The Franchise Law Review: Austria
Just as in Germany, franchise systems have developed very slowly in Austria, but Austria now has a flourishing franchise industry. In particular, international franchise systems such as Burger King and McDonald's are very successful in Austria.
Most German franchise systems are likely to move into to Austria as the first step of the international development of their franchise system, so that virtually all the German franchise systems are also present in Austria, such as Fressnapf, Zoo & Co, Studienkreis, Schülerhilfe, ISOTEC or hagebaumarkt.
Austria has not yet enacted a franchise act of its own, so the principle of contractual freedom exists. It must, however, be borne in mind that Commission Regulation (EU) No. 330/2010 on the application of Article 101 of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices (vertical agreements) also directly applies in Austria, and is national law; however – just as in Germany – the provisions of general civil law, commercial law, corporate law, competition law, antitrust law, consumer protection law, employment law and data-protection law (the General Data Protection Regulation),2 as well as the corresponding decisions of the Austrian Supreme Court (OGH) and the European Supreme Court (EuGH), must be complied with when franchising agreements are drawn up. Finally, the general contractual provisions, as well as the provisions relating to industrial and intellectual property rights and, in certain circumstances, aspects pertaining to tenancy law or fiscal law, must also be observed.
In Austria there are no restrictions on foreign franchisors. Master franchise contracts can be closed directly between a foreign franchisor and the Austrian master franchisee or the Austrian franchisor running the franchise outlet (direct franchising).
No franchise regulation nor any disclosure requirement exists in law in Austria, other than in decisions of the OGH.
Through a franchising agreement, the franchisor grants the franchisee the right of use of its trademark rights. An informal agreement is sufficient to validly grant the licence. It can also be agreed that the franchisee's entitlement to use the trademark is recorded in the trademark register.3 A registration of the trademark register is, however, not a necessary prerequisite for the franchisee to be entitled to use the trademark. It may be stipulated in the franchise agreement that certain types of use of the mark, for example, in advertising, require the franchisor's consent.
Signage has major economic significance in the success of a franchise system, and the franchisor must vouch for the fact that its rights are being validly maintained. Such signage is a 'property usually required in commerce' within the meaning of Section 922 of the Austrian Civil Code (ABGB), so that if it is lacking, the franchisee may be entitled to assert warranty claims. A complete exclusion of any such claims is generally considered unethical under Section 879 of the ABGB. The franchisor is required to protect the intellectual property rights accordingly. In addition, the franchisee is also entitled to assert the right to pursue infringements of intellectual property rights, as the mark ranks among the trademarks protected under Section 9 of the Austrian Act on Unfair Competition.
The 'trade dress' plays an important role if the franchise system is operated in the form of a retail outlet (e.g., a special interior, choice of colour, staff uniform and packaging). The protection of trade dress is not dependent upon registration; it must, however, have gained public recognition.
The protection of the company or its name begins with its registration in the commercial register.
As previously mentioned, Austria has no special law on franchising or a disclosure requirement law. Franchise contracts and even master franchise contracts have to be drafted according to the rules of the ABGB, the Antitrust Law, the Enterprise Law (UGB), the rules of the labour and consumer protection regulations, the Austrian Act on Unfair Competition (UWG) and the rules of the EU block exemption on vertical restraints.4
Of interest in relation to the drafting of franchise agreements are two booklets published by the Austrian Federal Competition Authority: the first one covers franchise systems and price policy, and the second deals with compliance regulations. Both booklets are relevant for franchisees, as well as for franchisors, and in relation to the structure of a master franchise agreement and the franchise agreement with local franchisees.5
ii Pre-contractual disclosure
There are no disclosure requirements with which a master franchisee is obliged to comply by law. The main points are set by the jurisdiction of the OGH.6 A franchisee or master franchisee has to be informed about all points that are relevant to the decision of the franchisee or master franchisee to close the franchise or master franchise contract. This may refer to information concerning:
- the local market situation;
- the expected turnover of the franchise outlet;
- a business plan for building up the franchise system in Austria (optional);
- the competitors;
- the importance of the franchise system in Austria;
- number of franchisees (local or international);
- franchisees leaving the franchise system, especially for what reason during the final year for closing the franchise contract;
- intellectual property rights of the franchise systems;
- information about the master or local franchisee franchise contract; and
- the know-how of the franchise system.7
The type of information that has to be disclosed depends on the franchise contract. Normally, franchisors in Austria have a disclosure requirement document giving the potential franchisee all such relevant information.
Foreign franchisors should look to the guidelines of pre-contractual information by the Austrian Franchise Association (ÖFV), but these guidelines are not binding on the courts in Austria.
