According to the experts, the Polish franchise and distribution network market will continue to grow in the coming years. At the end of 2016, there were more than 1,160 different franchise models in Poland, of both Polish and foreign origin, with 68,000 franchise outlets. Since 2015, the franchise market has increased by 52 new franchise brands. The most popular franchises are chain stores (ABC Sklepy po sąsiedzku, Delikatesy Centrum, Żabka), restaurant chains (Telepizza, KFC), clothing retailers (Vistula & Wólczanka, KappAhl) and cosmetics retailers (Inglot, Yves Rocher). Currently, a franchise remains one of the main ways of development for small entrepreneurs, and provides jobs for up to 460,000 people in Poland.
The latest trend in the franchise market is the move from classic shops to providing services online, where the franchisors create online central sales platforms for clients and then orders are delivered by local franchisees. This new solution has already been successfully adopted by Telepizza, with online orders delivered by local restaurants, and Intermarché, with online orders being picked up by clients at selected pickup points in local stores.
We can observe both the increasing presence of international franchises in Poland, and the achievements of Polish export brands abroad. The biggest Polish players on the international franchise market are companies such as Inglot (whose stores can be found on all continents, in 74 countries, including Dubai, Ivory Coast, Kazakhstan, the Philippines, Peru, Nepal and the United States), Gino Rossi, 4F and Organique. Polish producers have also started expanding into different directions, gaining recognition, for example, in B2B markets.
Franchising is perceived as a safe business concept by Polish entrepreneurs. The growing number of ‘multi-franchisees’ (entrepreneurs who own more than one branch) is evidence of the high levels of confidence in the franchise system. Companies belonging to the Polish Franchise Organisation use the Franchising Code of Ethics adopted by the European Franchise Federation.
II MARKET ENTRY
Non-EU companies are obliged to establish a branch or subsidiary company to operate a business in Poland. Ownership of real estate is restricted for non-EEA franchisors and requires government approval.
Conducting business activity in Poland requires registration. Apart from registering, there are, in general, no strict rules on starting a business in Poland.
ii Foreign exchange and tax
There are no exchange controls in force. The standard Polish withholding tax rate due on franchise fees and dividends is 20 per cent. If a double-taxation agreement (DTA) applies, both franchise fees and dividends payable to foreign entities are subject to tax established thereunder. The Polish franchisee is a remitter of withholding tax in Poland and remains liable for payment of amounts due to the Tax Office.
III INTELLECTUAL PROPERTY
i Brand search
A brand search allows assessment of the availability of a mark in the light of earlier registrations and applications. When conducted prior to filing, a brand search avoids the undesired costs of potential infringement proceedings or the unexpected necessity of changing the brand because of earlier registration of an identical or similar trademark.
The Polish Patent Office (PPO) provides online access to all published trademark applications and registrations, and can thus be used as a database for brand searches. Adequate appreciation of the potential risk of confusion with earlier trademarks usually requires some level of proficiency. The assistance, therefore, of trademark or patent attorneys is strongly recommended when analysing search results.
As of 15 April 2016, the PPO examines absolute refusal grounds only. Conflicts with earlier trademarks are not examined ex officio. The holders of earlier trademarks may oppose conflicting applications before their registration. This requires ongoing scrutiny and monitoring of new trademark applications in relevant classes.
Brand searches are usually limited to earlier trademark applications and registrations; however, to identify all potential risks connected with the launch of a new brand, it is also worthwhile conducting a ‘freedom to operate’ search. This search concerns non-trademark prior rights, such as company names, trade names, unregistered trademarks and all other designations used on the relevant market. The simplest way to conduct it is by using an internet search engine.
ii Brand protection
In Poland, a trademark application can be filed either in paper or electronic form. The scope of protection is determined by the list of goods and services attached to the application, classified in accordance with the Nice Classification. Application proceedings can take as long as between 10 and 12 months, provided the application is not opposed.
Individuals and entities that have a domicile or a business seat in Poland, or on EEA territory, do not have to be represented in trademark registration proceedings by a professional representative. Individuals or entities from outside the EEA must be represented in trademark registration proceedings by a Polish-qualified professional (i.e., trademark attorney or attorney-at-law).
