Franchise fulfils an important role in the Dutch economy. Approximately 800 franchisors are active on the Dutch market. Together, they have almost 31,000 franchise outlets, employ almost 300,000 people and generate a turnover of over €32.5 billion.2 The biggest franchise formulas in the Netherlands are: RegioBank (bank), Primera (convenience store) and Jumbo (supermarket).3
The Netherlands Franchise Organisation acts as the umbrella branch organisation for franchise businesses and is responsible for the healthy development of franchising in the Netherlands. The Netherlands Franchise Organisation has more than 200 members (franchisors) and is affiliated with the European Franchise Federation and the World Franchise Council.4
II MARKET ENTRY
In the Netherlands, there are neither restrictions on a foreign entity granting a master franchise nor restrictions on foreign franchisors owning equity in a local business or owning real property. However, companies incorporated under foreign law that are not located in a country that is a member of the European Economic Area can be subject to the Companies Formally Registered Abroad Act if they want to operate on the Dutch market. On the basis of this Act, companies have to comply with statutory and registration requirements that are applicable to Dutch companies, such as registration in the Business Register.
ii Foreign exchange and tax
No specific tax rules apply for a foreign franchisor who wants to set up a franchise chain in the Netherlands. Foreign franchisors or franchisees qualify as Dutch resident for tax purposes if they are established in the Netherlands as a Dutch liability company (for example, a private or a public limited liability company, BV or NV respectively). In that event, foreign franchisors and franchisees will be treated in the same way as Dutch residents for tax purposes.
III INTELLECTUAL PROPERTY
To exploit a franchise formula successfully, it is, of course, necessary for a franchisee to be entitled to use the franchisor’s store concept, business name and logo, and the franchisor’s know how. In the paragraphs below we will outline different ways for a franchisor to protect its intellectual property rights. Know-how is not protected by intellectual property law.5 Know-how can be protected by putting in place contractual non-disclosure and non-compete obligations.6
i Brand search
Trademarks can be looked up online in databases. A franchisor can check if a trademark is already registered at EU level on the website of the European Union Intellectual Property Office (EUIPO).7 Moreover, registered Benelux intellectual property rights can be looked up on the website of the Benelux Office for Intellectual Property (BOIP).8 International trademark registrations can be looked up in the database of the World International Property Organization.9
ii Brand protection
Trademarks have to be registered to receive trademark protection. In the Netherlands there are no Dutch national trademarks, but one can apply, through the BOIP, for registration of a Benelux trademark, which is protected under the Benelux Treaty for Intellectual Property. If a trademark is registered in the Benelux trademark register, the registrant has exclusive trademark rights in the Netherlands, Luxemburg and Belgium. Moreover, a trademark can be registered as an EU trademark in the EU trademark register. If the franchisor decides to do so, he or she has the exclusive right to the trademark in the European Union.
The procedure for definitive trademark registration takes about three months at the BOIP and six months at the EUIPO and the registration is valid for a period of 10 years and subsequently can be renewed for an unlimited number of successive 10-year periods. In principle, therefore, a trademark can be protected indefinitely. The registration process consists of the following steps:10 online application and payment of a fee, publication of the application, examination of the application, possible opposition by third parties and formal registration of the trademark (on condition that no successful opposition was made, possible objections were rejected and the application fulfils the registration requirements).
Formal registration for copyright is not required (and not possible) in the Netherlands. Copyright is granted automatically to works that meet the criteria for copyright protection under the Dutch Copyright Act, because the Netherlands is party to the Berne Convention.11 A franchise formula can be protected by copyright if the formula qualifies as a product of art, science or literature.12 Under the Dutch Copyright Act only the original application of a franchise formula is protected. The imitation of a franchise formula does not automatically entail that the similar franchise formula infringes the imitated franchisor’s copyright. To determine this, a judge will take into account the degree of similarity between the formulas, the development of the franchise formula and the possibility that imitated elements of the protected formula could be derived independently, were public or previously known.
A trade name does not have to be registered to be protected under the Dutch Trade Names Act; protection is granted to a trade name that is actually used. It is prohibited to use a trade name that is (nearly) identical to an older trade name, if this use can lead to a risk of confusion among the public. The greater the extent to which companies conduct different types of business or conduct business at different geographical locations, the less likely the risk that confusion will be established.
A franchise agreement usually licenses the franchisee to use the intellectual property rights (usually trademarks) of the franchisor. In the event that a dispute arises regarding this right of use, parties may bring legal action against each other, which means that parties can also start summary proceedings to obtain provisional measures. If the trademark licensee (franchisee) is registered in the trademark register, the franchisee is able to step in on counterfeit actions initiated by the franchisor. The franchisee is in this event entitled to bring a claim for compensation or remittance for profit.13 This enables the franchisee to obtain compensation for damage it has suffered because of the infringement. This is only possible if the franchisor has given the franchisee the authorisation to start these proceedings.14
Moreover, in cases of major urgency and evident infringement (i.e., where delay would cause irreparable harm), an intellectual property (IP) owner can request an ex parte injunction from a judge in summary proceedings; this is an injunction granted without notice being given to the infringer.15
iv Data protection, cybercrime, social media and e-commerce
Many franchisors collect, use and often share with their franchisees or other parties large amounts of consumer data; for example, in the context of loyalty programmes or (digital) marketing. These large datasets can be analysed with data management programs and big-data applications to improve the franchisor’s services and marketing.
This handling of data falls within the scope of Dutch data protection law, under which consumer data qualifies as ‘personal data’. Until 25 May 2018, Dutch data protection legislation will be laid down in the Dutch Data Protection Act (DDPA). The DDPA includes the EU-wide recognised data protection principles and regulates – in a nutshell – whether and under which conditions personal data may be used, which precautions need to be taken (e.g., information, consent, notification and pre-authorisation obligations), which rights of the data subject need to be respected (e.g., rights to access, objection, deletion and correction) and which arrangements the parties involved in the processing of the data have to make (e.g., entering into a data processing agreement or implementing data transfer mechanisms).