Most franchise contracts concluded by a German master franchisor with an Austrian master franchisor, or local franchisees directly with the German franchise headquarters, have a choice of German law. Therefore the most recent decisions of German courts of appeal8 are also important in relation to pre-contractual disclosure in Austria and the information to be delivered to potential master franchisees when concluding a master franchise agreement, and to local franchisees concluding a direct franchise contract.
There are no registration requirements for foreign franchisees or Austrian franchisees, and no rule is expected in the future. Membership of the ÖFV is not mandatory but may be useful for recruiting franchisees in Austria.
iv Mandatory clauses
A franchise agreement is characterised as a sui generis agreement, which incorporates elements of a licence agreement, as well as the types of agreement regulated by national law, such as commercial agency agreements, sales contracts, urban and usufruct leases, loan agreements, and memoranda and articles of association. The main purpose of a franchise agreement is the transfer of expertise developed by the franchisor.
Franchise agreements give rise to ongoing obligations, as they are concluded for a particular period and not just for a one-off performance on the part of the franchisee. This leads to a permanent mutual duty of care, and thus also increased significance is given to good faith.
The conclusion of a franchise agreement is, in principle, not subject to any condition regarding form, and, in certain circumstances, may be assumed through conduct that may imply consent to the terms and conditions suggested. The written form is therefore not a legal prerequisite for the franchise agreement to be considered valid. It is, however, advisable, for reasons relating to evidence, to conclude a franchise agreement in writing.
The franchisor is to be introduced in the recitals of the franchise agreement. In particular, a brief outline of the history and development of the franchise must be given, as well as a summary of the key elements characterising the particular franchise.
Detailed provisions in regard to the franchisee's legal personality must be included in the franchise agreement. The question of legal personality entails particularly that it has to be checked whether the franchisee is a natural or legal person (partnership or company). A supplementary agreement to the franchise agreement may also be concluded concerning the franchisee's company, if necessary.
The franchisee is not a representative of the franchisor, and also has no authority to transact business on behalf of any third party. For this reason, it should be explicitly regulated in the franchise agreement that the franchisee does not represent the franchisor, and that the franchisor is freed by the franchisee from responsibility for any third-party claims made because of the actions of the franchisee.
It is always advisable to precede a franchise agreement with recitals, in which the history of the emergence and basis for the franchise system are explained. Recitals are of legal significance for establishing the inherent purpose of the provisions set out in the agreement (the commercial basis). They may therefore also serve the purpose of examining the question of whether it is possible to adjust the franchise agreement, or even terminate it in accordance with the principles of the commercial basis lapsing.
Franchise systems fees
Most franchise agreements provide for the payment of an initiation fee, a franchise fee and an advertising fee.
The initiation fee is not a fee for ongoing services provided by the franchisor, but a consideration in return for the expertise developed by the franchisor and passed on to the franchisee. It should therefore be laid down in the franchise agreement that, should the agreement be dissolved for any reason, the latter is not returned to the franchisee.
Franchise fees are paid to the franchisor by the franchisee, usually on a monthly basis. They are, in the vast majority of cases, calculated based on the total net sales generated by the franchisee. Since total net sales are usually taken as a basis, spin-off products that the franchisee sells may also be included in the calculation when establishing the figure, unless anything has been agreed in the franchise agreement to the contrary.
The average fee of this type in Austria in 2006 was 5.37 per cent of the corresponding total net sales achieved. In some systems, however, these may as well be significantly above that figure. It is also possible to agree that a fixed monthly amount be paid. Furthermore, it may be laid down in the franchise agreement that, in the event of certain total net sales not being achieved, the franchisee still has to pay a minimum franchise fee.
The obligation to pay fees should be differentiated from the obligation to contribute towards advertising expenses. This entails franchisees making a certain contribution, usually calculated as a percentage of the total net sales, towards the national or regional advertising to be carried out. Such contributions are earmarked for a specific purpose, and should be used by the franchisor in accordance with the established purpose.
Transfer of expertise (know-how)
The transfer of the relevant expertise is an essential component of the franchise agreement, as the franchisor hands over to the franchisee complete instructions for operations.
In accordance with the guidelines of the EU Commission on vertical agreements, Directive (EU) 2016/943 on the protection of undisclosed know-how and, de lege ferenda, the German law of protection of know-how by way of a choice of German law in the franchise contract, or the Austrian know-how protection legislation based on the above-mentioned EU Directive 2016/943, the expertise being imparted to the franchisee is a necessary prerequisite for the agreement to qualify as a franchise agreement. Should no expertise be transferred, it will be considered only a licensing agreement.