Information on trademark applications is published within two months of filing. If there are no absolute refusal grounds, the application is published in the official bulletin, and from this time any third parties may file their observations regarding absolute refusal grounds, regardless of the PPO’s primary positive assessment. On the basis of these submissions, the PPO might change its view and dismiss the trademark application.
For published trademark applications, the PPO automatically runs an informative search of earlier identical or similar trademarks registered for identical or similar goods, for the purpose of registration.
Within three months of publication of the application, the holders of earlier trademarks, as well as the holders of earlier personal and economic rights, may oppose the trademark application. The opposition deadline is not extendable. The parties have two months (extendable to six months) to settle the case (cooling-off period). Following this, the PPO will proceed with the opposition. The likelihood of confusion is determined in cases of identical or similar registered trademarks applied in relation to identical or similar goods or services. The trademark applicant may raise a non-use claim against the earlier registration. The PPO is bound by the grounds of the opposition indicated by the opponent. Letters of consent are acceptable.
If no opposition is filed, the PPO issues a decision on trademark registration. Otherwise, the PPO also grants registration to the extent an opposition was dismissed by a final, non-appealable decision. Registration is conditional upon payment of the relevant registration and publication fees.
Trademark protection initially lasts for 10 years, with the possibility of unlimited extensions for subsequent 10-year periods.
A motion for invalidation of a trademark may be filed at any time after the registration based on absolute and relative refusal grounds. However, relative refusal grounds may only be raised by the holders of earlier trademarks, or earlier personal or economic right holders. Non-use cancellation is acceptable after five years of non-use, as long as there are no reasonable grounds for non-use. A non-use cancellation request may be filed by any person.
Brand protection is complementary to other intellectual property (IP) rights. A figurative or 3D mark can also be protected by copyright law or as an industrial design.
Poland has a bifurcated system, in which trademarks can be invalidated only in proceedings before the PPO, while infringement cases are decided by the courts. Accordingly, invalidity arguments may not be raised as a counterclaim defence in court proceedings (except in EU trademark infringement proceedings). There are no specialist IP courts in Poland, apart from the court dealing with EU trademarks and Community designs.
In the case of a pending infringement case a court would usually stay the proceedings if a request for invalidation were filed before the PPO; however, as there is no legal provision addressing this particular issue, it is not obligatory, and in principle the decision to stay the infringement proceedings is left to the court’s discretion.
In Poland, preliminary injunction (PI) requests are decided in ex parte proceedings (i.e., defendants are not informed about the PI request and generally have no opportunity to defend their rights until the decision on the grant of the PI is issued and served upon them, unless a court schedules a hearing to consider the PI request). There is also no formal way of submitting ‘protective letters’ (common in Germany), as they are generally not legally recognised in Poland. To obtain an injunction, the trademark holder has to prove that infringement is probable and that the trademark holder has a legitimate interest in the injunction (e.g., the lack of an injunction may cause the trademark holder irreparable damage). In the event that a PI is granted, a claim should generally be filed within 14 days of receipt of the PI decision.
In general, an action should be brought before the district court of the defendant’s seat. However, if the infringing product is available throughout the whole territory of Poland (e.g., through an online shop), a PI request or the claim itself may be filed with any of the 45 district courts in Poland. This is because the jurisdiction ratione loci can be determined by the place of an alleged infringement.
In an infringement action the claimant may claim cessation of infringement, return of unlawfully obtained profits, publication of the final judgment (or information about it) and – in cases where the infringement is culpable – compensation for damage. Moreover, the court may also decide on the destruction, withdrawal from the market or transfer of ownership of the infringing goods.
In practice, seeking damages in trademark cases may be quite difficult from an evidential perspective. It is for the claimant to prove the actual damage it suffered and the adequate causal relation between the infringement and the damage. Damages can also be calculated based on the criterion of ‘reasonable royalty’, but this is very seldom used as there are serious doubts regarding its interpretation. Obviously, the most credible point of reference for a ‘reasonable royalty’ would be the licence fee charged by the claimant in a similar case based on an existing licence agreement. This is, however, very rarely the case. Most typically, the rights holder rather claims the handing over of profits unlawfully obtained by the defendant, meaning revenues gained from sales of infringing products, as it is much easier to calculate this figure, and obtain reliable data on sales volumes and prices.