As of 1 January 2016, two important amendments of the DDPA entered into force. First, the DDPA, as of that date, includes a legal requirement to notify (serious) data breaches to the Dutch Data Protection Authority (DPA) and to the individuals concerned (the data subjects).16 Second, the competence of the DPA to fine organisations for violating the DDPA was extended.
As of 25 May 2018, the General Data Protection Regulation (GDPR)17 will apply throughout the EU. Under the GDPR, for each violation the DPA can impose fines of a maximum of €20 million, or 4 per cent of the controller’s total worldwide yearly revenue. The aim of the new legislation is to enforce similar, strict data protection rules in all EU Member States, especially in light of new privacy-intrusive technologies (profiling, big-data applications, etc.). For example, franchisors will have to give consumers more control over their personal data by providing them with more extensive information about the processing of their data, and will have to grant consumers additional rights.18 Further, franchisors no longer have to deal with all local data protection authorities where they are established but instead will mostly be supervised by a single lead authority. The Dutch government intends to adopt a new act to smooth the implementation of the GDPR. The Dutch government published a draft of this act and provided stakeholders with the opportunity to comment. In its opinion,19 the DPA advised the government to follow the usual ‘policy neutral’ approach, meaning that no rules will be included other than those strictly necessary for implementation of the GDPR and to retain the current privacy practice. At the moment of writing, no final act has yet been published or adopted.
According to the Dutch Franchise Code (DFC), the franchise agreement should include arrangements or agreements regarding the collection, use and exploitation of consumer data.20
Cybercrime, social media and e-commerce
In the Netherlands statutory laws apply to cybercrime, social media and e-commerce, but none of these are franchise specific. However, if franchisees or franchisors sell products or services through a website to consumers, they are subject to disclosure requirements for distance contracts,21 requirements for concluding contracts by electronic means22 and requirements for service providers23 as set out in the Dutch Civil Code (DCC).
IV FRANCHISE LAW
In the Netherlands, there is no statutory law on franchising. There is a wide range of case law on franchising from which it is clear that civil law applies, including statutory and case law on contracts, as well as the specific rules on trademarks, trade names, and Dutch and European competition law. In addition, franchisors who are members of the Netherlands Franchise Association have to comply with the European Franchise Federation’s European Code of Ethics for Franchising.24 Efforts have been made to draft – and provide a statutory basis for – self-regulation guidance, but this is at present unlikely to succeed in its current form (see Section VII).
ii Pre-contractual disclosure
There are currently no statutory pre-contractual disclosure obligations for franchisors. Based on the general rules of error, a franchisee can annul a franchise agreement if he or she was in error about relevant circumstances on the basis of a statement or information provided (or omission to provide the same) by the franchisor, and if he or she would not have concluded the agreement without that information.
From general contract law, it follows that the franchisor has an obligation to provide relevant information to a franchisee and a franchisee also has a duty to ask questions to get information. The scope of these duties depend on the power and specific position and knowledge of each party. Nevertheless, the duty to inform the other party of relevant information generally outweighs the duty to investigate.
In Paalman/Lampenier,25 the Dutch Supreme Court determined that the doctrine of reasonableness and fairness does not, in principle, place an obligation on franchisors to provide a financial prognosis to a prospective franchisee except in special circumstances. It follows from lower court case law that if the franchisor does provide a profitability assessment to the franchisee, the franchisor has a special duty of care. A financial assessment has to be diligently prepared. This means that the financial assessment must be based on a careful and thorough location survey and market investigation, and must contain a clear substantiation of the figures.26 If the franchisor, for instance, provides the franchisee with a financial prognosis and is aware that the prognosis contains serious flaws but does not notify the franchisee of those flaws, the franchisor may be found to have acted wrongfully and be held liable for damages.27 This was recently confirmed by the Supreme Court in the StreetOne case, and it was clarified that if the franchisor prepared the forecast him- or herself, he or she is responsible if it was not diligently prepared.28 If the franchisee relies on incorrect information (regardless of whether the franchisor knew it was flawed), and proves that he or she would not have entered into the agreement without that information, he or she may nullify the agreement afterwards.29 Consequently, the franchisee must be placed in a position as if the agreement had not been concluded.30
If the revenues of the franchisee turn out lower than the financial prognosis of the franchisor, this does not automatically mean that the financial prognosis was not of the required quality. Disappointing results may also result from unexpected circumstances (i.e., flaws in the exploitation of the store by franchisee or an economic recession).31 The franchisee is also obliged to independently investigate the proposition.32 Case law confirms that a candidate franchisee must have a critical attitude towards information provided by the franchisor regarding future revenues of a new franchise concept.33 However, it has also been decided that there is no duty on the franchisee to investigate the correctness of the prognosis in the event that the franchisor is a big professional party, who ensured that the prognosis was conducted with ‘great care’, and where the franchisor put the franchisee under time pressure to sign the agreement.34
According to the DFC, a franchisor should provide the franchisee with ‘written, complete and accurate information’ within a reasonable time (four to six weeks) before the conclusion of the franchise agreement, so that the franchisee does not feel rushed into the deal.35 The DFC includes an extensive list of specific information a franchisor has to provide to its (prospective) franchisees.36 The DFC does not include an obligation to provide a financial prognosis. The DFC states that it is preferable to supply a prognosis and that the prognosis has to be careful and transparently substantiated. As stated earlier, the DFC currently has the status of a self-regulation code.