The ÖFV Code of Ethics defines 'expertise' as a package of non-patented practical information based on experience of and trials conducted by the franchisor, which is secret, substantial and identifiable. According to the statements contained in the ÖFV Code of Ethics, 'secret' means that the substance, structure or precise composition of the components of the expertise is not generally known or not easily accessible, in regard to which the word 'not' is to be understood in the narrow sense, so that each individual part of the expertise ought to be entirely unknown or unavailable outside the franchisor's business. According to the ÖFV Code of Ethics, the expertise is deemed 'material' if it covers knowledge that is indispensable for the franchisee concerning the use, sale or resale of the contractual goods or the provision of the contractually agreed services. The expertise is in particular indispensable for presenting the goods intended for sale, processing products in the context of the provision of services, the manner in which customers are served, and conducting business from an administrative and financial perspective. The expertise moreover has to be useful to the franchisee. A further prerequisite is that the expertise needs to be identified. This means that the expertise must in any case be described in sufficient detail for it to be possible to check whether the features of secrecy and materiality are being fulfilled.
The description of the expertise may be included in either the franchise agreement, the handbook or the guidelines, which usually form part of the agreement.
The expertise should be documented in the franchise handbook, which accompanies the franchise agreement. Both are connected by means of dynamic references (i.e., it is laid down in the franchise agreement that the franchisee is required to use the applicable version of the franchise handbook).
As regards future law, the know-how of a franchise-system is only protected by EU and national law if it is both documented in written form (or, for example, within the franchise system intranet) and also permanently developed by the franchisor, with the franchisee contractually obliged (whether by the franchise contract or the master franchise contract) to keep the franchise system know-how secret, even after the termination of the franchise contract.
In the event of the franchise agreement not containing any provisions on legal succession, it will end upon the death of the franchisee. Just as in the case of an agency agreement or commercial agency agreement, the activity undertaken by the franchisee based on the franchise agreement is personal, and thus relates to an individual. The franchise agreement is concluded based on the personal qualifications of the franchisee, which is why the franchisor has an interest in the franchisee personally fulfilling the obligations arising from the agreement.
Usually a legal succession clause is agreed in franchise agreements, to give the franchisee's heirs the opportunity to continue to carry on the franchise operations. The case may be different, however, if a franchise agreement is concluded with an Austrian private company limited by shares. Should the majority shareholder of the franchisee's company die, the franchise agreement will only lapse if, pursuant to the memorandum and articles of association, the death leads to the dissolution of the franchisee's company, and thus its liquidation. Notwithstanding the latter, the provision that the death of the majority shareholder is a reason for terminating the franchise agreement can, of course, also be included in the franchise agreement.
Certain limitations in regard to the contractual period in particular arise from Sections 864a and 879 of the ABGB), Section 6(1)(1) of the Austrian Consumer Protection Act (KSchG), and the Commission Regulation (EU) No. 330/2010.
A long contractual period in conjunction with an exclusive obligation to purchase from the franchisor may, in certain circumstances, be deemed unethical gagging. Drawing upon the case law on the beer supply contracts, a contractual period of 20 years appears to come very close to being the upper limit that can be tolerated. Classing an excessive contractual period as gagging is based on the restriction of the economic independence of the purchaser contained therein. According to the requirements of the ÖFV Code of Ethics, the contractual period should be limited in such a way that the franchisee can amortise his or her initial investments. Depending on the circumstances of the case, a contractual period exceeding 20 years may also be justified in franchising. This is particularly the case with investment franchise agreements or master franchise agreements.
It should be agreed in franchise agreements – in the final or subsidiary provisions – that any amendments and additions or supplementary provisions to the agreement need to be laid down in writing to be legally valid, which is also supposed to apply to setting out a provision dispensing with the requirement for the written form. In addition, there should be no subsidiary verbal agreements supplementing an agreement, to prevent problems to obtain the necessary evidence from occurring should a lawsuit be initiated.
Usually, in the final provisions a severability clause is also agreed upon, which, in the event of any provisions of the agreement being or becoming invalid, should stipulate that the validity of the remaining provisions of the agreement should not be affected, and that the latter will therefore remain valid. It is consequently usually agreed in the agreement that a void or invalid provision be reinterpreted or supplemented in such a way that the economic purpose intended with the void or invalid provision is achieved as precisely as possible, and that the latter is also supposed to apply to any loopholes in the agreement.
i Franchisor tax liabilities
The corporate income tax system in Austria is nearly same as the system in Germany, but the rates to be paid by franchisors in the legal form of a corporation differ in Austria. At the moment those rates are under political discussion, and a tax reform is to be expected next year.
