Franchising in Hungary is a common business model and enjoys continuously growing popularity. In aggregate, around 300–350 franchise networks operate in Hungary, the number of franchisees is approximately 20,000, and around 100,000 employees (including suppliers) work in the franchise sector. The vast majority of franchise networks are active in the retail, services and hospitality industries.2
Hungary's membership status in the EU since 2004 has contributed to the growth of the number of foreign franchisors. According to publicly available data3 there are currently approximately 350 foreign franchise networks with more than 20,000 units in Hungary. Most of them are from the United States (20) and Germany (14). Some well-known franchisors are present in the country, including Spar, McDonald's, Nordsee, Dallmayr, BioTechUSA, Kodak and Hertz. Famous Hungarian franchises include Fornetti (food), Diego (decor), Duna House (real estate) and Coop (retail).
The Hungarian Franchise Association (HFA) was established in 1991 and currently has approximately 60 members. The HFA, working to the European Code of Ethics for Franchising and its own Code of Ethics,4 supervises the operation of franchise networks and represents and promotes the Hungarian franchise sector and its own members. The HFA has acceded to the European Franchise Federation and the World Franchise Council.
To date, no government report has been prepared on franchising in the Hungarian market, but a brief overview of the local franchise market in English is accessible on the HFA's official website5 and the HFA, from time to time, issues short summaries on the status of its members and franchising in general.
II MARKET ENTRY
As a general rule, no restrictions apply and no approval is required by foreign franchisors to enter the Hungarian market. However, if a foreign franchisor pursues economic activity in Hungary, it might be required to set up a local company (see Section V.i); setting up such a company follows the general rules of company formation (see Section IV.iii).
There is no general restriction on a foreign entity granting a master franchise or development rights to a local entity, although the parties to franchise agreements must comply with the provisions of competition law (see Section VI.v) and some specific sectoral rules may also affect the establishment of a master franchise relationship.
There is no general restriction on foreign franchisors owning equity in a local business. EU- and EEA-based individuals and entities, and entities that enjoy the same treatment on the basis of an international treaty, can acquire title of ownership to Hungarian non-agricultural real estate under the same conditions as Hungarian nationals. Other foreign individuals or entities may acquire Hungarian non-agricultural real estate if they obtain a permit granted by the county or metropolitan government office; however, no foreign party, whether a private individual or company, may acquire title or any other right to Hungarian agricultural land or protected natural areas. The same restriction applies to acquisitions by Hungarian subsidiaries owned by foreign investors.
ii Foreign exchange and tax
No withholding tax is levied in Hungary on dividends. However, cross-border franchising can face value added tax (VAT) issues (e.g., when offsetting marketing and other services fees against franchising fees in the form of a discount).
III INTELLECTUAL PROPERTY
i Brand search
The Hungarian Intellectual Property Office (HIPO) – as well as the European Union Intellectual Property Office (EUIPO)6 – maintains an online database of all Hungarian and EU-registered intellectual property (IP) rights, such as trademarks, patents and design rights. Before considering the use of a sign or device as a brand identifier, conducting a search in the HIPO and EUIPO databases is recommended. To avoid the risk of future opposition or cancellation of a trademark the search should cover not only the identical, but also the possible similar versions of the proposed sign to avoid any conflict with earlier registered rights. When considering the scope of the search, special attention must be paid to the goods and services for which the sign or design is to be used. Although the existence of a company name does not hinder the registration of a similar or identical sign as a trademark, a preliminary assessment should include a search of the company register for any commercial and company names that have been in the market for a long time and may cause problems in the future. The principal data on Hungarian companies, including company names, is freely accessible through the online company registry. An online presence may be identified by searching in the official .hu (dot hu) domain registry operated by the Council of Hungarian Internet Providers. As the Hungarian language uses accented letterforms (á, é, í, ó, ö, ő, ú, ü, ű) and such use is also allowed in domain names, a search for variations is strongly recommended to avoid cybersquatting.
ii Brand protection
A Hungarian trademark is obtained through registration with the HIPO. A sign can be registered as a Hungarian trademark, a European Union trademark or as an international trademark designating Hungary under the Madrid Agreement of 1891 Concerning the International Registration of Marks and the Madrid Protocol of 1989. The use of a sign does not create trademark protection in Hungary; a trademark must be registered. Trademark protection has generally been granted for any signs, provided these are capable of distinguishing goods or services from the goods or services of other undertakings and can be represented in the trademark register in a manner that enables the authorities and the public to clearly and precisely determine the subject matter of the protection applied for or granted to its holder (origin-indicating function). A sign is excluded from trademark protection if it is devoid of any distinctive character. The procedure for registration of a trademark begins with the filing of a trademark application with the HIPO or the EUIPO; registration is granted for 10 years and may be renewed without limitation.