As a result of incorrect implementation of the Enforcement Directive into Polish law, requests for disclosure of information can be made only for the purpose of securing a particular claim (e.g., cessation claim, damages or return of unlawfully obtained profits). These are proceedings similar to a PI action. In the request for disclosure of information, the claimant has to indicate the claims that would be ‘secured’ by the request. In other words, it would have to be shown that the requested information was necessary to establish the scope of the claims (e.g., the amount of damage or amount of unlawfully obtained profits).
The period of limitation for all claims is three years, counted separately for each infringement from the time the right holder became aware of the infringement and the infringer; not later, however, than five years from when the infringement took place.
iv Data protection and e-commerce
The EU data protection rules have been fully implemented in Poland.
In the context of franchising relationships, the franchisor or franchisee can be considered the data controller (the data owner) or the data processor (entity acting on behalf of a controller), or both. If the franchisor as data controller outsources processing to a franchisee (or vice versa), both parties must conclude a data-processing agreement indicating at least the scope and purpose of processing.
The franchisee or franchisor (as controller) needs to have a legal basis for processing. In the context of its activity several legal bases for processing are possible, in particular, consent, legitimate interest of the data controller or data recipient, and performance of the contract with the data subjects (the latter would only be reserved to franchisees as a party to the agreement). For marketing purposes, the franchisee or franchisor can rely on legitimate interest to promote its own products or services (except for e-communication, where an opt-in is required). If, however, the franchisor would like to use the franchisee’s clients’ data for marketing purposes, it must first obtain an appropriate consent.
If the franchisee or franchisor, acting as a data controller, wants to transfer data to third countries that do not provide adequate levels of personal data protection, an additional legal basis is required. In practice, the most reliable legal basis would be entering into standard contractual clauses2 between the Polish franchisor or franchisee and the data importer from the third country. Standard contractual clauses have been issued by the European Commission as data transfer contract models. Following the decision in Schrems (C-362/14) invalidating EC decision 2000/520/WE on the Safe Harbor Framework, it is no longer possible to rely on Safe Harbor as a legal basis for data transfer to the United States. Its successor, the Privacy Shield Framework, entered into force in 2016; however, its validity is already being challenged.
Polish law provides mandatory provisions protecting consumers in business to consumer (B2C) relations. The protection exists regardless of whether the business is located in Poland. For example, if the business is located in Germany, it is obliged to follow Polish mandatory provisions protecting consumers.
As an EU Member State, Poland has implemented the New Consumer Directive,3 which provides consumers with, inter alia, the right to withdraw from distance sales agreements within 14 days of signing and imposes obligations on e-businesses to appropriately inform consumers of relevant information.
B2C companies have to be mindful of ‘abusive clauses’, which cannot be included in standard agreements with consumers. Abusive clauses concern, for instance, limitation of liability of the service provider or seller towards consumers and exclusive jurisdiction of the court applicable to B2C e-business. Clauses that have been held abusive by courts are contained in a register of abusive clauses, which currently contains almost 6,200 clauses. Until recently, it has been a practice that associations would sue businesses for the use of each abusive clause separately to profit from the suits. In April 2016, a legislative amendment comes into effect whereby the competition and consumer protection authority, rather than civil courts, will be competent to decide if specific clauses are abusive. The rationale behind the amendment is, inter alia, to curb the practice of suing entities as a form of a business model. The regulator will also have the authority to impose fines amounting to 10 per cent of the business’s turnover.
IV FRANCHISE LAW
Franchise contracts are not subject to specific regulation and the general principle of freedom of contract applies.
ii Pre-contractual disclosure
There is no mandatory pre-contractual disclosure requirement in Polish law, but there are some general rules that Polish law recognises, such as the pre-contractual principle of good faith (culpa in contrahendo) and certain other rules of the Civil Code.
i Polish tax system
The Polish tax system is a complex combination of direct and indirect taxes based on Polish regulations, international treaties and EU law.