The franchisor is not liable for any taxes to be paid by the franchisee. On the entrance fee and the royalties, 20 per cent VAT has to be paid.
For income tax purpose, the entrance fee is usually recognised over the term of the franchise. The part of the fee that represents payment for initial services can be recognised as a business expense in the first year. Franchise fees and royalties are subject to withholding if the franchise agreement does not expressly stipulate which portion of the franchise fee is a royalty payment and which part is paid for service; the tax authorities will assess the portions according to their experience. Austria has double-taxation treaties with a large number of countries, which often allow exemptions to be applied for.
ii Franchisee tax liabilities
The franchisee is liable for corporate income tax if it is a corporation. If the franchisee is a natural person or a partnership, he or she is liable for income tax.
Franchisees often pay themselves a salary as CEO of the franchisee company to pay income tax rather than corporate income tax. Such a salary needs to reflect the market and the salaries normally paid. If the salary substantially strips out all profits or is otherwise unusual, this can lead to a challenge by the tax authorities.
Impact of general law
i Good faith and guarantees
Good faith and fair dealing is central to Austrian contract law,9 similar to the German contract law. As the franchisor and the franchisee are working together on a long-term franchise contract, there is an implied obligation of good faith that applies to both parties. As a result, the franchisor needs to consider the impact on the franchisee before exercising a remedy or imposing a new system standard. The main practical example of how good faith affects franchising is the requirement that changes to the manual are subject to the requirement of good faith: the franchisor may only impose changes while taking into account the reasonable interests of the franchisee – this is the loyalty to which the franchisor is entitled.
ii Agency distributor model
The UGB came into force in Austria on 1 January 2007. According to the provisions of the UGB, 'enterprise-related transactions' refers to all transactions of an entrepreneur that form part to the operations of his or her company. Transactions that a natural person concludes before taking up the operations of his or her company to create the prerequisites for the latter do not yet count as enterprise-related transactions.
What is significant when applying the UGB is Section 454 is that when the franchise agreement is terminated a franchisee is entitled to assert a claim to compensation for investment for any investments not amortised as at the agreement being terminated, as long as the latter have been initiated by the franchisor.
iii Employment law
The franchisee has to work as an independent salesman, running the franchise outlet at his or her own risk. Therefore the franchisee must have his or her own:
- price policy;
- running of the franchise outlet; and
- staffing decisions.
If franchisees do not have these rights, they are not independent – they are employees of the franchisors. The guiding decisions in Germany of the Labour Supreme Court and the Civil Supreme Court are also the leading decisions in Austria.
iv Consumer protection
In the past, franchisees were supposed to be briefed, if necessary, about their right of withdrawal in accordance with the provisions of the Austrian Consumer Protection Act. On 13 June 2014, the Implementing Act on the EU Directive on Consumer Rights came into force. With this law a uniform right of revocation was introduced in all EU Member States, and thus also in Austria.
In other words, when concluding a franchise agreement the founder of a new business must be briefed on the 14-day right of revocation available to him or her, in Austria as well. Should the information on revocation not be provided or not be in line with the legal requirements, the franchisee may revoke his or her declaration of intent given with a view to concluding the franchise agreement, even after 14 days have expired; however, in the interests of legal certainty, this right of revocation will lapse one year and 14 days after the franchise agreement has been closed.
Following a recent judgment by the OGH,10 if the franchise agreement has been concluded by a consumer franchisee and certain franchise-agreement regulations are thus rendered invalid because they are in conflict with consumer protection law, the franchisee and the franchisor have to conclude an amendment stipulating that the required regulations are obligatory as the franchisee has now became an entrepreneur.
v Competition law
Austria is one of the 28 EU Member States and as such European competition law principles apply. There are some local issues around the interpretation of the Vertical Restraints Block Exemption and its impact on franchise agreements. Generally, it is thought that a purchase tie in a franchise system should not exceed the 80 per cent threshold set out in the Vertical Restraints Block Exemption.
Price-fixing is, according to the Vertical Restraints Block Exemption, not allowed and normally franchise contracts last for five years if the franchisee is obliged to sell only products of the franchise system to customers and the purchase and sale of other products is not allowed.
The Austrian antitrust authorities have recently published guidelines for the pricing policy of franchise systems as well as other distribution contracts, but they are not binding on the Austrian courts.
For example, the following are not allowed:
- verbal or written agreements fixing prices or minimum prices;
- agreements for paying provisions to franchisees if they agree that the recommended prices are fixed prices;
- obligations for franchisees to pay penalties if they do not agree that the recommended prices are fixed prices; and
- agreements monitoring the pricing policy of a franchise.