Design protection grants legal protection for the appearance of a product. Design protection is granted for any design that is new on a worldwide level and has individual character, and for which there are no grounds for refusal that exclude it from protection. Design protection can be obtained by filing a design application with the HIPO, with the EUIPO or by filing an international application under the Hague Agreement Concerning the International Deposit of Industrial Designs. The term of design protection is five years, which may be renewed four times for an additional five-year period each time (i.e., for 25 years altogether).
Under the Hungarian .hu top-level domain, domain names may be registered according to the Domain Registration Rules and Procedures of the Council of Hungarian Internet Providers.
A licence for the use of a trademark or design must be given in writing, and to gain effect against third parties, it must be registered with the relevant registry (i.e., the HIPO or the EUIPO).
The trademark owner (or licensee) can prevent any third party from using a sign without the proprietor's consent in the course of trade. The Trademark Act7 contains examples of use that can be objected to: (1) using the trademark on goods or on packaging thereof; (2) putting on the market or offering for sale goods under the trademark or stocking them for these purposes; (3) offering or supplying services under the trademark; (4) importing or exporting goods under the trademark; and (5) using the trademark in business correspondence and in advertising. In addition to the uses listed by the Trademark Act, the Hungarian Competition Act sets out the following further examples: (1) using the sign as a trade or company name or part of a trade or company name; and (2) using the sign in comparative advertising in a manner that is contrary to the Hungarian Competition Act.
Under the Design Act,8 design protection confers on its holder the exclusive right to exploit the design. The holder of the design protection is entitled to prevent any person not having the holder's consent from exploiting the design. Exploitation covers in particular the making, using, putting on the market, offering for sale, importation and exportation of the product embodying the design, as well as the stocking thereof for those purposes.
The trademark proprietor or the holder of a design right is entitled to start proceedings to stop infringement of that right. A licensee recorded in the Trademark or Design Register may also commence infringement proceedings in his or her own name if he or she provided the right holder with an opportunity to take appropriate actions against infringement, but the right holder has failed to take actions. The civil law sanctions are (1) establishment of infringement by the court; (2) permanent injunction to cease infringing activity or any activities directly threatening to infringe, as well as to desist from doing so in the future; (3) providing information about the persons who participated in the production and distribution of the goods concerned by the infringement, and about the business relations created for the dissemination of the goods; (4) public apology; (5) recovery of unjust enrichment; and (6) seizure, transfer, recall and definite removal from the channels of commerce; destruction of the infringing products and the packaging thereof, as well as the means and materials exclusively or principally used for infringement. These sanctions can be claimed regardless of whether the infringer acted in good or bad faith. The trademark or design owner (or licensee) can also claim compensation for damage (in the amount exceeding the unjust enrichment), but for such a claim the general provisions of the Civil Code9 would apply, requiring the culpability of the infringer to be proven as well.
In cases of trademark and design infringement, it is also possible to commence preliminary injunction (PI) proceedings either before commencement of the infringement proceedings (the main action) or in the main action. This provides the rights holder with the opportunity to stop the infringement (by way of a cease-and-desist order) on a preliminary basis prior to reaching a final decision in the infringement suit, and this provides an effective tool against damage caused by the infringer. There are certain legal preconditions to be satisfied for a PI to be granted; nevertheless, for trademark and design right holders, the law provides a legal presumption granting more effective protection in cases of trademark and design infringement taking place in Hungary.
General civil law applies in relation to questions that are not regulated by the Trademark or Design Acts. Under the Civil Code, individual rights enjoy protection. Individual rights include (1) the right to bear a name, and (2) protection of goodwill. Under the Civil Code, a remedy – an award (lump sum) – for the infringement of individual rights can also apply. For the application of this remedy, it is not necessary to prove the amount of damage or the culpability of the infringer, only the fact of the infringement.
As from 2018, the provisions of the Trade Secrets Act10 implement the rules of the EU Trade Secrets Directive, therefore a trade secret is no longer a right relating to personality. Trade secrets enjoy special protection under the Trade Secrets Act that follows the same rationale and sanction system as that for intellectual property protection. The provisions of the Civil Code apply generally to matters that are not specifically regulated by the Trade Secrets Act. In the past, both the Civil Code and the Unfair Market Practices Act could serve as a legal basis in cases of violation of trade secrets. Following the introduction of the new Trade Secrets Act, the former provisions of the Unfair Market Practices Act on trade secrets no longer apply, as trade secrets are now protected uniformly by the new Trade Secrets Act.11
iv Data protection, cybercrime, social media and e-commerce
The rules of the EU General Data Protection Regulation (GDPR)12 apply to the processing of personal data by franchisees or franchisors, as controllers or processors, if any of these have an establishment in the EU, regardless of whether the processing takes place in the EU or not. Moreover, the GDPR applies to the processing of personal data of data subjects in the EU even if the franchisees or franchisors, as controllers or processors, are not established in the EU, but their processing activities are related to: (1) the offering of goods or services, irrespective of whether a payment from the data subject is required, to such data subjects in the EU; or (2) the monitoring of the behaviour of such data subjects, as far as their behaviour takes place within the EU.