There are no specific Dutch registration requirements for franchises in the Netherlands. All companies are obliged to register in the trade register of the Dutch Chamber of Commerce. Zoning and other administrative law requirements may apply depending on the type of franchised business.
iv Mandatory clauses
Currently, no franchise-specific legislation has been adopted. For this reason, there are no mandatory clauses that must be included in franchise agreements. Efforts have been made to draft – and provide a statutory basis for – self-regulation guidance, but this is at present unlikely to succeed in its current form (see Section VII).
v Guarantees and protection
In general, a franchisor can enforce a surety that is provided by a franchisee. Based on Dutch family law, a surety provided by a franchisee may be subject to the approval of the franchisee’s spouse. This approval is not needed in the event it is performed by a director of a private company with limited liability who alone or jointly with his or her co-directors holds a majority of shares, provided it is made in the normal conduct of the business of the company. Under normal circumstances, this will be the case when a director commits himself or herself as surety or joint and several co-obligor under a franchise agreement.37
i Franchisor and franchisee tax liabilities
First, franchisors and franchisees established in the Netherlands are subject to Dutch corporate income tax. The Dutch corporate income tax is 20 per cent for the first €200,000 taxable profit and 25 per cent for the profit that exceeds €200,000.39
Second, under Dutch tax law dividend payments and other distributions of profits made by a franchisor or a franchisee are subject to 15 per cent dividend withholding tax. An exemption may be available with respect to distributions to companies that (1) own at least 5 per cent of the shares in the distributing franchisor or franchisee; (2) are resident (also based on tax treaties between its jurisdiction of residence and third countries) in the EU, EEA or a jurisdiction that has concluded a tax treaty with the Netherlands that covers dividends; (3) do not have a function similar to a Dutch exempt investment institution or a (zero per cent taxed) fiscal investment institution as defined in the Dutch Corporate Income Tax Act; and (4) the anti-abuse rule is met. The Dutch government plans to abolish the dividend withholding tax, except for abuse situations, starting from 2020.
Third, Dutch wage tax is levied against progressive rates and is combined with the levy of social security contributions, which together comprise income tax. The combined tax rate starts at 36.55 per cent for a taxable income up to €20,142, a tax rate of 40.85 per cent applies for a taxable income up to €68,507, and for higher incomes a maximum rate of 51.95 per cent is applicable. However, the social security contributions are capped at €33,994 for individuals and the tax rate is a flat rate of 27.65 per cent. Individual entrepreneurs can benefit from various tax facilities such as a tax deduction for entrepreneurs and tax advantages for start-ups. Moreover, if a franchisor or franchisee holds more than 5 per cent of the shares in a company, a Dutch income tax of 25 per cent applies to dividends and capital gains received from these shares. If a party holds less than 5 per cent of the shares in a company, 30 per cent income tax applies over a deemed return that changes based on the average value of the parties’ investments and savings above the threshold of €25,000.
Fourth, the salary paid by franchisors or franchisees to their employers is subject to Dutch wage withholding tax and Dutch social security premiums. Notably, in the Netherlands, tax that is deducted from the salary of an employee can be fully credited against the individual income tax. Moreover, in the Netherlands, attractive tax benefits apply for foreign employers with highly qualified workers with specific, scarce skills.
Fifth, when an undertaking provides services or supplies goods in the Netherlands, it will be subject to Dutch value added tax (VAT). There are three VAT tariffs: 21 per cent, 6 per cent or zero per cent. The general VAT tariff is 21 per cent, which applies to most products and services. Certain services are exempted from VAT, such as insurance. Undertakings whose services or goods are subject to VAT can deduct VAT that is charged. In 2019, the Dutch government plans to raise the lower VAT tariff from 6 per cent to 9 per cent.
Finally, the Dutch government proposes to introduce a withholding tax (15 per cent) on interest and royalty payments from a Dutch taxpayer to a low-tax jurisdiction. Currently, it is uncertain when this will be formalised in a legislative proposal.
ii Fiscal climate
The Dutch tax system has a number of features that may be very beneficial in international tax planning, which, for various multinationals, has made the Netherlands a prime location in which to establish their franchise or financing company. One of the most attractive features is the participation exemption. Under this exemption capital gains derived from a qualifying shareholding (generally, holdings of 5 per cent or more) are fully exempt from Dutch corporate income tax. Other advantages are the absence of withholding taxes on interest and royalty payments (although this will change, as noted above in Section V.i), the absence of a capital contribution tax, creditability of foreign withholding taxes, the low level of taxable profits and the possibility of obtaining advance certainty in that respect by concluding advance pricing agreements with the Dutch tax authorities. The Netherlands has also entered into a comprehensive network of tax treaties that in most cases reduce withholding taxes on dividend, interest and royalty income received by a Dutch franchisor or franchisee from foreign countries and on dividend distributions made by a franchisor or a franchisee.
VI IMPACT OF GENERAL LAW
i Good faith and guarantees
There are three important and regularly invoked legal principles that play a prominent role in Dutch contract law:
- a the principle of contractual freedom (i.e., the principle that parties are free to draw up a contract according to their own wishes);
b the principle of pacta sunt servanda (i.e., the principle that each contract, as a rule, must be respected); and
- c the principle of reasonableness and fairness.40
According to the last of these, a contractual provision in a franchise agreement can be set aside if, based on the principle of reasonableness and fairness, the effect of this provision in the circumstances of the case is considered to be unacceptable.41 Courts adopt a reticent approach to deviating from a written contract based on the principles of reasonableness and fairness, and should always make an assessment on a case-by-case basis.42 For example, regarding termination of distribution (or franchise) agreements, courts consider a long duration and a high degree of dependency relevant indicators to set aside a (too) short contractual notice period. A limitation of liability, for instance, cannot be invoked if damages arise as a consequence of wilful misconduct or gross negligence of the debtor itself. Furthermore, it is possible that an exclusivity clause granting the territory to the franchisee could be set aside in the event of economic necessity on the part of the franchisor.43
A franchisor can have a duty of care towards its franchisees, the presence and level of which depends on a variety of circumstances, such as the type of franchise, the experience of the franchisor, etc. For example, the extent to which the franchise concept covers the total business can be relevant; whether the franchise concept is to be followed strictly (hard franchise); how much the franchisee can influence the operation of his or her own business; and how dependent he or she is in the relationship. The less influence the franchisee has over his or her own business decisions, the higher the level of the duty of care the franchisor will owe to the franchisee. And the higher the level of duty of care, the more quickly the franchisor would need to offer assistance, advice and possibly make changes in the franchise (or retail) concept to overcome any problems the franchisee may face, to avoid responsibility and thus liability for negative results and damages.
ii Agency distributor model
Unlike franchising or distribution, commercial agency is governed by statutory law, including certain mandatory provisions, implemented on the basis of Council Directive of 18 December 1986 on the coordination of the laws of the Member States relating to self-employed commercial agents (86/653/EEC). While franchisees and distributors are, as a rule, not entitled to goodwill compensation upon termination, an agent may claim compensation for goodwill provided that the following conditions are met:
- a the agent has brought the principal new clients or has significantly increased the volume of business with existing clients;
- b the principal continues to derive substantial benefits from the business with those clients; and
- c the payment of this compensation is equitable.
