The Franchise Law Review: Germany
Germany is a mature franchising market, with a good number of indigenous franchises ranging across more than 42 different sectors, from retail and fast food through hotels, education, car rental and domestic services to energy, health care and telecommunications. The three biggest sectors are services (43 per cent), retail (29 per cent) and hotels and gastronomy (20 per cent).
There are currently more than 960 active franchise systems and 171,824 franchise businesses in Germany, employing more than 716,935 employees, according to the German Franchising Association. The current annual turnover of the German franchise sector is estimated at about €129 billion.2
Domestic franchise chains, such as Apollo-Optik, Arko Kaffee und Confiserie and BabyOne sit side by side with the likes of McDonald's, Hertz, Intercontinental Hotels and Mail Boxes Etc. The average franchise business operating in Germany is active in 17 different countries at the same time. Over 41 per cent of all franchise systems in Germany are still expanding.
The German Franchise Association and the German Franchisee Association are both active, and the German Franchise Association is a member of the European Franchise Federation and of the World Franchise Council.
Although the General Trade Act imposes some sector-specific regulations, Germany is a market economy, which typically imposes no restrictions on foreign franchisors as regards the granting of master franchise or development rights.
ii Foreign exchange and tax
There are no foreign exchange controls or restrictions on foreign currency payments applicable to cross-border franchising in Germany. It is prudent to ensure that franchise documentation states the currency in which payments should be made and the rate and time of currency conversion. Likewise, it is preferable to describe ongoing fees as service fees rather than royalties, as these can be more advantageously dealt with tax-wise.
Germany has double-taxation treaties in place with most countries and the terms of the relevant treaty should always be taken into account when structuring international payment flows.
i Brand protection and search
The key intellectual property rights involved are trademarks, designs, domain names, copyright, database and know-how rights (patent rights are usually not relevant). Although copyright is not registrable in Germany, trademarks are, and franchisors can choose whether to register them as domestic German or European Union trademarks (EUTM) or international registrations. The registration fee for an application for a German registration is €300 with a discount of €10 should the registration be made online. A fast-tracked examination is available for an additional fee of €200. If more than three classes of goods and services are requested, a fee of €100 for each additional class will be charged. Before application, the applicant is expected to make an availability search (at least briefly) in respect of the trademark, which is usually carried out by specialised service providers, to avoid a conflict with a prior rights holder.
Not surprisingly, however, most franchisors opt for EUTM registrations rather than German domestic registrations, although domestic registration is more common if it is a German-language mark used solely for a domestic German business. Franchisors can extend their trademarks to Germany as part of an international registration or subsequent designation, as Germany is a party to the Madrid Protocol.
Germany is a first-to-file jurisdiction, although unregistered marks can be acquired by way of usage if they have acquired a reputation in Germany, and Article 6 of the Paris Protocol also ensures that 'well-known marks' can be protected even if there is no evidence of use in Germany. The German Unfair Competition Act provides relevant supplementary protection to trademarks.
In addition to pure trademark protection, the German Trademark Act also grants special protection for trade designations, which could be business names or titles of works. Their protection does not require a registration, but rather a certain level of usage of the trade designation by the proprietor.
As trade designations are not contained within the trademark register, special search tools are required to identify existing prior third-party rights.
Just recently know-how protection has been modified by the new German Trade Secrets Protection Act (based on the EU Trade Secrets Directive3), which has been implemented to improve protection for companies' technical and commercial trade secrets, and which provides additional stipulations to concretise existing protections for companies.
Trademark proprietors are entitled to commence enforcement proceedings based upon their trademark rights. It is possible to obtain a preliminary injunction (ex parte) in Germany, even without an oral hearing, within a very short time ('urgency period'), but any delay in issuing proceedings can mean that this right may fall away. Both parties must be represented before the court by a lawyer admitted to the German Bar.
German litigation lawyers usually work on an hourly fee arrangement – conditional fees are generally not compliant with German Bar rules. In German litigation, the English rule applies, so attorneys' fees are usually paid by the losing party to the winning party. The amount to be refunded is, however, limited by the Attorney's Remuneration Act and, as a result, the winning party may end up bearing part of its own attorney's fees.