The GDPR imposes various new or extended obligations on the controller and the processor regarding the documentation of data processing activities and transparent communication with data subjects. The new obligations include maintaining records of data processing, submitting data breach notifications or data protection impact assessments and has notably extended obligations regarding the handling of data subjects' requests. Therefore, we also strongly recommend that franchisors and franchisees conclude a written agreement about the exact terms and conditions of any data transfer between them. We strongly recommend that franchisors and franchisees either pay special attention to data protection matters themselves or else seek adequate legal advice, because if a company fails to comply with the GDPR, the authorities can impose extraordinarily high fines (up to €20 million or 4 per cent of a company's total worldwide annual turnover for the preceding financial year, whichever is higher).
The threshold for being considered a data controller is relative low.13 The data controller shall alone or jointly with others determine the purposes and means of the processing of personal data. Even if franchisors do not 'collect' data directly, they still might be considered joint data controllers along with the franchisees. This role and liability should be considered on a case-by-case basis.
Pursuant to the GDPR, any transfer of personal data undergoing processing or to a third country or to an international organisation shall take place only if: (1) the European Commission has decided that the third country (or a territory or one or more specified sectors within that third country) or the international organisation in question ensures an adequate level of protection; and (2) the controller or processor has provided appropriate safeguards, and on condition that enforceable data subject rights and effective legal remedies for data subjects are available. In the absence of the aforementioned possibilities, a transfer of personal data to a third country or an international organisation shall only take place subject to one of the special conditions set out in Article 49 of the GDPR.
The E-Commerce Act,14 in full harmonisation with the related EU laws, regulates (1) the service provider's obligations on the provision of data, (2) the service provider's liability, (3) the conclusion of contracts via electronic means, (4) notice and takedown proceedings and (5) the rules concerning electronic advertisements. Crimes in relation to cybercrimes and franchising under the Criminal Code15 may include the circumvention of protective technologies or technologies protecting information systems, as well as violation of information systems or data.
There is no specific law on social media. This area is primarily regulated by the general provisions of civil law as well as the Data Protection and E-Commerce Acts.
IV FRANCHISE LAW
In the absence of a dedicated franchise act, franchises are subject to the same laws – primarily the Civil Code16 – that govern other businesses. The general rules of civil and contractual law as well as the Civil Code's specific chapter on franchise agreements (in the wording of the Civil Code, 'agreements on the lease of rights') apply to franchises in Hungary. According to the definition of the Civil Code, the lessor (i.e., the franchisor), in exchange for remuneration, licenses its copyright, IP rights and know-how to the lessee (i.e., the franchisee), whereas the franchisee manufactures and sells products or provides and sells services through the use of the franchisor's rights. This definition does not include any reference to the licensing of trademarks and focuses on service and distribution franchises instead of the most common commercial franchises. The Civil Code also includes provisions on (1) the licensing of copyright, IP rights and protected know-how, (2) the franchisor's supply obligation, (3) the protection of the good reputation of the franchise network, (4) the franchisor's instruction and supervisory rights, and (5) rules on the termination of contracts concluded for an indefinite period. Because of the Civil Code's dispositive nature the parties may deviate from these provisions in their agreements. Since the focus of the franchise agreement in the Civil Code is rather one-sided and the provisions are not comprehensive, the parties, using the freedom-of-contract principle, usually exclude the application of the provisions of the Civil Code on franchise agreements.17
The Civil Code entered into force as of 15 March 2014 and replaced the previous Civil Code.18 The rules of the previous Civil Code apply to agreements that were in place on 15 March 2014 as do statements and amendments made concerning such agreements. Nonetheless, the parties may agree to apply the provisions of the current Civil Code to their contract even if the contract was entered into before 15 March 2014.
Franchise agreements must be in compliance with the Competition Act.19 In the absence of a special block exemption regulation on franchises, the Block Exemption Regulation20 sets out the criteria as to how franchise agreements may be exempted from the prohibitions relating to the restriction of competition.