The amount can never exceed the equivalent of one year’s compensation, based on the average of the previous (five) years, as this is taken to provide an indication of the maximum exposure foreseeable. The commercial and financial risks rest with the principal under an agency agreement.
If, in reality, the franchisee acts not for his own account and risk, but for the franchisor’s account and risk, and in particular if it can be said the franchisee concludes contracts with customers in the name of the principal, the agreement may in reality be an agency relationship, which would trigger the applicability of mandatory provisions on termination, commission and goodwill.44 Therefore, it is important that a franchisee clearly indicates on or in his or her premises both the franchisee’s identity (legal entity name) and that the franchisee operates the franchised business in his or her own name and for his or her own account and risk. Usually, a sign in the store and a clear indication on, for example, the receipts that the customer receives upon payment are sufficient.
iii Employment law
There are three key requirements to qualify as an employment agreement under Dutch law. The employee (1) has to perform work for a period, (2) in the service of the employer (relationship of authority), and (3) in exchange for a salary.45 This is mandatory law, which means that if – based on all the circumstances of the case – an agreement between parties meets these three requirements, there is an employment agreement (even if the parties expressly agree otherwise).46 In most cases, a franchise agreement is not an employment agreement, because the authority relationship is missing. A franchisee is often an independent entrepreneur who runs his or her business at his or her own expense and risk. However, the franchisor can be in a relationship of authority to the franchisee if the franchisee is obliged to comply with detailed (and regular or individual) instructions from the franchisor; for example, with regard to the set-up and execution of the franchisee’s business activities or the working hours of the franchisee. As a basic rule, no relationship of authority exists if the compelling instructions of a franchisor only relate to the preservation of the uniformity and quality of the franchise concept.47 Most franchise manuals would thus not create a relationship of authority.
In the event that the relationship between the parties does not correspond with the franchise agreement and qualifiess as an employment agreement, the franchisee (employee) will be granted all the rights of an employee under Dutch law. This means (among other things) that the franchisor (employer) is obliged to withhold taxes and national insurance contributions from the employee’s salary. Moreover, employees are entitled to salary during the first two years of illness, the accrual of a minimum number of holidays per year and an annual holiday allowance. In most cases, the employer also requires the permission of the Employee Insurance Agency or the subdistrict court to terminate the employment agreement unilaterally.
Following the entry into force of the Employment Relationship (Deregulation) Act as of 1 May 2016, parties can use the ‘model agreements’ on the website of the Dutch tax authorities to ensure that the relationship between parties will not qualify as an employment agreement. If the work is being carried out in accordance with the model agreement, there is no employment agreement. The use of model agreements is not mandatory. Parties can also submit their own agreement and let the Dutch tax authorities assess the agreement. Because there is a lot of uncertainty regarding the use of these model agreements, the enforcement of the Employment Relationship (Deregulation) Act 2016 has been postponed until 1 January 2018. In the coalition agreement, published on 10 October 2017, it has been announced that the Employment Relationship (Deregulation) Act will be replaced.
The risk of qualification of the relationship as an employment agreement is limited if the franchisee contracts with the franchisor through the franchisee’s Dutch limited liability company. As soon as a franchisee hires his or her own personnel, the risk that the franchisor can be seen as the employer of the franchisee’s personnel is further reduced. In addition, there is no concept of ‘joint employment’ under Dutch law. The risk that the employees of the franchisee could be considered to be employees of the franchisor, even though in theory possible, rarely occurs. It could apply if there were a lot of direct contact (instructions, authority, payment of salary) between the franchisor and the employees of the franchisee, and, for example, if for some reason the franchisee could not be held liable (for example, if the franchisee went bankrupt).
iv Consumer protection
The DCC defines a ‘consumer’ as ‘[a] natural person who does not act in the course of his professional practice or business’.48 This means that there is a negligible risk that a franchisee will be considered a consumer. However, under the DCC, small businesses may benefit from certain rules that also benefit consumers; for example, relating to the question of whether one’s general terms and conditions have been validly declared applicable and have been provided. Based on settled case law and literature, a kind of reflex effect is accepted for small businesses for the lists of terms and conditions that are deemed, or likely to be, unreasonably burdensome (and therefore voidable), meaning that small franchisees or franchisors could also benefit from rules intended to protect consumers under Dutch law.
v Competition law
Franchise agreements in the Netherlands are subject to EU and Dutch competition law. The Dutch equivalent of Article 101 of the Treaty on the Functioning of the European Union (TFEU) is included in Article 6 of the Dutch Competition Act (DCA).49 The European Commission’s Guidelines on Vertical Restraints50 also apply – through a clause in the DCA – to trade in the Netherlands that has no cross-border effect, and include a description of franchising. Specific freedoms (contractual restrictions on the franchisee) in franchising fall outside the cartel prohibition, while outside the context of franchising these are to be assessed under competition law and some are even likely to be impermissible. Furthermore, the European competition laws as set out in the Block Exemption on Vertical Agreements51 and Article 101 TFEU are relevant to assess the enforceability of exclusivity, pricing, product ties and certain internet sales provisions in franchise agreements. In Coty/Akzente52 the European Court of Justice ruled on whether a contractual clause prohibiting distributors in a selective distribution network for luxury goods from using online third-party platforms was permissible under Article 101 TFEU.
vi Restrictive covenants
Non-compete provisions during the term of a franchise agreement are generally considered to fall outside Dutch and European competition law53 if they are necessary to protect the know-how and goodwill of the franchisor that is licensed to the franchisee, and to maintain the common identity and reputation of the franchised network.54
Franchisees often try to escape from non-compete obligations by arguing that the provision constitutes a restriction on competition and is therefore null and void. Dutch courts, however, appear to have adopted a reticent approach. In the ANVR cs/IATA-NL case,55 the Dutch Supreme Court ruled that the burden of proof is high. Civil franchise cases such as Yarden franchise/X156 and Top 1 Toys/Vedes57 show that it is essential that a plaintiff invoking competition law supports his or her arguments with a thorough market definition of the relevant product and geographic market and an in-depth analysis of the market shares of the parties to fulfil the burden of proof, otherwise he or she will not succeed with the claims.