Example clauses are allowed concerning:
- recommended prices;
- fixed maximum prices; and
- price monitoring of franchise competitors.
If a franchisor commits a breach of competition law (e.g., price-fixing in relation to the franchisees), the OGH11 has fixed new principles for the determination of the penalties to be paid to the Austrian Competition Authority.
Following the Coty judgment of 5 December 2017 by the EuGH,12 the franchisor is allowed to forbid the selling of franchise-system 'luxury products' by the franchisee through Amazon or other online platforms. In future, therefore, the question will arise as to whether a franchise-system product is a beauty product (online sale allowed) or a luxury product (online sale not allowed).
vi Restrictive covenants
Non-compete clauses may only be agreed within the scope of antitrust provisions, and should be restricted by the limit of unconscionability in accordance with Section 879 of the ABGB. Accordingly, a geographically unlimited competition clause would inherently cause concern during the currency of a contractual relationship.
Because of the existing interest in maintaining and extending the franchise system, a geographically unlimited non-compete obligation will also be permitted during the period in which the franchise agreement is being maintained. According to Commission Regulation (EU) No. 330/2010, and the Commission Guidelines, the latter is permissible, subject to certain prerequisites, under antitrust law.
In accordance with the provisions of Commission Regulation (EU) No. 330/2010, if the percentage of goods sold being purchased from the franchisor amounts to over 80 per cent of the amount spent on purchases, non-compete clauses may only be agreed for a maximum of five years, unless the exemption clause of Article 5 of Commission Regulation (EU) No. 330/2010 comes into force. According to this, the five-year limitation does not apply if the contractual goods or services are sold by the franchisee on the premises and in grounds that are the property of the franchisor, or are rented by the latter on either a usufructuary or an urban basis, from third parties not connected with the franchisee, and the non-compete obligation does not extend beyond the period in which the franchisor uses the premises and grounds.
From the sixth year onwards, the franchisee is entitled to sell competing products, at least to the extent of 20 per cent of the initial purchase value. This regulation has led to a situation in which only an initial contractual period of five years may be agreed in the case of a franchise agreement with 100 per cent of the goods sold being purchased from the franchisor, and then the parties subsequently conclude another franchise agreement that is, in turn, of five years' duration.
Furthermore, according to Commission Regulation (EU) No. 330/2010, post-contractual non-compete obligations are only permissible for a maximum period of one year following termination of the franchise agreement, as long as the non-compete obligation refers to goods and services that are in competition with the contractual goods or services, relates to premises and grounds from which the franchisee has operated its business during the contractual period, and is vital to protecting the expertise transferred by the franchisor to the franchisee. In all others cases, post-contractual non-compete obligations under Commission Regulation (EU) No. 330/2010 are not legal.
Limitations on the legality of non-compete obligations may also arise from Section 879 of the ABGB. Accordingly, non-compete obligations are generally only permitted to a very limited extent. This is mainly justified by the aim of protecting the free and unimpaired exercise of a profession. To assess the legitimacy of a non-compete obligation, initially the valid interests of both parties need to be determined. The technical, geographical and time limits of the legitimacy of the non-compete obligation will emerge upon weighing up the considerations in this way. These depend substantially on the product and features of the market in question.
Termination of the agreement
Like any agreement, the franchise agreement can be amicably dissolved by agreement between the parties. Franchise agreements are often concluded for a certain period, so that the franchise agreement ends upon the expiry of the agreed period. The parties are essentially free in determining the length of the period.
Even in the event that the application of the KSchG is in principle assumed, the right of termination in accordance with Section 15 does not apply. Section 15 of the KSchG covers sales contracts and comparable agreements. Within a franchise system, the franchisor provides recurring services, in particular consultancy and support services concerning marketing or organisational activities.
In accordance with Section 21(1) of the Commercial Agents' Act (HVertrG), if the agreement has been concluded for an indefinite period it may be dissolved by either party in the first contractual year by giving one month's notice. After the second contractual year has commenced, however, the notice period will be at least two months, and after the commencement of the third contractual year at least three months and so on until the sixth and following contractual years, when the notice period will be six months. When calculating the duration of the notice period, in the case of agreements entered into for a specific period but then extended for an indefinite period in accordance with Section 20 of the HVertrG, the contractual period of the defined-term agreement entered into must be included in the calculation. These legal concepts also apply to the termination of franchise agreements.
The basic concept of not permitting termination out of season may, however, be taken into consideration when making analogies in law concerning the termination of ongoing commitments.