Although they are not binding legislation, the Code of Ethics and the HFA guidelines24 have been considered by courts in civil proceedings on an increasing number of occasions. Additionally, these regulations may also serve as a basis for assessing whether the parties to a franchise agreement acted in good faith and according to the applicable standard of conduct in a particular situation.
ii Pre-contractual disclosure
Under the rules of Hungarian civil law, contracts must be concluded on the basis of mutual agreement by the parties. The parties must agree on all material details. There is no need to agree on details that are regulated by law. However, the Civil Code does not define the term 'material details'. According to the standard practice and the HFA's Code of Ethics, in the case of franchise agreements material details include: the licensing of know-how, commercial appearance, trademarks, the franchisee fee and royalties to be paid, and duration and termination of contract (see Section IV.iv).
The Civil Code recognises the doctrine of culpa in contrahendo. Under this principle the parties are obliged to (1) cooperate during the conclusion of the franchise agreement, (2) respect each other's rightful interests and (3) before the conclusion of the franchise agreement, inform each other regarding all essential circumstances in relation to the proposed contract. There is no explicit statutory provision on the formal requirements of the pre-contractual information duty concerning franchise agreements.
Under Hungarian law, a franchisor may be exposed to a damages claim in tort over pre-contractual statements if the franchisee is able to prove that (1) the franchisor unlawfully concealed or misrepresented essential circumstances prior to entering into the franchise agreement (breach of duty); (2) the franchisee incurred damage (damage); (3) the damage was incurred by the franchisee because of the concealment or misrepresentation of essential circumstances (causal link); and (4) the franchisor is not able to excuse itself by proving that it proceeded as generally expected under the given circumstances (i.e., acted according to the applicable standard of conduct in the particular situation). However, neither party may be held liable for not entering into the agreement.
It is generally accepted practice that, to protect their business interests and trade secrets, franchisors require franchisees to sign a non-disclosure agreement or a unilateral non-disclosure declaration before the franchisor delivers the draft of the franchise agreement.
There are no specific registration requirements for franchises. However, there are registration requirements that may have an impact on franchising:
- for the purpose of pursuing economic activities in Hungary, everyone can freely establish a company. Companies are registered by registry courts;
- before a newly established company can be registered by the competent registry court and its tax number issued, a preliminary tax registration procedure is completed by the tax authority;
- after their registration by the registry court, companies are obliged to apply for registration at the competent chamber of commerce and industry within five days; and
- if the franchisor or the franchisee pursues a specific activity, additional registration (e.g., at chambers or authorities) may be required.
iv Mandatory clauses
Under Hungarian law, there are no specific mandatory statutory clauses to be included in franchise agreements. According to the general contractual rules, the parties must agree on all material details of the contract, otherwise it may be invalid or unenforceable. The Civil Code regulates some of the basic content of franchise agreements (see Section IV.i). However, parties may deviate from or even exclude these statutory provisions and agree on additional contractual provisions.
The HFA's Code of Ethics, which does not constitute a mandatory legislative act, is often considered by courts as a guideline for assessing the fulfilment of the duty of good faith. It sets out minimum requirements to be included in franchise agreements. These are (1) the franchisor's and the franchisee's rights and obligations; (2) the description of goods and services to be provided to the franchisee; (3) the term of the agreement, which must be sufficiently long to enable the franchisee to achieve a return on its initial investments; (4) provisions on renewal of the agreement; (5) conditions under which the franchisee may sell or assign the business being subject to the franchise agreement and the franchisor's related rights; (6) the advantages on the franchisee's side resulting from the use of the business name, trademarks, signs, images and other marks of the franchisors; (7) the franchisor's rights to adapt new or changed methods with regard to the franchise system; (8) termination of the agreement; and (9) conditions for post-contractual mechanisms concerning goods, real estate etc. that belong to the franchisor or third parties.
v Guarantees and protection
The franchisor may request guarantees or other types of securities from the franchisee. Those securities are regulated in the Civil Code. The parties to the franchising agreements usually rely on suretyship, security deposit, liens, bank guarantee, contractual penalty or purchase options. Under the Civil Code, in line with the protection of the good reputation of products and services subject to franchise agreements, each party is obliged to protect the good reputation of the franchise network.
Guarantees provided to the franchisor by the franchisee are enforceable. To ensure proper enforcement, the guarantee should be properly drafted. It is also recommended that the scope of the franchisee's collateral commitments cover the franchisee's breach of its contractual obligations towards suppliers.
i Franchisor tax liabilities
Generally, the position of a foreign franchisor will most likely not constitute a permanent establishment in Hungary. Thus, there will be no tax liabilities for the franchisor in Hungary. However, if there is a permanent establishment or a branch office or a commercial representative office established by the franchisor, general tax liability will arise as described below.