iii Data protection, social media and e-commerce
The rules of data protection law play an important role in any dealings with the personal data of end users (and employees); these rules have a significant impact, for example, when franchisors run loyalty programmes and promotional campaigns. The General Data Protection Regulation (Regulation (EU) 2016/779 (GDPR) has applied since 25 May 2018. Any processing of personal data by the franchisee (and franchisor) must be based on the consent of the data subject or another legal justification under law. Wherever a data controller transfers data outside the EU or EEA (i.e., to a third country), for example, into the United States, measures to ensure an adequate level of data protection compliance must be met by suitable means, such as data subject consent or other guarantees.4 Until the Schrems II5 ruling of 16 July 2020 by the European Court of Justice (ECJ), data controllers could rely equally on the EU Model Contract Clauses, Binding Corporate Rules (for transfers within corporate organisations) or the EU–US Privacy Shield Framework (the EU–US Privacy Shield) as suitable guarantees without taking any additional measures for transfers outside the EU or EEA to the United States. Since then and in light of the ECJ's criticism of insufficient protection of data subjects' rights against data access by (US) intelligence authorities, data exporters (e.g., franchisees) from the EU and data importers (e.g., franchisors) in the United States (and in other non-EU countries) must conduct an additional risk assessment and take additional safeguards to warrant data subjects' rights.6 These additional safeguards must be determined on a case-by-case basis and may include technical measures such as the encryption, tokenisation and anonymisation of personal data; organisational measures such as further information obligations towards the data subjects about foreign government or security authority intervention and access to personal data; and undertakings by the data importer to take legal action in challenging the rightfulness of such foreign government intervention action. Where a data importer cannot or does not provide such safeguards, the data exporter shall discontinue the data transfer and can be held liable by EU data protection authorities.7 The European Commission has recognised the immense challenge for businesses resulting from the Schrems II decision and has prepared a new set of EU Model Clauses.8 Following a consultation phase and formal enactment by way of an official European Commission decision, franchisors and franchisees will be able to effect data transfers under the new EU Model Clauses9 by specifying in sufficient detail their additional technical and organisational safeguards as required in light of the ECJ requirements.
Where a data controller instructs a data processor to process data on its behalf and subject to its instructions within the EU, the parties have to enter into a commissioned data processing agreement. Under Article 28 of the GDPR, the data processor assumes a higher level of liability towards the data subject and the authorities for complying with data protection law, whereas under the former GDPA only the data controller was responsible towards the data subject and the authorities. Data protection authorities have issued further guidance on the requirements regarding processor obligations and liability.10 Franchisors and franchisees must, however, also consider whether they could be tied into joint controllership, namely where they jointly determine the means and purposes of processing personal data.11 Franchisors and franchisees will need to consider the guidelines on joint controllership recently published by the European Data Protection Board (EDPB).12 Joint controllership requires either (1) a common decision by the franchisor and the franchisee on the means and purposes of processing personal data, or (2) can result from converging complementary decisions by the parties. In the latter case, the key criterion is that the processing of both parties is linked in a manner that makes the processing impossible for only one party. Depending on the circumstances, this can certainly be the case; for example, where a franchisor provides infrastructure or a platform, or both of these, for the franchisees to jointly process end customer data.13 As a result, both parties will have to define their joint controllership in a separate agreement, or in an annex to their franchise agreement, pursuant to Article 26 of the GDPR, as well as having to be aware of their joint and several liability towards the data subjects and authorities.14 According to the EDPB, joint controllers need to determine and agree on their respective responsibilities to meet the GDPR requirements transparently. The agreement between the parties needs to reflect their roles and relationships towards the data subjects.
Notably, each regional state in Germany has its own data protection authority, which can take slightly different views on interpreting and enforcing the law. However, under the GDPR, the possible scope of interpretation has now narrowed down, given the GDPR's universal application throughout the EU and EEA; additionally the EDPB plays an important role in providing further guidance; the GDPR also makes provision for other forms of secondary law that may take consideration of particular industry and sector practices, such as codes of conduct18 and certifications.19
Further to that, consideration also has to be given to various provisions of the German Unfair Competition Act that apply to online marketing activities, in particular regarding unsolicited electronic communication. Lack of compliance with these provisions can lead to serious consequences, including cease-and-desist actions by consumers, competitors or consumer protection associations. These legal actions are independent of the monetary fines and other sanctions and administrative orders that can follow from not complying with the requirements of the GDPR. While the EU guidelines on the application and setting of administrative fines20 have yet to result in a harmonised approach between EU Member States in regard to enforcement actions, the German group of national and regional data protection authorities, the Data Protection Conference (DSK), has certainly increased the level of enforcement actions and related fines. The Berlin data protection authority imposed a fine of around €14.5 million on a real estate company for not maintaining a proper deletion process for customer data.21 More recently, the Hamburg Commissioner for Data Protection and Information Security imposed a fine of €35.3 million on an international retail company because it had an insufficient legal basis for data processing (information about employees' private life was collected and stored on a large scale).22 In future, franchisors and franchisees should monitor whether the DSK adopts a formal position on the draft document23 providing guidance on the imposition of fines on companies in proceedings under the GDPR that it put forward for further discussion at European level by the EDPB.