However, a franchisee can also argue that a non-compete provision is unenforceable because the effect of the provision is unacceptable on the basis of the principle of reasonableness and fairness. Relevant circumstances in relation to the enforceability of a post-term non-compete provision (or limitation of the duration thereof) are the duration of the franchise relationship, the duration and the territorial scope of the non-compete provision and the specific situation (knowledge, transfer of know-how,58 background and bargaining power) of the franchisee.59 The consequences of the non-compete provision for the franchisee may be taken into account when assessing the enforceability. The mere fact that the franchisee will not be able to generate revenues for some time is not sufficient to render the provision unenforceable. Moreover, if the franchisee has chosen to terminate the franchise agreement, he or she is less likely to be protected against a contractual non-compete provision than in a case where the franchise agreement has been terminated by the franchisor, or the termination has been caused by the franchisor’s behaviour.60 In general, and particularly if the clause does not violate competition law (for example, if the clause is block exempted), courts are reluctant to set aside a non-compete provision.
Long-term franchise agreements for a definite term end on expiry and can only be terminated earlier if agreed. If an agreement has been concluded for an indefinite term and the parties have not provided for a contractual regime for termination, the guiding principle is that the agreement can be terminated for convenience. However, taking the nature and content of the agreement into consideration, the principle of reasonableness and fairness may provide that such a termination requires sufficiently compelling grounds, a certain notice period or an offer of a certain compensation.61 The fact that the termination has a negative impact on the other party plays a role but of itself does not make compelling grounds necessary.62 If the agreement provides for a contractual regime for termination, in the event of certain circumstances the principle of reasonableness and fairness may still play a role or require there to be compelling grounds, or may prevent termination at a certain moment or without an offer of compensation.63 Although a goodwill or severance payment is normally not required in the event of the termination of a long-term agreement (except for commercial agency), a party can be held liable for, among other things, certain investments made by the terminated party if the franchisee made the investments at a point when he or she could not have foreseen the termination and it is unlikely that these investments can be recouped before the end date of the collaboration.64
In the event that a franchise agreement also contains provisions regarding the lease of premises, the franchisee is protected by Dutch mandatory provisions on rental law. A lease agreement regarding commercial premises (such as restaurants) may be terminated only through a dissolution by the subdistrict court. It is crucial that the franchisor is entitled to terminate the lease when the franchise agreement has ended – and the other way around.65 Any divergence requires the prior approval of the subdistrict court.66 This permission can only be granted if the rights of the tenant will be respected and it does not weaken the tenant’s position.67 A clause in which a breach of the franchise agreement also qualifies as a breach of the lease agreement (and on the basis of which the lease agreement may be terminated) is not a divergence that requires the prior approval of the subdistrict court.68
viii Anti-corruption and anti-terrorism regulation
The Dutch Fiscal Information and Investigation Service (FIOD) and the Tax and Customs Administration are in charge of the detection of fraud. The FIOD also has supervisory responsibility regarding anti-money laundering and is able to start criminal investigations together with the Public Prosecution Service.
The Act to Limit Fraud in Acquisitions came into force on 1 July 2016. Based on this Act, fraud in acquisitions is subject to a prison sentence of a maximum of two years.69 Moreover, the Act states that:
A person who makes public or causes to be made public information regarding goods or services which he, or the person for whom he acts, offers in the conduct of a profession or business (i.e., a franchisor) acts unlawfully towards another person acting in the conduct of his business (i.e., a franchisee) if this information is misleading in one or more of the following respects.70
Thus, based on the Act, acquisition materials that refer, directly or indirectly, to numbers, results or expected income for the franchisee should be always objective, verifiable and not misleading.
ix Dispute resolution
Forum choice and choice of law clauses
A Dutch court will apply a choice of law clause in a franchise agreement if it meets the requirements for a valid and applicable choice of law as set out in the Rome I Regulation.71 The same applies for a forum clause, if it meets the requirements as set out in the Brussels I bis Regulation.72 It is not uncommon for Dutch franchisees to initiate summary proceedings in cases of (alleged) unlawful termination. Article 35 Brussels I bis provides for the possibility of initiating summary proceedings in the Netherlands,73 even if the parties agreed that another court has ‘exclusive’ jurisdiction. In Dutch summary proceedings a franchisee can, among other things, claim continuation of the agreement arguing that it has been unlawfully terminated. The possibilities of awarding damages as a consequence of an unlawful termination of an agreement in summary proceedings are limited.
Mediation and arbitration
Mediation is not mandatory in the Netherlands, but is widely available. For example, the Netherlands Franchise Association has established its own dispute settlement rules for mediation. Members and non-members of the Netherlands Franchise Association are able to invoke these rules. Moreover, the Netherlands Franchise Association has selected qualified persons to whom parties can be referred when they wish to select a mediator.74 Moreover, during a court case, a court can recommend (but not oblige) parties to try to mediate their dispute with help of the mediation bureau of the court. During the mediation the court case will normally be put on hold.