Foreign entrepreneurs may conduct their business in Hungary by opening a branch office in the country. Such a branch office is a separate organisational unit of the foreign business association without legal personality registered by the Hungarian court of registration. Through their branch offices, foreign businesses are entitled to carry out permanent business activities in Hungary and are represented towards the authorities and third parties by their branch offices.
A commercial representative office is a unit of a foreign company without a legal personality, which can operate from the time it is registered in the company register. The scope of activities of commercial representative offices is limited to mediating and preparing contracts and carrying out information, advertising and propaganda activities on behalf of the foreign company.
If the franchisor is a Hungarian entity, there are advantageous tax allowances in connection with the franchising fee if it qualifies as a royalty. Provided that certain conditions are fulfilled, 50 per cent of the revenues accounted as royalties may reduce the tax base.
ii Franchisee tax liabilities
Taxpayers with Hungarian residence have tax-paying obligations for their income originating both from Hungary and abroad. Non-resident businesses are only taxable on activities conducted in Hungary.
Corporate tax is 9 per cent of the positive tax base. Companies are required to file a corporate tax return every year (for each business year). Generally, the financial year is identical to the calendar year, but companies may use a different financial year and, in relation to this, a tax year different from the calendar year. Business associations are required to file their corporate tax returns and pay corporate tax by 31 May following the tax year. If the taxpayer opts for a different tax year, the filing and payment deadline is the last day of the fifth month after the last day of the financial year.
As well as corporate income tax, general VAT rules apply to franchise businesses. Currently, with some exceptions, the VAT rate is 27 per cent.
iii Tax-efficient structures
Numerous structuring solutions are favoured. Because of the deduction from the corporate income tax base of 50 per cent of received royalties, a franchisor set-up in Hungary is definitely an option to be considered.
VI IMPACT OF GENERAL LAW
i Good faith and guarantees
According to the general principles of civil law, in the course of exercising civil rights and fulfilling applicable obligations, the parties must act in good faith and cooperate with each other. Unless stricter requirements are prescribed by law, the parties must act according to the generally applicable standard of conduct in the particular situation (i.e., during the conclusion, fulfilment and termination of franchise agreements). Compliance with the standards of good faith and cooperation is especially required in the case of long-term relationships (such as franchise agreements) and during the fulfilment of requirements concerning the provision of information. The duty of good faith is further specified in some provisions of the Civil Code (e.g., in relation to breach of contract). Upon the incurrence of any damage, the person incurring the damage may claim damages, if all relevant prerequisites are met (see Section IV.ii). Courts and arbitration tribunals rarely decide on a case expressly and exclusively on the basis of a violation of the duty of good faith under the Civil Code.
ii Agency distributor model
Under Hungarian law franchisors or franchisees are not treated as agents or distributors.
Under the provisions of the Civil Code on agency agreements agents intermediate in sale, purchase or other agreements in exchange for a fee. Under the main rule, agents may not enter into agreements on behalf of the principal. In the case of long-term agency arrangements, however, agents are entitled to conclude agreements on behalf of their principal. In any scenario, agents are only entitled to the agency fee; the economic results of the agreements concluded by the agents exclusively benefit the principal. The Civil Code expressly sets out that franchisees proceed under their own name and at their own risk.
The Civil Code also contains specific regulations on distribution agreements; such agreements, however, solely relate to the purchase and selling of goods. The supplier is only entitled to instruct the distributor on the appropriate distribution of the goods. So, although retail franchises usually have some common features with distribution agreements, distribution and franchise agreements have some significantly different features in practice. In comparison with distribution agreements, franchise agreements constitute a closer cooperation of the parties. In the case of distribution agreements, the manufacturer does not instruct and closely monitor the distributors and does not provide extensive support to the distributors.
iii Employment law
Courts do not treat franchisees as employees and to date there is no case law from the Hungarian Supreme Court dealing with this issue. Considering the basic features of the employment relationship under the Labour Code25 (e.g., employees can only be individuals, not undertakings or private entrepreneurs; work must be performed in accordance with the employer's instructions; employees must arrive at work on time, in a condition fit for work, perform work during working hours and cooperate with fellow workers) and the standard practices of franchise agreements, it is very unlikely that franchisees will be considered employees by Hungarian courts.
iv Consumer protection
Under the Civil Code and the Consumer Protection Act26 the term 'consumer' means a private individual (i.e., a natural person) who is a party to a contract concluded for reasons other than the person's economic or professional activity. As franchise agreements necessarily relate to the franchisee's economic and professional activity, franchisees cannot be treated as consumers.