Social media monitoring, as well as active marketing through social media, raises a considerable number of issues under the GDPR – as was previously the case under German privacy rules, which is why use of these channels is typically less developed than in other European jurisdictions. Accordingly, taking proper legal advice on a case-by-case basis is required for activities in this field.
German regulations on e-commerce mainly derive from EU legislation, such as the directives on distance selling24 and on consumer rights.25 E-commerce providers need to observe a variety of information obligations; failure to comply with these obligations can trigger extended rights of withdrawal for consumers, as well as possible competitor actions.
On the basis of unfair competition law, competitors as well as competition associations, qualified consumer protection associations and chambers of industry and commerce, or craft chambers, can launch cease-and-desist actions against market players that do not 'play by the rules' with regard to compliance with requirements on electronic contracting, information obligations, unlawful advertising or even, in certain circumstances, presenting clauses in standard terms of business that are partially or entirely unenforceable. Given the quick reaction times and the speed of courts in granting injunctions (including ex parte injunctions), businesses need to pay particular attention to the potential pitfalls in the area of unfair competition law.
There is no franchise law as such in Germany; provisions concerning franchising can instead be found in the general codes of law such as the Civil and Commercial Codes. These provisions, inter alia, impose pre-contractual disclosure obligations and a heavy expectation of good faith on all parties, making claims of profit to potential franchisees particularly risky.
ii Pre-contractual disclosure
Pre-contractual disclosure obligations are imposed on the principle of culpa in contrahendo, which is codified in Section 311(2) of the Civil Code. In addition, the law concerning misrepresentation is also relevant.
During the negotiations, both parties – not just the franchisor – must tell the truth, make no false promises and disclose all material facts to each other. This is especially true as regards those facts that will have a material impact on the success of the franchise and that may induce the potential franchisee to become part of the network. Earnings claims are particularly difficult and must be based on reliable and relevant empirical data – estimates must be clearly labelled as such. It is even possible that should the franchisor's directors or agents make dishonest or misleading statements to potential franchisees, they could be held personally liable according to Section 311(3) of the Civil Code.
Franchisors should therefore be very cautious in marketing their franchises in Germany. Any failure to comply with the principle of culpa in contrahendo will mean that a contract could be set aside, and any fees paid may have to be repaid in full. There is a statutory period of limitation of three years for claims that a contract failed to comply with this principle, which commences at the end of the year in which the claim arose and the franchisee obtained knowledge of the circumstances giving rise to the claim.
Germany does not require franchises to be registered.
iv Mandatory clauses
The ongoing relationship between franchisor and franchisee is especially affected by agency laws26 if the franchisee commits to the ongoing purchase of products and equipment. Antitrust law, based upon Article 101 of the Treaty on the Functioning of the European Union (TFEU), also has an impact on issues such as the grant of exclusivity, tying and price control.
A test of fairness by the rules on unfair contract terms will be imposed on any provision in a standard form agreement that has not been negotiated by the rules on unfair contract terms.27 The threshold for qualifying as 'negotiated' is rather high in Germany, so it is very likely that a standard form agreement will fall within the scope of the rules on unfair contract terms. Special justification is generally needed if a provision deviates from the fallback position as set out in the Civil Code to the detriment of the franchisee. Franchisees can be treated as if they were consumers in domestic agreements.
Several statutory provisions will be implicit in the agreement, such as a right of the franchisee to terminate and the franchisor's obligation to provide certain services. There is a great deal of case law on the question of what constitutes sufficient grounds for termination, so franchisors must be cautious when exercising or contesting this right.
v Guarantees and protection
The principle of contra bonos mores has a limiting effect on securities, especially if the value of the surety clearly exceeds the debt; where this is the case, the suretyship agreement might be declared void or the debtor can demand a partial release of the security.
i Franchisor tax liabilities
Franchisors that are tax resident in Germany are liable for corporation tax of 15 per cent plus a solidarity surcharge that is added to the corporate income tax and set at a rate of 5.5 per cent of the corporate income tax rate (equalling an additional 0.825 per cent) and trade tax. Trade tax is a municipal tax. As such, tax rates are individually determined by each municipality (the German average is around 14 per cent). Withholding tax of 25 per cent is payable on dividends.