Arbitration is a recognised form of dispute resolution in the Netherlands. If a legally valid arbitration agreement is in place, a Dutch judge is not competent to handle the case.75 However, an arbitration agreement does not preclude a party from requesting protective measures from a judge, or starting summary proceedings to obtain provisional measures (on condition that the requested decision cannot be granted promptly in arbitration).76 Arbitration proceedings are generally much more expensive than normal litigation before a Dutch court. If the franchisee and franchisor are established in countries that are party to the New York Convention77 – and to which the Netherlands is a party – arbitral awards are easily enforced.78 The Netherlands Franchise Association, together with the Netherlands Arbitration Association, has established a list of ‘franchise arbitrators’ from which parties can select an arbitrator to settle a franchise dispute.79
Civil procedural law in the Netherlands is known for its pragmatic, predictable and expeditious approach. Proceedings in a court of first instance normally take between one and two years. A bill is pending that will establish the Netherlands Commercial Court (NCC). The NCC will specialise in ruling on international trade disputes. The proceedings before the NCC will be conducted in the English language. It is, however, unclear when, or whether, the bill shall be adopted, although it is clear that the envisaged date of 1 January 2018 shall not be met.
Provisional injunctions in summary proceedings and permanent injunctions in proceedings on the merits can be obtained to prevent a former franchisee from continuing to trade in breach of a non-compete clause or from using a franchisor’s trademarks or other IP rights. A claim in summary proceedings requires an urgent interest, and if the case is too complex to handle in summary proceedings, a judge can deny the claim. However, Dutch courts tend to hear all sorts of cases in summary or injunction proceedings, including claims of a terminated franchisee that rejects the termination. It is – compared with certain other countries – relatively easy to obtain a court order in the Netherlands to seize property (including bank accounts) in the Netherlands, even prior to a court case. Such a seizure must, however, be followed by regular proceedings.
In the event of damages for breach of contract, the court will determine the damage in the way that is most consistent with the nature of the damage caused. Where the extent of the damage cannot be assessed exactly, it shall be estimated.80 Under Dutch law, the only types of damage eligible for compensation are loss to property and other prejudice.81 Loss to property comprises both the loss incurred and the profit deprived.82 In commercial cases, the losing party will normally be ordered to pay compensation of the legal costs of the other party. These costs are, however, fixed by the court and are generally much lower than the actual legal costs.
VII CURRENT DEVELOPMENTS
From 2013 onwards, franchisees pressured Dutch lawmakers to adopt mandatory rules on franchising to better protect the rights of franchisees. For this reason, the Minister of Economic Affairs established in 2014 a committee with representatives of franchisors and franchisees to draft self-regulatory rules. As a result, after a consultation round, the final version of the DFC was published on 17 February 2016.
The DFC is based on a ‘comply or explain’ principle, which indicates that the parties should express why they do not apply certain parts of the DFC. The DFC includes a chapter with definitions, three chapters with obligations of the parties (obligations regarding acquisition, publicity and mutual information facilities, preliminary contracts and the franchise agreement itself) and a chapter regarding dispute resolution. The DFC contains many ‘open standards’. This is common in Dutch contract law and, for many of these, case law has already developed a clear meaning. Most of the ‘rules’ in the DFC are not well drafted83 but are largely similar to the rules that currently apply. For example, a franchisor is required to protect and develop the franchise concept, and to provide advice to a franchisee if it is needed and requested, etc. However, the DFC also includes obligations that are clearly not in line with freedom of contract; for example, the franchisor cannot adopt clauses that permit changes to be implemented unilaterally or that permit changes to be adopted if no agreement can be reached with a ‘franchisee representative’ on the matter. Furthermore, the franchisor is obliged not to reject on unreasonable grounds the conclusion of a ‘second’ or ‘following’ franchise agreement with a franchisee. The DFC also states that the agreement has to be drafted in the national language of the franchisee’s place of residence. In a country where most people speak English or other foreign languages, this is currently not common practice if the franchisor is foreign (nor is it included anywhere else in the DCC, not even for employment or agency contracts).
Many large franchisors and the Dutch Franchise Association rejected the DFC as ‘imbalanced’ and in violation of the principle of freedom of contract. Since many franchisors refused to declare the DFC applicable to their agreements, on 12 April 2017 the Minister of Economic Affairs published a draft bill to give the DFC a statutory basis. The draft bill introduces an article into the DCC providing a legal basis for an order in council (AMvB) that will declare a ‘code of conduct’ binding for franchise relationships. The DFC is not mentioned, but it is clear that the DFC is intended to be designated in the AMvB as the applicable code of conduct.
There was a public consultation of six weeks in which to respond to the draft bill. Of the 359 submissions, the majority (mostly from individual franchisees) were supportive. Most positive responses lacked any substantiation. Many of the critical submissions were substantiated and often even academic in nature. Franchise organisations such as the International Franchise Association and the Dutch Franchise Organisation, as well as other institutions such as the American Chamber of Commerce, and franchisors, academics and private practitioners indicated their objections to the draft bill.
The first article of the draft bill includes definitions of the following concepts: the franchise formula, franchisor, franchisee and franchise agreement. It is noteworthy that payment by the franchisee of monetary compensation for use of the concept is included in the definition of a ‘franchise agreement’. The explanatory memorandum makes clear that this compensation may be direct or indirect; for example, an additional amount on the purchase price the franchisee pays for products he or she buys from the franchisor.
The second article of the draft bill lists rules that should be included in the code of conduct. These include rules about recruitment and selection of franchisees, preliminary agreements, providing essential information during the performance of the agreement, collective consultations, alternative dispute resolution, purchase obligations, non-competition after the end of the agreement, and unilateral termination by the franchisor. However, the draft bill does not give any direction as to what the content of such rules could be. Nevertheless, the draft bill does state which information must be provided to a franchisee before concluding the franchise agreement; for example, information regarding the financial position of the franchisor, the expected profits, costs and investments, the place of exploitation of the franchise formula, other franchisees, etc. Further, it is stated that it is possible to deviate from the mentioned code of conduct, although explicit reasoning has to be given in writing in the franchise agreement, detailed rules for the form and content of which may be included in an order in council. If a deviation is not explained properly, the franchisee may nullify the relevant clause of the agreement. Finally, the third article of the draft bill provides for a transition period of five years for existing franchise agreements.