v Competition law
The Competition Act, in full harmonisation with Article 101 of the TFEU and further related EU regulations, sets out that (1) agreements; (2) concerted practices between undertakings; and (3) decisions by social organisations of undertakings, public corporations, associations or other similar organisations that have as their object or potential or actual effect the prevention, restriction or distortion of competition are prohibited. Under this prohibition, franchise agreements, in the vast majority of cases, constitute vertical restrictions of competition as they are concluded between undertakings from different levels of the value chain. However, franchise agreements may fall within the scope of statutory exemptions:
- agreements concluded by undertakings that are not independent of each other do not qualify as agreements restricting competition. However, as the independence of the franchisee is an essential feature of franchising, this exemption cannot be applied to franchise agreements;
- franchise agreements of minor importance are not prohibited, unless the agreements relate to price-fixing or market sharing. A franchise agreement is of minor importance if the joint market share of the participating undertakings and undertakings that are not independent from them does not exceed 10 per cent of the relevant market;
- if franchise agreements are in compliance with the provisions of the Block Exemption Regulation, they are automatically exempted from the prohibitions on the restriction of competition. The block exemption does not apply to agreements in which, by the cumulative effect of those agreements and similar other agreements on the relevant market, the requirements of general exemptions are not satisfied; and
- the prohibition of restriction of competition may also be inapplicable if the franchise agreement fulfils the criteria for general exemption under the Competition Act.
The Block Exemption Regulation applies to vertical agreements entered into between an association of undertakings and its members, or between such an association and its suppliers, if all its members are retailers of goods and if no individual member of the association, together with its connected undertakings, has a total annual turnover exceeding the sum of Hungarian forints equalling €50 million. The exemption also applies to the licensing of IP rights provided that these provisions (1) do not constitute the primary object of the franchise agreement; (2) are directly related to the use, sale or resale of goods or services by the franchisee or its customers; and (3) do not contain restrictions of competition having the same object as vertical restraints that are not exempted under the Block Exemption Regulation. The exemption, however, applies only if the franchise agreement does not contain mutual vertical restrictions and the franchisor is not a competitor to the franchisee concerning the production of goods or the provision of services. Finally, to be exempted, the market share of both the franchisor and the franchisee may not exceed 30 per cent on the relevant market.
Franchise agreements may not be granted exemption from the prohibition if the objective is the limitation or restriction of (1) the franchisee's ability to determine its sale price; (2) the territory or clientele in or to which the product or service can be sold; (3) the active or passive sale at the retail level of a selective distribution system; (4) the cross-supply among distributors of a selective distribution system; or (5) the sale of components as spare parts, if the agreement was concluded between the supplier and the person who incorporates the spare parts (specific exemptions may apply in some cases).
No exemption may be granted for (1) any direct or indirect non-compete obligation, the duration of which is indefinite or exceeds five years; (2) any direct or indirect obligation causing the franchisee, after termination of the agreement, not to manufacture, purchase, sell or resell goods or services (specific exemptions may apply); (3) any direct or indirect obligation causing the franchisee as a member of a selective distribution system not to sell the brands of particular competing suppliers.
Reasonable and necessary contractual clauses on exclusivity and full line forcing, which are essential features of most franchise agreements, may usually be exempted from the prohibition of the restriction of competition, if the parties comply with the statutory provisions and the case law of the Hungarian Competition Authority (see Section VI.vi). Any agreement or practice to fix prices is, in the vast majority of the cases, prohibited and cannot be exempted. It is important to note that compliance with competition law must be assessed by the parties themselves. Improper formulation of franchise agreements may entail significant legal risks, therefore it is strongly recommended that franchisors and franchisees seek proper legal advice and prepare an economic analysis on a case-by-case basis.
vi Restrictive covenants
Generally, all non-compete and other restrictive covenants that fall within the scope of hardcore or excluded restrictions, or do not fulfil the requirements under the Block Exemption Regulation, may not be enforced. In addition, all clauses that unnecessarily and unreasonably narrow the scope of the franchisees' freedom to set (reselling) prices and make decisions as to where to purchase the goods subject to the franchise agreement restrict the competition.27 Thus, franchise agreements may be exempted under the Block Exemption Regulation, or the general exemption, if they contain only restrictive provisions that are in compliance with the principles of franchising and necessary for the protection and operation of the licensed know-how.
Therefore, the parties are advised to (1) continuously supervise the compliance of the franchise agreement with the provisions of competition law; and (2) avoid any clauses that unnecessarily and unreasonably restrict or have an objective to restrict the competition. Non-compete and other restrictive covenants may be enforced by incorporating appropriate clauses into the franchise agreements.