Royalty fees for the granting of rights under the German Copyright Act (e.g., software licences, although not the licences to use patents or trademarks) bear a reduced VAT rate of 7 per cent, while all other fees paid to the franchisor by the franchisee are subject to VAT at 19 per cent. The initial franchise fee is usually amortised over the duration of the franchise for income tax purposes.
ii Franchisee tax liabilities
In addition to corporation tax and the solidarity surcharge, trade tax is also payable by franchisees.
Tax on personal income falls into bands ranging from 14 to 45 per cent; corporate tax, municipal trade tax and VAT also apply at the rates mentioned in Section V.i.
Impact of general law
i Good faith and guarantees
Franchisors cannot exercise their contractual rights or change their business formats with impunity, as the concepts of good faith and fair dealing are implicit in all agreements. Although both franchisors and franchisees benefit from and carry reciprocal burdens, it is generally franchisors, as the dominant parties, that find they have to defend themselves from allegations of behaving unfairly or in bad faith. This is particularly the case when franchisors seek to issue disciplinary or other actions against their franchisees, so their actions need to be proportionate.
ii Agency distributor model
The courts often apply agency law to franchise agreements by analogy.
iii Employment law
Some employers in low-skill businesses, such as contract cleaning, have been known to use a form of 'false franchising' as a way of reducing their liabilities to their employees. The German courts are very sensitive to this type of abuse and the Federal Labour Court's decision in the Eismann case28 established that franchisees can be deemed to be 'in fact' employees of a franchisor if the franchisor controls every aspect of an individual franchisee's business.
As of 2015, a uniform nationwide statutory minimum wage was introduced in Germany. This wage is intended to be reviewed by a commission every two years. As of 1 January 2021, it was increased from €9.35 to €9.50 and will be increased further in stages to €10.45 until 1 July 2022.
iv Consumer credit protection
Section 513 of the Civil Code protects new businesses, including some franchisees, in relation to loans, respites or any other forms of financial aid, as well as instalment supply contracts. Specific statutory information requirements apply and such franchisees may be entitled to withdraw from their contracts.
v Competition law
German competition law is based on the corresponding provisions contained in the TFEU. Nevertheless, the German courts can be particularly strict in their approach.
vi Restrictive covenants
Franchisors can prevent their franchisees from competing with them for the duration of their agreements, but prohibiting franchisees from supplying other franchisees within the same franchise systems is regarded as contravening Article 4(b) of the Block Exemption Regulation. Post-termination restrictive covenants must be explicitly provided for in the franchise agreement and limited in time, scope and territory, and are only enforced by the courts in the event that the franchisor has paid the franchisee a consideration for them.
The franchisor cannot terminate a franchise contract for a minor breach. Termination must be proportionate, fair and in good faith.
If the franchisee undertakes to sell its business to the franchisor on termination, this will be enforced by the courts, but is not common practice among franchisors in Germany.
viii Anti-corruption and anti-terrorism regulation
In practice anti-corruption and anti-terrorism compliance considerations do not apply in the context of franchising in Germany.
ix Dispute resolution
Foreign law is generally acceptable in agreements. Even if foreign law has been agreed, mandatory German and European laws will apply if the franchisee is operating in Germany. Under the Brussels I Regulation, judgments of a court of an EU Member State are enforceable in other Member States without the need for any special procedures, and arbitration awards are fully recognised; mediation is also available.
Injunctions are relatively easy to obtain. Ex-franchisees that continue to use former franchisors' marks are easily stopped by way of interim injunctions. Damages can be awarded but are usually intended to cover actual losses incurred.
The courts continue to wrestle with issues concerning pre-contractual disclosure, termination, the need to give notice, and cooling-off periods. It is likely that this will remain the situation for the next few years.
1 Stefan Münch, Alexander Duisberg and Markus Körner are partners and Michael Gaßner is a counsel at Bird & Bird LLP. This chapter was originally drafted by Stefan Engels and Bahne Sievers, formerly lawyers at Bird & Bird LLP.
2 Figures as at 2019 by the German Franchise Association (Deutscher Franchise-Verband e.V.).
3 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.
4 Art. 46 para. 2 GDPR.
5 ECJ ruling of 16 July 2020 Schrems II (Case No. C-311/18).
6 EDPB: Frequently Asked Questions on the judgment of the Court of Justice of the European Union in Case C-311/18 – Data Protection Commissioner v Facebook Ireland Ltd and Maximillian Schrems; DSK (28 July 2020): Pressemitteilung der Konferenz der unabhängigen Datenschutzaufsichtsbehörden des Bundes und der Länder, available at https://www.datenschutzkonferenz-online.de/media/pm/20200616_pm_schrems2.pdf (last accessed 9 December 2020).
