of three years for such claims, which commences at the end of the year in which the claim arose and the franchisee obtained knowledge of the circumstances giving rise to the claim.
Germany does not require franchises to be registered.
iv Mandatory clauses
The ongoing relationship between franchisor and franchisee is especially affected by agency laws7 if the franchisee commits to the ongoing purchase of products and equipment. Antitrust law, based upon Article 101 of the Treaty on the Functioning of the European Union (TFEU), also has an impact on issues such as the grant of exclusivity, tying and price control.
A test of fairness by the rules on unfair contract terms will be imposed on any provision in a standard form agreement that has not been negotiated by the rules on unfair contract terms.8 The threshold for qualifying as ‘negotiated’ is rather high in Germany, so it is very likely that a standard form agreement will fall within the scope of the rules on unfair contract terms. Special justification is generally needed if a provision deviates from the fallback position as set out in the Civil Code to the detriment of the franchisee. Franchisees can be treated as if they were consumers in domestic agreements.
Several statutory provisions will be implicit in the agreement, such as a right of the franchisee to terminate and the franchisor’s obligation to provide certain services. There is a great deal of case law on the question of what constitutes sufficient grounds for termination, so franchisors must be cautious when exercising or contesting this right.
v Guarantees and protection
The principle of contra bonos mores has a limiting effect on securities, especially if the value of the surety clearly exceeds the debt. In such a case, the suretyship agreement might be declared void or the debtor can demand a partial release of the security.
i Franchisor tax liabilities
Franchisors that are tax resident in Germany are liable for corporation tax of 15 per cent plus a solidarity surcharge that is added to the corporate income tax and set at a rate of 5.5 per cent of the corporate income tax rate (equalling an additional 0.825 per cent) and trade tax. Trade tax is a municipal tax. As such, tax rates are individually determined by each municipality (the German average is around 14 per cent). Withholding tax of 25 per cent is payable on dividends.
Royalty fees for the granting of rights under the German Copyright Act (e.g., software licences, although not the licences to use patents or trademarks) bear a reduced VAT rate of 7 per cent, while all other fees paid to the franchisor by the franchisee are subject to VAT at 19 per cent. The initial franchise fee is usually amortised over the duration of the franchise for income tax purposes.
ii Franchisee tax liabilities
In addition to corporation tax and the solidarity surcharge, trade tax is also payable by franchisees.
Tax on personal income falls into bands ranging from 14 to 45 per cent; corporate tax, municipal trade tax and VAT also apply at the rates mentioned in Section V.i.
VI IMPACT OF GENERAL LAW
i Good faith and guarantees
Franchisors cannot exercise their contractual rights or change their business formats with impunity, as the concepts of good faith and fair dealing are implicit in all agreements. Although both franchisors and franchisees benefit from and carry reciprocal burdens, it is generally franchisors, as the dominant parties, that find they have to defend themselves from allegations of behaving unfairly or in bad faith. This is particularly the case when franchisors seek to issue disciplinary or other actions against their franchisees, so their actions need to be proportionate.
ii Agency distributor model
The courts often apply agency law to franchise agreements by analogy.
iii Employment law
Some employers in low-skill businesses, such as contract cleaning, have been known to use a form of ‘false franchising’ as a way of reducing their liabilities to their employees. The German courts are very sensitive to this type of abuse and the Federal Labour Court’s decision in the Eismann case9 established that franchisees can be deemed to be ‘in fact’ employees of a franchisor if the franchisor controls every aspect of an individual franchisee’s business.
As of 2015, a uniform nationwide statutory minimum wage of €8.50 was introduced in Germany. This wage is intended to be reviewed by a commission every two years and will increase to €8.84 in 2017.
iv Consumer credit protection
Section 513 of the Civil Code protects new businesses, including some franchisees, in relation to loans, respites or any other forms of financial aid, as well as instalment supply contracts. Specific statutory information requirements apply and such franchisees may be entitled to withdraw from their contracts.
v Competition law
German competition law is based on the corresponding provisions contained in the TFEU. Nevertheless, the German courts can be particularly strict in their approach.
vi Restrictive covenants
Franchisors can prevent their franchisees from competing with them for the duration of their agreements, but prohibiting franchisees from supplying other franchisees within the same franchise systems is regarded as contravening Article 4(b) of the Block Exemption Regulation. Post-termination restrictive covenants must be explicitly provided for in the franchise agreement and limited in time, scope and territory, and are only enforced by the courts in the event that the franchisor has paid the franchisee a consideration for them.
The franchisor cannot terminate a franchise contract for a minor breach. Termination must be proportionate, fair and in good faith.
If the franchisee undertakes to sell its business to the franchisor on termination, this will be enforced by the courts, but is not common practice among franchisors in Germany.
viii Anti-corruption and anti-terrorism regulation
In practice anti-corruption and anti-terrorism compliance considerations do not apply in the context of franchising in Germany.
ix Dispute resolution
Foreign law is generally acceptable in agreements if they have sufficient connection to a foreign country, but not if both parties are located in Germany. Even if foreign law has been agreed, mandatory German and European laws will apply if the franchisee is operating in Germany. Under the Brussels I Regulation, judgments of a court of an EU Member State are enforceable in other Member States without the need for any special procedures, and arbitration awards are fully recognised; mediation is also available.
Injunctions are relatively easy to obtain. Ex-franchisees that continue to use former franchisors’ marks are easily stopped by way of interim injunctions. Damages can be awarded but are usually intended to cover actual losses incurred.
VII CURRENT DEVELOPMENTS
The courts continue to wrestle with issues concerning the pre-contractual disclosure, termination, the need to give notice, and cooling-off periods. It is likely that this will remain the situation for the next few years.
1 Stefan Münch, Alexander Duisberg and Markus Körner are partners and Michael Gaßner is an associate at Bird & Bird LLP. This chapter was originally drafted by Stefan Engels and Bahne Sievers, former lawyers of Bird & Bird LLP.
2 Figures as of 2014 by the German Franchise Association (Deutscher Franchise-Verband e.V.).
3 ECJ C-362/14, Schrems, 6 October 2015.
4 Certain civil rights organisations have challenged the Privacy Shield; proceedings are pending before the court of first instance, Case T-670/16, Digital Rights Ireland.
5 Directive 97/7/EC.
6 Directive 2011/83/EU.
7 Agency laws, inter alia, impose the duty on franchisors to pay compensation to franchisees on termination, the principle of good faith, the rule that unfair contracts are void and the principle that long-term contracts can be terminated for good reason, and cooling-off rights in accordance with European consumer protection law.
8 Section 305 et seq. of the Civil Code.
9 NJW 1997, 2973.