Ongoing commitments of indefinite duration may also be ended by giving notice of termination in the absence of contractual arrangements. This right may generally not be entirely excluded through contractual provisions. This right of termination does not, however, exist if it would conflict with the purpose of the agreement. Whereas it does actually follow on from the legal nature of the franchise agreement that long-term cooperation between the contracting parties is intended, it does, however, not follow on that the latter should only end in cases of extraordinary dissolution.
In principle, parties are at liberty to agree termination dates and deadlines for dissolving a franchise agreement. Essentially, a waiver of termination may also effectively be submitted for a specific period. The limit for the legitimacy of termination agreements is formed, inter alia, by immorality. For instance, it may, in certain circumstances, be immoral for the franchise agreement to stipulate that the franchisor has a right of termination in the event of unsatisfactory sales if the same is not also conceded to the franchisee.
The analogue application of commercial agency law to franchise agreements is also affirmed by the OGH, where typical causes concern both the termination of the agreement and the claim to compensation. Section 22 of the HVertrG provides for the dissolution of commercial agency agreements for a significant reason.
According to Section 22 of the HVertrG, the following circumstances are in particular deemed to be important reasons entitling the principal to dissolve the contractual relationship prematurely:
- the commercial agent becomes incapable of carrying out his or her activities;
- the commercial agent is guilty of an act that makes him or her appear unworthy of the principal's trust, particularly if, contrary to the provision of Section 7 of the HVertrG, he or she accepts a reward when he or she transmits orders to the principal that have not been placed or if he or she otherwise engages in deception in regard to essential business matters;
- the commercial agent, after a period deemed considerable according to the circumstances, ceases to work for the principal, or refuses to do so, or if he or she infringes any other essential contractual provisions;
- the agent is guilty of violence against or substantial defamation of the principal; and
- insolvency proceedings are instituted against the assets of the commercial agent.
The commercial agent in turn is entitled to dissolve the contractual relationship prematurely, if:
- he or she is unable to carry out his or her work; or
- the principal:
- unduly curtails or retains commission due to the commercial agent or infringes other essential contractual provisions;
- is guilty of violence against or substantial defamation of the commercial agent; or
- gives up carrying on the operations in the line of business in which the commercial agent is primarily involved.
Pursuant to Section 21 of the Austrian Insolvency Code (KO), in the event of mutual agreements not having been entirely fulfilled by both parties, the insolvency administrator will be entitled either to fulfil the contract and demand the consideration or to withdraw from it. In the second case, the other contracting party will actually be entitled to assert a claim for compensation for damages, this may only be filed as a claim against the insolvency estate.
In the event of insolvency, the insolvency administrator is entitled to assert a statutory right of continuation for 90 days from the insolvency proceedings being instituted during which its claims to segregate items from the assets involved in the insolvency proceedings (e.g., to require the handing over of trademarks or machinery of the franchisor) cannot be asserted13 and the contractual agreement of a right of withdrawal or the dissolution of the agreement in the event of composition proceedings being instituted is usually inadmissible.14
Should the franchisee die, the franchise agreement will, in the event of doubt in the matter, lapse upon his or her death, since he or she is usually obliged to be personally involved in the day-to-day operations. The case may be different if a franchise agreement is concluded with an Austrian private company limited by shares. Should the majority shareholder of the franchisee's company die, the franchise agreement will lapse only if, pursuant to the memorandum and articles of association, death leads to the dissolution of the franchisee's company and its liquidation. Notwithstanding the latter, the provision that the death of the majority shareholder is a reason for terminating the franchise agreement can, of course, also be included in the franchise agreement.
Legal consequences of termination of the agreement
Upon termination of the franchise agreement, the franchisee will lose its right to use the trademarks, business designations, logos and other promotional or business symbols of the franchisor. Any operating resources owned by the franchisor are likewise to be returned. In the event of any doubt, the franchise handbook, as well as any additions, will cover the matter. The franchisee may not continue to use the items once the franchise agreement has been terminated.
According to the case law of the OGH, the provisions on the obligation to disclose customer data laid down within the scope of the franchise agreement are also deemed 'justified interests' of the franchisor within the meaning of Section 8 of the Austrian Data Protection Act.
An obligation on the part of the franchisee to cease and desist from selling goods or providing services for payment of the franchisor once the agreement has been terminated may arise from a direct contractual provision, for example, from a post-contractual prohibition of competition,
Abuse of signage under Section 9 of the UWG is usually not seen in post-contractual sales, insofar as original products are concerned, since no likelihood of confusion regarding the origin of the goods exists in that case. It should, however, be set out in the franchise agreement that such products are bought back by the franchisor when the franchise agreement is terminated, if applicable applying a mode of calculation for the purchase price already set out in the franchise agreement (cost price minus X per cent).