As stated above, the draft bill introduces an article into the DCC that provides a legal basis for an AMvB that will declare a code of conduct (i.e., the DFC) binding for franchise relationships. An order in council is a royal decree, a rule of lower standing that the government can adopt and that does not need to be approved by the Dutch parliament. The actual rules of the code of conduct are not included in the draft bill but in the code of conduct itself. However, only the draft bill must be adopted by the parliament. Consequently, the normal legislative process only concerns the text of the bill, not the code of conduct. This means that the order in council and the code of conduct are not subjected to a full review by the parliament. This is most regrettable, since support in the sector – on the part of the franchisors – seems to be scarce.
Even if the draft bill were to be adopted, the legal status of the code of conduct (i.e., the DFC) would not be ‘law’ in the sense of a generally binding rule.84 This means that franchisors that were not part of the negotiation and drafting process of the DFC, or that officially distanced themselves from the outcome, or non-Dutch franchisors (or Dutch franchisors operating outside the Netherlands), could take the position that they are not bound by the DFC (e.g., not bound to comply or explain), even if the draft bill were to be adopted.
However, at the moment it is not certain whether the draft bill will be adopted. The Dutch coalition agreement – published on 10 October 201785 – indicates that there will be additional legislation to strengthen the position of franchisees in the pre-competitive phase. The wording of this phrase is a signal that the new government wants to take a different direction (I guess ‘pre-contractual’ is meant, and not ‘pre-competitive’). Since the date of publication of the coalition agreement, the government website that publishes the draft bill, the consultation responses and the status of the legislative process has stated that the draft bill is on hold in view of the reference in the coalition agreement.86 In the market, it is generally understood that the draft bill is unlikely to be adopted in its current form. In other words – to be continued!
1 Martine de Koning is a partner at Kennedy Van der Laan. The author thanks Renske Sinke and Isabel van Tuyll van Serooskerken for their valuable input on this chapter.
5 The Directive on the protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition, use and disclosure was adopted by the European Parliament (No. 2016/943) and will be implemented in the Dutch Civil Code (DCC) by 9 June 2018 at the latest.
6 See, for example, European Court of Justice, 28 January 1986, NJ 1988, 163, par. 16 (Pronuptia); District Court Overijssel 22 June 2016, ECLI:NL:RBOVE:2016:2914, par. 5.4. (X/FBD Franchise); Court of Appeal of ’s-Hertogenbosch 28 December 2005, ECLI:NL:GHSHE:2005:AU8610 (Multicopy).
7 https://euipo.europa.eu/ohimportal/en/search-availability; known as the European Union Office for Harmonization in the Internal Market (OHIM) until 23 March 2016.
8 See https://register.boip.int/bmbonline/intro/show.do.
10 For the correct order of steps for EUIPO and BOIP, see https://euipo.europa.eu/ohimportal/en/registration-process and https://www.boip.int/wps/portal/site/trademarks/register/how-procedure/.
11 Berne Convention for the Protection of Literary and Artistic Works.
12 Article 10 Copyright Act.
13 Article 2.32 (4) Benelux Convention on Intellectual Property. Note that a licensee is not entitled to start an injunction.
14 Article 2.32 (5) Benelux Convention on Intellectual Property.
15 Article 1019e Civil Procedure Code.
16 Article 34a(2) DDPA.
17 Regulation (EU) 2016/679 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data, and repealing Directive 95/46/EC (General Data Protection Regulation) will enter into force on 24 May 2016 and will apply from 25 May 2018. The Regulation is directly applicable and aims to ensure the same rules in all Member States. However, the Regulation includes many open norms. It is too early to indicate how these norms will be applied by the different Member States, such as the Netherlands.
18 Such as the right to data portability (Article 20 GDPR) and the right to be forgotten (Article 17 GDPR).
20 Article 4.6 sub. j DFC.
21 Article 6:230m Book 6 DCC.
22 Article 6:227b and 6:227c DCC.
23 Article 6:230a–230f DCC.
24 See the Dutch Franchise Association website: www.nfv.nl/juridisch-franchisegevers/. See the European Franchise Federation website at www.eff-franchise.com/77/regulation.html.
25 Supreme Court 25 January 2002, ECLI:NL:HR:2002:AD7329 (Paalman/Lampenier).
26 Court of Appeal Amsterdam 14 March 2017, ECLI:NL:GHAMS:2017:821 (Albert Heijn/X), District Court Overijssel 8 June 2016, ECLI:NL RBOVE:2016:2172 (Speeleiland Tholen/Otto Simon).
27 District Court Breda 14 April 1998, Prg 1998/4967 (Aviti/Kinderparadijs) and District Court Arnhem, 18 June 1999, Prg. 1999/5211 (Brown Fashion); Supreme Court 25 January 2002, ECLI:NL:HR:2002:AD7329 (Paalman/Lampenier); Court of Appeal ‘s-Hertogenbosch 15 September 2015, ECLI:NL:GHSHE:2015:3583 (ToFuel/Tofuel B.V.).
28 Supreme Court 24 February 2017, ECLI:NL:HR:2017:311 (StreetOne).
29 District Court Limburg 15 March 2017, ECLI:NL:RBLIML2017:2344.
30 Article 6:228 DCC.
31 District Court Overijssel 8 June 2016, ECLI:NL RBOVE:2016:2172 (Speeleiland Tholen/Otto Simon).
32 District Court Overijssel 9 March 2014 and 6 June 2015, ECLI:NL:RBOVE:2014:1985 and ECLI:NL:RBOVE:2015:2907 (X/Otto Simon); District Court Den Bosch 29 May 2013 (LJN CA1429); District Court Arnhem 15 June 2011 (LJN BR0232).
33 Court of Appeal Amsterdam 14 February 2017, ECLI:NL:GHAMS:2017:455 (X/Tot Straks).
34 District Court Noord-Holland 3 December 2014, ECLI:NL:RBNHO:2014:11564.
35 Article 3.4 Dutch Franchise Code.
36 This includes, for example, information on the financial position of the franchisor, published annual reports and profit and loss accounts, complete and recent overview of all franchisees including their contact information, whether there has been an earlier franchise business on the location, the reasons for termination of previous franchise agreements and accompanying documents, etc. See Article 3.6. Dutch Franchise Code.