Under the Civil Code, the parties may freely determine the rules regarding the termination of contracts entered into for both a definite and an indefinite period. Franchise agreements may be terminated by the mutual consent of the parties or by one of the parties giving notice of termination. If the contract is terminated with immediate effect, it ceases to exist upon the time of delivering of the notice. Otherwise the agreement terminates at the end of the notice period.
The Civil Code sets out specific rules with regard to the termination of franchise agreements concluded for an indefinite period, from which the parties may deviate by mutual consent. Franchise agreements concluded for an indefinite period may be terminated any time, effective as of the last the day of the calendar month concerned. The termination period is one month in the first year of the agreement, two months in the second year, three months in the third and following years. Upon the termination of the franchise agreement, all rights of the franchisee relating to copyright, IP rights or protected know-how cease to exist. The Civil Code contains no provisions on the termination of franchise agreements concluded for a definite period; nonetheless, the parties, under the principle of freedom of contract, will be entitled to enter into a franchisee agreement for a definite period and regulate the termination of such an agreement.
If agreed by the parties, the franchisor may take over the franchisee's business after the termination of the franchising agreement.
viii Anti-corruption and anti-terrorism regulation
If the services set out in the franchise agreement fall within the scope of the Anti-Money Laundering and Anti-Terrorism Act,28 the service provider must comply with the general provisions on customer due diligence measures, reporting obligations and preparation and application of internal regulations. The Anti-Money Laundering and Anti-Terrorism Act does not provide for any specific franchise-related regulations.
ix Dispute resolution
In practice, parties to franchise agreements tend to opt for litigation via ordinary courts and arbitration tribunals. While mediation is a recognised form of alternative dispute resolution, it is not mandatory under Hungarian law and parties are usually reluctant to choose this way of solving their disputes. There is no specific procedure or industry practice for franchising disputes; neither does the HFA offer mediation or arbitration rules or services. However, the HFA, upon request by HFA members, may play a conciliatory role in disputes arising between members.29
Under the recently adopted Code of Civil Procedure,30 business entities (i.e., franchisors and franchisees) can file claims with ordinary courts without an obligation to attempt resolution by way of mediation. Nevertheless, mediation is available for all parties before filing an action. Ordinary court proceedings, including first and second instances, may last for several years, although the objective of the new Code of Civil Procedure is to increase the efficiency of civil proceedings. To this end, the new Code introduced a two-part structure to the procedure (a preparatory phase and a merits phase) and increased the level of professionalism by ordering mandatory legal representation before the courts of general jurisdiction and any in appellate proceedings.
A PI request may generally be filed before the complaint is filed with the court. (Under the previous Code of Civil Proceedings this option was restricted to intellectual property and competition matters.) In this case, the party seeking the interim relief is obliged to file its compliant within a maximum of 45 days of the filing of the PI request. The court may order a PI upon request: (1) for the purpose of preventing any change in the status quo, if subsequent restitution would not be possible; (2) to safeguard the applicant's subsequent exercise of rights; (3) to prevent any imminent damage the applicant may be exposed to; or (4) in other exceptional circumstances. Regardless of which of these grounds are relied on by the plaintiff, there is an additional general precondition to be fulfilled: the disadvantages caused by the PI should not exceed the advantages achieved thereby. It is therefore possible to obtain a PI to prevent a former franchisee from continuing to trade in breach of a non-compete provision or from using the franchisor's trademarks or other IP rights. The court decides on the PI in expedited proceedings and must issue a ruling on the request within eight days of its filing, at the latest.
Ordinary courts recognise and uphold foreign choice-of-law or jurisdiction clauses, if the clauses are in compliance with relevant Hungarian laws and EU laws, especially if these are not against public order or mandatory Hungarian statutes. Arbitration proceedings are usually shorter and more commercially oriented, although more expensive than ordinary litigation.
Under Hungarian contractual law, the party breaching the contract may be held liable for damages. The franchisor or the franchisee is not liable for the damage caused, if it is able to prove that (1) the circumstances causing the damage were out of its control, (2) the circumstances were not foreseeable by it at the date of the conclusion of the agreement, and (3) it was not obliged to prevent the circumstances or damage. The consequential damage and lost profit must only be reimbursed if the injured party is able to prove that the potential damage could have been foreseen at the time of entering into the franchise contract. If the damage was caused wilfully, the full amount of the damage must be compensated. The person incurring damage has the obligation to mitigate the damage and the party causing the damage will not be held liable for that portion of the damage that could have been avoided by the person incurring the damage.
Litigation costs are allocated proportionally between the parties depending on the outcome of the litigation. These costs are not statutorily capped; however, excessive attorney fees and court costs may be reduced by the court.