Should the former franchisee give the impression that he or she is still the franchisee in his or her sales activities, or at least an authorised dealer or contractual partner of the franchisor, this conduct may, in certain circumstances, be deemed an anticompetitive 'exploitation of third-party reputation' under Section 1 of the UWG.
Any claims to compensation for damage will be governed by the general regulations under the Austrian law of obligations.
An unauthorised termination by the franchisee may lead to claims for compensation on the part of the franchisor. The franchisor will, however, be obliged to keep its losses to a minimum by engaging in an appropriate protective transaction; for example, by concluding a new franchise agreement with a third party. The case law states that, in consideration of the mutual interests of the parties as well as when assessing the question of whether there is a reason for early dissolution, the assessment of the legislator regarding the premature dissolution of an agency agreement is to be taken as the basis of reasoning.
From the perspective of contract law, the question arises whether the franchisor is in a position to relieve itself of liability. In this respect, the limitations of Section 879(3) of the ABGB are to be observed. Liability exemption will always be inadmissible and void if it puts the other party – in this case, the franchisee – severely at a disadvantage.
According to the case law, excluding liability for harm deliberately caused is unethical, and therefore irrelevant, but it is legitimate to exclude liability for slight negligence. The explicit or tacit agreement of the exclusion of liability for gross negligence is admissible insofar as it is not unethical. Conduct being unethical should be assumed in the event that the negligence taking place is so blatant that, in light of the experience gained from daily life and based on honest commercial practice, the conduct cannot be condoned.
Following termination of the agreement, the former franchisee is required to refrain from disclosing the franchisor's expertise, even without express provision having been laid down. The parties may agree that the prohibition on the disclosure of expertise should apply for an indefinite period, and thus not be subject to any limitations.
For the franchisee, there is no separate legal provision regarding the question of whether he or she is entitled to assert a claim for compensation once the franchise agreement has been terminated. Such claims are only regulated for commercial agents in Section 24 of the HVertrG. According to this provision, a commercial agent is entitled to assert a claim to compensation if and to the extent that:
- it supplies the principal with new customers or has considerably extended already existing business relationships;
- it is to be expected that the principal or his or her successors in right can also draw benefits from these business relationships, even after the contractual relations have been dissolved; and
- the payment of compensation, taking into account all the circumstances – in particular the commission payments due to the commercial agent arising from business transacted with the customers concerned – is equitable.
In a decision in April 1991,15 the OGH affirmed the application of Section 24 of the HVertrG to franchisees for the first time. The OGH linked to its previous decisions on the analogous application of Section 24 of the HVertrG to licensed dealers and on the comparability of the tasks of the licensed dealer with those of the franchisee.
In the opinion of the OGH, the legal status of a franchisee can certainly be compared with that of a licensed dealer. In the case of a franchise relationship, the integration into the distribution system could even be closer than between manufacturers or intermediate distributors and their licensed dealers. This is allegedly the case if the franchisee's dependence upon the franchisor extends to virtually all matters of business management, wherein the entire management activities are largely geared towards the instructions of the franchisor, which also has extensive monitoring rights.
Compensation for investment
Section 454 of the UGB determines that, when the contractual relationship with the franchisor is terminated, a franchisee has a claim to compensation for investments that, according to the distribution undertaking (franchise agreement), it was obliged to make to ensure uniform distribution, as long as the latter are neither amortised nor reasonably utilisable once the agreement comes to an end. Both material and staffing expenditure are covered.
Section 454 of the UGB covers both investments and expenditure. Both material and staffing expenditure fall under the latter. The following can be compensated:
- marketing expenses;
- advertising expenditure;
- expenses for trade fair presentations;
- expenses for maintaining the sales organisation;
- expenses for setting up the sales premises;
- expenses for developing a warehouse for spare parts;
- costs of providing the business with the appropriate special tools;
- expenses for designing and redesigning the headquarters;
- specific personnel costs (equipping the staff employees); and
- the costs of CPD and vocational training.
It is to be borne in mind that investments that exceed the contractual obligation are not covered by the claim to compensation for investments.