Poland has been a member of the Organisation for Economic Co-operation and Development (OECD) since 1996. The OECD issued and systematically updates the Model Tax Convention on Income and on Capital, as well as the commentary to the Convention. Most DTAs to which Poland is a party are based on the Model Convention.
Individuals and companies receiving income sourced in Poland are subject to Polish income tax, personal and corporate, respectively. Within this scope, Polish law applies unless any international agreements – including DTAs – provide otherwise.
DTAs significantly affect the tax treatment of cross-border transactions, but privileges under a DTA apply if a taxpayer submits a valid tax residency certificate issued by its local tax authority. Foreign tax residency certificates remain valid for Polish tax authorities throughout the validity period provided in the document. If a tax certificate does not include an expiry date, from 4 January 2015, it will be valid for 12 months following its issuance date unless the taxpayer changes its domicile within this period.
Poland is a member of the EU and thus is also a member of the harmonised VAT system.
ii Franchise taxation
Franchising is not expressly regulated under Polish contract and tax laws (mixed contract). Therefore, income and costs derived from franchising are taxed in a manner applicable to the taxation of those contracts to which franchising contracts are similar.
Under Polish law, following OECD guidelines, income derived from franchising should be divided for income resulting from certain sub-arrangements covered by the franchising relation, including provision of know-how, licensing and provision of services. Each part is then subject to the different tax treatment applicable to each particular type of income.
Moreover, in the event that any business arrangement – including a franchising contract – is set up between related parties (affiliates), transfer pricing regulations apply. If applicable, parties should draft and store transfer pricing documentation reflecting the market value of any payments made between parties under contract; any lack of relevant transfer pricing documentation may be challenged by the Polish tax authorities. Parties may also be required to pay increased tax as a result.
As of 1 January 2015, partnerships, in the same way as companies and individuals, are required to comply with transfer pricing regulations.
VI IMPACT OF GENERAL LAW
i Good faith and guarantees
Parties to a contract are expected to act in good faith and the courts will take this into account.
ii Agency distributor model
Although Polish courts have not yet awarded franchisees the protection provided under the Polish Civil Code,4 it is possible that this may happen in the future.
iii Employment law
Franchising is commonly regarded as a form of business activity.
The franchisee cannot be treated as an employee, and operates under its own name, bearing the economic risk of its own activities. The relation between franchisee and franchisor can be described as cooperation, not as employee–employer subordination. Also, the franchisor receives remuneration under a franchising agreement, while the employee receives remuneration in accordance with an employment agreement. Franchisees are not entitled to the same social protection as employees.
iv Consumer protection
As franchisees are considered businesses, they are not protected by Polish consumer law, even in the case of sole traders.
v Competition law
A franchise agreement is a type of distribution (vertical) relationship between independent entities. Under certain circumstances, such a relationship may affect trade by restricting or distorting competition in the relevant market, as it usually contains a combination of different vertical restraints. The Polish Competition Authority has issued a number of decisions regarding franchising. In June 2013, it issued its most notable decision, concerning the fixing of resale prices by Sphinx Polska, which is one of the largest restaurant chains operating in the casual dining sector in Poland.5
Franchising is defined as a distribution system in which the franchisee is directly or indirectly obliged to resell goods that have been bought from the franchisor, and to use intellectual property rights and know-how that have been licensed from the franchisor. Since the scope of this definition is fairly broad it is common in practice to apply a more specific definition made under EU rules.
Provided that the franchise agreement contains some restrictive clauses it can be exempted from the prohibition of anticompetitive agreements as long as the aggregate market share of competitors on the relevant market does not exceed 5 per cent, or the market share of each non-competing entity on the relevant market does not exceed 10 per cent. This provision constitutes the de minimis principle, but it is not commonly applied to franchise agreements as they tend to contain ‘hardcore restrictions’, particularly clauses that are perceived as price-fixing or market-sharing between the parties.