37 Article 1:88 DCC.
38 The author thanks Crowe Horwath Foederer, Amsterdam, the Netherlands, for their valuable input on this Section.
39 Rates are based on financial year 2018 and will be subject to change in subsequent years.
40 Article 6:2(1) DCC.
41 Article 6:248(2) DCC.
42 Supreme Court 9 January 1998, ECLI:NL:HR:1998:ZC2540 and JB 1998/27, NJ 1998, 363, RvdW 1998, 17 (Apeldoorn/Duisterhof).
43 District Court Noord-Holland 30 January 2017, ECLI:NL:RBNHO:2017:688 (Intertoys/franchisenemer) and District Court Amsterdam 24 March 2017, ECLI:NL:RBAMS:2017:1860.
44 Article 7:431, 7:432 and 7:442 DCC.
45 See Section 7:610 of the DCC, which includes the definition of an employment agreement under Dutch law.
46 Although the intent of the parties may play a role in the assessment as to whether there is an employment agreement. Supreme Court, 14 November 1997, ECLI:NL:HR:1997:ZC2495.
47 Asser/Houben 7-X 2014/155.
48 Article 6:193a(1a) DCC.
49 The European Court of Justice (ECJ) has decided in the Eco Swiss/Benetton case (ECJ 1 June 1999, C-126/97) that Article 101 TFEU is considered to be a rule of European public policy. By contrast, the Dutch Supreme Court stated that Article 6 of the Dutch Competition Act cannot be qualified as a rule of Dutch public policy (Supreme Court 16 January 2009, LJN BG3582, NJ 2009 (Gemeente Heerlen/Whizz Croissanterie).
50 European Commission, Guidelines on vertical restraints, 2010/C 130/01.
51 Commission Regulation (EU) No. 330/2010 of 20 April 2010 on the application of Article 101 (3) on the TFEU to categories of vertical agreements and concerted practices (European Commission, VBER 2010/330).
52 See ECJ judgment, 6 December 2017, ECLI:EU:C:2017:941 (Coty/Akzente).
53 European Commission, VBER 2010/330, Article 5 and Guidelines on vertical restraints, 2010/C 130/01, No. 190(b); ACM Guidelines on vertical restraints www.acm.nl.
54 European Court of Justice, 28 January 1986, NJ 1988, 163, par. 16 (Pronuptia); District Court Overijssel 22 June 2016, ECLI:NL:RBOVE:2016:2914, par. 5.4. (X/FBD Franchise); Court of ’s-Hertogenbosch 28 December 2005, ECLI:NL:GHSHE:2005:AU8610 (Multicopy).
55 Supreme Court 21 December 2012, NJ 2013, 155, ECLI:NL:HR:2012:BX0345 (ANVR c.s./IATA-NL).
56 District Court of Midden-Nederland 11 June 2014, ECLI:NL:RBMNE:2014:7395 (Yarden franchise/X).
57 Court of Appeals Arnhem-Leeuwarden 15 October 2013,ECLI:NL:GHARL:2013:7702 (Top 1 Toys/Vedes).
58 District Court Overijssel 22 June 2016, ECLI:NL:RBOVE:2016:2914, par. 5.5. (X/FBD Franchise).
59 Note that a post term non-compete that applies for the entire territory of the Netherlands is not by definition invalid or unenforceable (we note, however, that competition law may set boundaries); see District Court of Breda 18 April 2012, ECLI:NL:RBBRE:2012:BW4396 (FietsNed), confirmed by Court of Appeals Den Bosch, 21 August 2012, ECLI:NL:GHSHE:2012:BX5661 (FietsNed II) and District Court Arnhem 5 October 2009, ECLI:NL:RBARN:2009:BK1781 (Bruna).
60 District Court Maastricht 17 November 2011, ECLI:NL:RBMAA:2011:BU5153 (EZL), District Court Utrecht 23 December 2011, ECLI:NL:RBUTR:2011:BV3058 (Super de Boer).
61 Supreme Court 28 October 2011, ECLI:NL:HR:2011:BQ9854 (De Ronde Venen/Stedin) and Supreme Court 14 June 2013, ECLI:HR:2013:BZ4163 (Auping/Beverslaap).
62 Supreme Court 14 June 2013 (Auping/Beverslaap).
63 Supreme Court 10 June 2016, ECLI:NL:HR:1134 (Alcatel).
64 Supreme Court 21 June 1991, ECLI:NL:HR:1991:ZC0291 and NJ 1991, 742, RvdW 1991, 169 (Mattel/Borka).
65 Asser/Houben 7-X 2014/176.
66 Asser/Houben 7-X2014/178; Article 7:291(2) DCC.
67 Asser/Houben 7-X2014/178; Article 7:291(3) DCC; see also Article 5(2) VBER.
68 Supreme Court 21 April 2017, ECLI:NL:HR:2017:752 (Kippersluis/Jumbo).
69 Article 326d Dutch Criminal Code.
70 Article 6:194 DCC.
71 Regulation 593/2008 on the law applicable to contractual obligations.
72 Council Regulation (EC) No. 1215/2012 of 12 December 2012 on jurisdiction and recognition and enforcement of judgments in civil and commercial matters (recast).
73 Provided that a party has sufficient connection with the Netherlands.
75 Article 1022 Civil Procedure Code.
76 Article 1022a and 1022c Civil Procedure Code.
77 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 10 June 1958).
78 Note that it is necessary to request a declaration of enforcement – the exequatur.
80 Article 6:97 DCC.
81 Article 6:95 DCC.
82 Article 6:96 DCC.
83 See, for example, the definitions, lack of a logical order in which the topics are placed, the overlap between clauses and mixing of rules and explanatory comments, and overall vagueness in the descriptions of obligations.
84 Art. 79 Act on the Judicial Organisation (Wet RO).
85 Coalition agreement, ‘Vertrouwen in de toekomst’, VVD, CDA, D66 en ChristenUnie. 10 October 2017 https://www.kabinetsformatie2017.nl/documenten/publicaties/2017/10/10/regeerakkoord-vertrouwen-in-de-toekomst, p. 35.