To enforce foreign ordinary court judgments and arbitral awards, the following requirements must be met: (1) a foreign court must have jurisdiction over the subject matter; (2) that court's decision must be legally binding or have equivalent effect; and (3) the decision must meet none of the grounds for refusal, such as violation of public order.31 Hungarian courts readily recognise foreign arbitral awards from other member countries of the New York Convention,32 although violation of Hungarian public order may serve, among others, as grounds for refusal.
VII CURRENT DEVELOPMENTS
Because of its strategic geographical location, its EU membership status, its relatively cheap and skilled workforce, and low investment requirements, Hungary is likely to remain a target country for foreign franchisors and there are no current developments that would deter foreign franchisors from entering the Hungarian market. The Civil Code contains specific provisions on franchise agreements, which may serve as guidance for franchisors when entering into contracts with franchisees. The parties, however,usually exclude the application of the provisions of the Civil Code on franchise agreements for practical reasons.
The new GDPR rules require special attention and franchisors or franchisees operating in the EU, if they have not already done so, may have to adapt their current data processing activities to comply with the new legislation.
With the rapid increase in the use of social media by business in the past couple of years, authorities, courts and legislators have all endeavoured to catch up and Hungary is no exception. The Hungarian Competition Authority has issued basic guidelines on social media content that is sponsored or endorsed in any way, and these serve as a cornerstone for all market participants. The Hungarian Competition Authority now strictly assesses and enforces compliance with these guidelines and is not reluctant to impose fines for severe irregularities; for example, in particular, where (1) the 'paid-for' nature of social media is not communicated simply, clearly and unambiguously (i.e., the sponsored product or company must be clearly indicated as such in the content) and in a way that is emphasised, easily noticeable and necessarily and conspicuously understandable by consumers (the #reklam, or #advertisement, hashtag must preface the content description; or (2) the content is not an independent, neutral opinion or offer but is in fact also paid for or the result of some other direct economic interest.
1 Péter Rippel-Szabó, Bettina Kövecses and Péter Sziládi are associates at Siegler Bird & Bird Ügyvédi Iroda.
2 Source: Hungarian Franchise Association, 'Franchising in Hungary', accessible at https://www.franchise.hu/English/Franchising+in+Hungary (last accessed 24 October 2019).
5 See footnote 2.
7 Act XI of 1997 on the Protection of Trademarks and Geographical Indications.
8 Act XLVIII of 2001 on the legal protection of designs.
9 Act V of 2013 on the Civil Code.
10 Act LIV of 2018 on the Protection of Business Secrets.
11 For further information, see Bird & Bird on Hungary's implementation of the Trade Secrets Directive at https://www.twobirds.com/en/in-focus/trade-secrets/trade-secrets-directive-tracker/hungary (last accessed 24 October 2019).
12 Regulation (EU) 2016/679 of the European Parliament and of the Council of 27 April 2016 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).
13 CJEU Case C-40/17. (Fashion ID case).
14 Act CVIII of 2001 on certain issues of electronic commerce services and information society services.
15 Act C of 2012 on the Criminal Code.
16 Act V of 2013 on the Civil Code.
17 In the summer of 2016, a draft amendment of the new Civil Code was accepted by the parliament. The original conception of this draft amendment intended to take out all franchise rules from the Civil Code on the basis that the rules of the Civil Code cannot contribute to the growing importance of franchise agreements in relation to small and medium-sized companies, and in relation to the Hungarian national economy. Ultimately, the accepted version of the amendment did not modify the current provisions on franchise agreements.
18 Act IV of 1959 on the Civil Code.
19 Act LVII of 1996 on the prohibition of unfair and restrictive market practices.
20 Government Decree No. 205/2011 (X.7) on the exemption for certain groups of vertical agreements from the prohibition of restriction of competition.
21 Act LXXVI of 1999 on copyright.
22 Act XXXIII of 1995 on the protection of inventions by patents.
23 Act LIV of 2018 on the protection of trade secrets.
25 Act I of 2012 on the Labour Code.
26 Act CLV of 1997 on consumer protection.
27 Position statements 2006 of the Competition Council of the Hungarian Competition Authority; Section 11.26 (Vj-171/2002). Pursuant to the Competition Council, the safeguarding of competition within a given brand where only a handful of competitors are present is especially important. The position statements reflect the Competition Council's law interpretation with regard to the Competition Act.
28 Act LIII of 2017 on the Prevention and Combating of Money Laundering and Terrorist Financing.
30 Act CXXX of 2016 on the Code of Civil Procedure.
31 Act XXVIII of 2017 on Private International Law.
32 United Nations Convention on the Recognition and Enforcement of Foreign Arbitration Awards, implemented into Hungarian law by Law Decree No. 25 of 1962.