If the de minimis principle cannot be applied, the franchise agreement can be exempted under the national and EU Block Exemption Regulations (VBER), which apply only to agreements that do not contain hardcore restrictions and where the market share of the franchisor and the franchisee on the relevant market, as a rule, does not exceed 30 per cent.6
The VBER lists the hardcore restrictions that will cause a franchise agreement to fall outside the scope of the VBER. This list includes price-fixing or resale price management. A franchisor may impose maximum or recommended resale prices. Nevertheless, a franchisor is only able to set fixed or minimum prices for low-price campaigns of up to six weeks (in most cases). It also includes restrictions on territories or customers to which a franchisee can sell or provide services, such as bans on passive sales outside an exclusive territory or customer group.
The VBER also lists grey restrictions, which are invalid themselves, but do not result in the invalidation of the entire agreement. One of these is the non-compete clause (see Section VI.vi).
Other provisions that should be analysed from a competition law perspective concern intellectual property rights licensing, approving the franchisee’s advertising campaigns, and combining selective and exclusive distribution systems.
If the VBER market-share thresholds are exceeded or the franchise agreement contains hardcore restrictions, the agreement is not exempted under the VBER. Nevertheless, entities can apply the individual exemption arguing that the franchising system has more advantages than anticompetitive effects in the relevant market. In such cases the burden of proof lies on the entities.
Franchise agreements may also be examined under the prohibition of abuse of a dominant position and merger control rules. In both cases the general competition law rules apply.
vi Restrictive covenants
The VBER defines non-compete clauses as the franchisee’s obligation to buy more than 80 per cent of goods from the franchisor or its supplier, and the franchisee’s obligation not to deal with goods that are substitutes for those offered by franchisor.
To be exempted under the VBER rules, in-term non-compete clauses have to be limited to five years or to the duration of the sublease if the franchisor owns the franchisee’s premises. Non-compete clauses that are concluded for longer periods can be exempted under an individual exemption if certain conditions are met.
To protect the franchisor’s know-how, parties can conclude a post-termination non-compete clause that may last no longer than one year after the agreement’s termination. Within that period the franchisee must agree not to deal with goods that are substitutes for those offered by the franchisor from the premises in which the franchisee operated during the franchise agreement under the national VBER.
If the franchisor provides the franchisee with know-how that is not in the public domain, the parties may consider concluding a post-termination non-compete clause for a longer period.
The franchise agreement is a long-term form of cooperation concluded for a fixed term (usually five, 10 or 20 years) or an indefinite period. There are two ways of terminating the agreement early under the Polish Civil Code: termination upon notice and rescission.
Termination upon notice occurs especially in the case of legal relations concluded for an indefinite period. The agreement can be terminated only upon notice ex nunc, which means that the notice is valid only for the future and not the past. Termination upon notice applies only to the relation expended in time. Generally, there is a notice period after which the agreement terminates (it might be a contractual, statutory or a customary term period). If a termination period is not provided, the agreement expires immediately after the termination notice is delivered.
Rescission is a remedy to a breach of contract – if one party commits a qualified delay in performing the contract, the other party may rescind it provided that the affected party notifies the defaulting party in writing of the intention to rescind, granting appropriate additional time for proper performance. If the set time limit lapses, the affected party is entitled to rescind the contract.
As mentioned in Section VI.vi, post-termination non-compete clauses of up to one year for franchise agreements are permitted under Polish law. A longer term for post-termination non-compete clauses can be established if the franchisor provides the franchisee with know-how that is not in the public domain.
It is advisable to include provisions on termination in the franchise agreement, including provisions concerning rescission. Explicit provisions can minimise the risk of confusion between the parties.
viii Anti-corruption and anti-terrorism regulation
Under Polish law, bribery is a crime committed by an individual giving or accepting a bribe. A person giving a bribe can avoid criminal liability if he or she informs the appropriate law enforcement institution of the circumstances of a crime before proceedings are initiated by that institution.