A claim to compensation for investment will, in accordance with Section 454(2) of the UGB, not arise in the event that:
- the franchisee has terminated the contractual relationship or dissolved it prematurely ('self-termination'), unless there was a significant reason for the latter, attributable to the franchisor;
- the franchisor has terminated the contractual relationship or dissolved it prematurely based on a significant reason attributable to the franchisee ('termination without notice for a significant reason'); or
- in accordance with an agreement with the franchisor, the franchisee has imposed the rights and obligations to which he or she is subject in accordance with the franchise agreement upon a third party ('transfer of contract' or 'sale of business').
It is, moreover, explicitly regulated in Section 454(5) of the UGB that the claim to compensation under Section 24 of the HVertrG is not affected, since the latter is in fact oriented towards a service that is different from the claim to compensation for investment, and pursues a different aim.
viii Anti-corruption and anti-terrorism regulation
Bribery and corruption are criminal offences in Austria, but there is no requirement for Austrian franchisors to carry out any background checks on potential franchisees.
Anti-terrorism regulation in Austria has no impact on franchise systems or the drafting of franchise contracts.
ix Dispute resolution
The franchise agreement has to set out which court has jurisdiction to decide on any legal dispute, should one arise, so including an agreement conferring jurisdiction is imperative for a franchise agreement. Since franchise agreements with foreign franchisors are also often concluded in Austria, it has to be established in the scope of the agreement that in the event of any dispute the law of the Austria will apply. Although international franchise agreements usually stipulate that the law of the franchisor's jurisdiction applies, this practice tends to be rejected by Austrians; Austrian franchisees are usually only prepared to sign a franchise agreement – even with foreign franchisors – if the application of Austrian law is agreed.16
In franchise agreements, however, and particularly with foreign franchisors, resolving disputes through an arbitration court is generally preferable to pursuing a case through the ordinary courts, so the franchise agreement should supplemented by an arbitration agreement. Use of the regulations of recognised arbitration institutions is generally recommended.17 Whether taking the route to such an arbitration institution or court is expedient has to be decided on a case-by-case basis.
In many cases, it is also laid down in franchise agreements in Austria that resolution of legal disputes should be attempted with the aid of a mediator prior to initiation of a judicial dispute (before the state or arbitration courts). To that extent, it has to be established in the franchise agreement that such mediation is to be undertaken, and that the failure of mediation is a procedural prerequisite to any kind of action being filed. The failure of the mediation, therefore, has to be made explicit by the mediator.
Furthermore, it must also be set out within the franchise agreement that measures of provisional legal protection are excluded from the scope of application of the mediation process, or of the arbitration court, and only the courts of the state court system are competent to deal with such measures.
Currently, no general franchising or special disclosure requirement law is expected.
1 Eckhard Flohr is a senior partner and of counsel at LADM Lawyers and Alfons Umschaden is a lawyer at Umschaden Law Firm.
2 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).
3 Section 25(1) of the Austrian Trademark Protection Act (MaSchG).
4 EU VO 330/2010.
6 OGH 19.01.1989 WBl. 131.
7 See Directive (EU) 2016/943 of the European Parliament and of the Council of 8 June 2016 on the protection of undisclosed know-how and business information (trade secrets) against their unlawful acquisition, use and disclosure – EU RL 2016, 943 ABl. EU Nr. L 157 – in force since 5 December 2018.
8 OLG Düsseldorf, ZVertriebsR 2014, 46; OLG Hamburg, ZVertriebsR 2015, 78 – Tom Taylor; OLG Dresden, ZVertriebsR 2016, 320 – Krankendienst; OLG Frankfurt, ZVertriebsR 2016, 313 – Haarentfernung.
9 Sections 863 II and 914 of the ABGB.
10 OGH 21 January 2015 – 3 Ob 186/14w ZVertriebsR 2015, 389.
11 OGH 8 October 2015 – 16 Ok 2/15b ZVertriebsR 2015, 391.
12 C-230/16 ZVertriebsR 2018, 52 A; see additional: Metzlaff/Schoper ZVertriebsR 2018, 1; Rohrßen DB 2018, 300; Rohrßen ZVertriebsR 2018, 277; Wolf-Posch/Samek ZVertriebsR 2018, 302; and the recently published decisions: OLG Frankfurt ZVertriebsR 2018, 321.
13 Section 11(2) of the KO.
14 Section 20e(2) of the Code on the Austrian Insolvency and Composition Proceedings.
15 OGH, 10 April 1991 – 9 Ob A 8.9 /81 Commercial Law Review 1991, 332; see also the recent judgment: OGH, 1 March 2017 – 5 Ob 72/16y ZVertriebsR 2017, 397.
16 The exception to this is that franchise contracts concluded directly with German franchisors are generally governed by German law.
17 Generally, the regulations of the International Chamber of Commerce, which has its headquarters in Paris.