7 The Commissioner for Data Protection and Information Security Baden-Württemberg: Orientierungshilfe: 'Was jetzt in Sachen internationaler Datentransfer?', available at https://www.baden-wuerttemberg.datenschutz.de/wp-content/uploads/2020/08/Orientierungshilfe-Was-jetzt-in-Sachen-internationaler-Datentransfer.pdf (last accessed 9 December 2020).
8 EU Commission, 12 November 2020, https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/12741-Commission-Implementing-Decision-on-standard-contractual-clauses-for-the-transfer-of-personal-data-to-third-countries (last accessed 9 December 2020).
9 The current EU Model Clauses can also be used during a 'sunset' period of one year, subject to taking additional technical and organisational measures that adhere to the requirements of the ECJ Schrems II decision (Case No. C-311/18).
10 DSK (16 January 2018): Kurzpapier Nr. 13, Auftragsverarbeitung, Art. 28 DS-GVO, available at https://www.datenschutzkonferenz-online.de/media/kp/dsk_kpnr_13.pdf (last accessed 9 December 2020).
11 Art. 26 GDPR.
12 EDPB (2 September 2020): Guidelines 07/2020 on the concepts of controller and processor in the GDPR, available at https://edpb.europa.eu/sites/edpb/files/consultation/edpb_guidelines_202007_controllerprocessor_en.pdf (last accessed 9 December 2020).
13 A similar case was decided by the European Court of Justice (ECJ): the ECJ ruled that Facebook and the administrators of Facebook 'fan pages' are to be considered joint controllers (ECJ ruling from 5 June 2018 (Case No. C-210/16, para. 39).
14 Art. 82(4) GDPR. See also DSK (19 March 2018): Kurzpapier Nr. 16, Gemeinsam für die Verarbeitung Verantwortliche, Art. 26 DS-GVO, available at https://www.datenschutzkonferenz-online.de/media/kp/dsk_kpnr_16.pdf (last accessed 9 December 2020).
15 DSK position paper (26 April 2018): Zur Anwendbarkeit des TMG für nicht-öffentliche Stellen ab dem 25 May 2018, available at https://www.ldi.nrw.de/mainmenu_Datenschutz/submenu_Technik/Inhalt/TechnikundOrganisation/Inhalt/Zur-Anwendbarkeit-des-TMG-fuer-nicht-oeffentliche-Stellen-ab-dem-25_-Mai-2018/Positionsbestimmung-TMG.pdf (last accessed 9 December 2020).
16 ECJ ruling from 1 October 2019 (Case No. C-673/17).
17 BGH ruling of 28 May 2020 Planet-49 (docket No. I ZR 7/16); The BGH ruled – contrary to the German data protection authorities' position – that the relevant provision in the German Telemedia Act (GTA) must be interpreted to the effect that Section 15(3) sentence 1 of the GTA also requires the user's active consent as described above, which means that Section 15 GTA is still applicable.
18 Art. 40 and Art. 41 GDPR.
19 Art. 42 and Art. 43 GDPR.
20 EDPB Guidelines wp 253, available at https://ec.europa.eu/newsroom/article29/item-detail.cfm?item_id=611237 (last accessed 9 December 2020).
21 Berlin Data Protection Commissioner press release (5 November 2019): Berliner Datenschutzbeauftragte verhängt Bußgeld gegen Immobiliengesellschaft, available at https://www.datenschutz-berlin.de/fileadmin/user_upload/pdf/pressemitteilungen/2019/20191105-PM-Bussgeld_DW.pdf (last accessed 9 December 2020).
22 Hamburg Commissioner for Data Protection and Information Security press release of 1 October 2020: Bußgeld wegen Datenschutzverstößen bei H&M, available at: https://datenschutz-hamburg.de/pressemitteilungen/2020/10/2020-10-01-h-m-verfahren (last accessed 9 December 2020).
23 DSK concept (14 October 2019): Konzept der unabhängigen Datenschutzaufsichtsbehörden des Bundes und der Länder zur Bußgeldzumessung in Verfahren gegen Unternehmen, available at https://www.datenschutzkonferenz-online.de/media/ah/20191016_bu%C3%9Fgeldkonzept.pdf (last accessed 9 December 2020).
24 Directive 97/7/EC.
25 Directive 2011/83/EU.
26 Agency laws, inter alia, impose on franchisors the duty to pay compensation to franchisees on termination; the rule that unfair contracts are void; the principles of good faith and that long-term contracts can be terminated for good reason; and cooling-off rights in accordance with European consumer protection law.
27 Section 305 et seq. of the Civil Code.
28 NJW 1997, 2973.