Organisations can be subject to criminal liability for crimes committed by employees or representatives only if the individuals have been convicted and the organisation failed to properly choose its executives, and at the same time the organisation benefited from the crime. Therefore, from a practical point of view, bribery committed by a franchisee will most likely not result in criminal liability of the franchisor.
ix Dispute resolution
In franchise disputes, the parties can choose between litigation and alternative dispute resolution (arbitration or mediation).
Arbitration is the most common form of alternative dispute resolution. Arbitration clauses are enforceable in Poland, unless otherwise specified. To refer the dispute to the arbitration court, the parties are required to provide an agreement specifying the subject matter or the legal relationship out of which the dispute arose or may arise.
Mediation can be conducted on the basis of a mediation agreement or court order directing the parties to mediation.
The Polish court system remains slow, with litigation proceedings before the Warsaw courts statistically the most lengthy. In the agreement, parties can decide which court has jurisdiction to decide in the event of a dispute.
If the parties include an arbitration clause in the agreement, they usually determine which arbitration court will decide in the event of a dispute. In Poland, permanent arbitration courts do exist, the most established being the Court of Arbitration at the Polish Chamber of Commerce. Parties can choose between permanent arbitration courts or indicate in the agreement that the arbitration court be established ad hoc. Usually, the arbitration court is one instance, unless the parties agree otherwise in the contract. This means that, unlike in ordinary courts, sentencing is faster. Arbitration courts are not bound by proceedings rules, and so less complex procedures can be used. The average length of arbitration proceedings is nine months.
Either party can file an appeal against the court’s verdict if it is not favourable. It is also possible to challenge the arbitration court’s award before the appellant court, but only on technical grounds – the merits of the case will not be examined.
Arbitration fees are usually higher than court fees, but the total cost of proceedings is usually lower in arbitration, as arbitration is statistically quicker and more specialised.
In Poland, the losing party is obliged to return the costs of lawyers to the successful party, but only within statutory limits that are not significant. So, in practice, in lengthy, complicated or high-value proceedings each party bears most of its legal costs.
From an international franchisor’s perspective, it is important to note that Poland is a signatory to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards and so foreign arbitral awards are enforceable in Poland. Also, since Poland is an EU Member State, Polish courts will recognise and enforce court judgments from other EU Member States (in accordance with the Brussels Regulation).7
VII CURRENT DEVELOPMENTS
In recent years the rapid development of franchising has been noticeable, and its popularity is constantly growing. Experts predict that the Polish franchise market will maintain its dynamic growth in the coming years. It is anticipated that by the end of 2016, the number of franchise systems could reach 1,170 and the number of franchise outlets to reach 71,000.
More and more Polish companies are deciding on international expansion. The leader in terms of the number of owned foreign sales outlets is still LLP Group (clothing brand owner), but other Polish companies have also increased their international expansion significantly (e.g., CCC and Wittchen).
Customer support for domestic brands is a new visible trend on the Polish market. The increased interest of Polish consumers in Polish products is a chance for domestic franchises to compete successfully with foreign franchise systems, and to expand Polish brands on international markets.
1 Kuba Ruiz is counsel at Bird & Bird Szepietowski i wspólnicy sp.k.
2 Commission decision of 5 February 2010 on standard contractual clauses for the transfer of personal data to processors established in third countries under Directive 95/46/EC of the European Parliament and of the Council.
3 Directive 2011/83/EU of the European Parliament and of the Council of 25 October 2011 on consumer rights, amending Council Directive 93/13/EEC and Directive 1999/44/EC of the European Parliament and of the Council and repealing Council Directive 85/577/EEC and Directive 97/7/EC of the European Parliament and of the Council.
4 Chapter XXIII of the Civil Code – Agency agreements.
5 Decision of 25 June 2013, No. DOK-1/2013.
6 Note that the national and EU block exemption regulations should be interpreted in conjunction with the results of the European Commission’s sector inquiry into e-commerce; the European Commission’s preliminary report on the e-commerce sector inquiry, as announced on 15 September 2016, is currently available at: http://ec.europa.eu/competition/antitrust/sector_inquiry_preliminary_report_en.pdf.
7 Council Regulation (EC) No. 44/2001 of 22 December 2000 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters.