The Franchise Law Review: Italy
According to the 2020 study by Assofranchising, franchising continued to develop in Italy in 2019.2 The reason for this may be identified in the strength of brands, which are likely to be viewed by consumers as a guarantee, especially during periods of recession, of the quality claimed for purchased services or products, in addition to offering reduced prices. Compared with stand-alone strategies, franchising networks not only facilitate the diffusion of the brand while maintaining a uniform standard of quality, but they may also benefit from a reduction of fixed costs, resulting in reduced prices for the end customer.
Concrete figures for franchising in 2019 show an increase of 4.4 per cent in the number of networks active in Italy, growing from 961 in 2018 to 980 in 2019. Of all the networks operating in the Italian franchising system, 90 per cent are Italian networks, while foreign master franchisors represent 7 per cent of the total, with the remaining 3 per cent consisting of foreign networks operating in Italy with registered offices in other countries.
Of course, the covid-19 situation is having a significant impact on franchising, as well as on all retail and services sectors in Italy. Data relating to 2020, unavailable as yet, will doubtless provide a picture of the impact of the pandemic on franchising in Italy and of the effects of the mitigation and relief measures adopted by the Italian government.
Our analysis of the Italian legislation on franchise contracts is conducted from the standpoint adopted by the legislature in relation to the entry of foreign franchisors to the domestic market.
Notably, the sole reference to international franchising made by the legislator within the Franchise Act is regarding the disclosure to be made by foreign franchisors intending to set up a franchise network in Italy;3 in particular, in Section 4.2 of the Franchise Act, the legislature required the government to issue a specific regulation detailing the quantity and quality of the information to be provided by foreign franchisors to Italian potential franchisees.4
The main issue with this regulation, issued by the Ministry of Manufacturing Activities5 as Decree No. 204/2005, is that it is applicable solely to those franchising agreements regulated by Italian laws by operation of international law; indeed there is still a gap in the law as no specific rule is provided with reference to pre-contractual agreements between foreign franchisors and local potential franchisees (the weak party of the agreement, in the view of the law) wherein the parties may have covenanted to have the contract regulated by a foreign law.
That said, from a practical standpoint, in addition to the information that the franchisor is required to provide to the franchisee under Decree No. 204/2005,6 upon request the latter may be given any information concerning the contract and the relevant annexes in Italian.
ii Foreign exchange and tax
See Section V.
i Brand search
Brand searches are carried out among Italian and EU applications and registrations, and international registrations with effect in Italy to verify that there is no identical or similar trademark nor reference to identical or similar products or services that could prevent the use of the protected trademark relevant to the franchise nor be a valid basis for starting a nullity action against the trademark.
Internet searches are also carried out to verify the validity of previously traced trademarks, if any, and also any prior use of identical or similar trademarks or identical or similar products or services that could present a challenge to the validity of the protected trademark relevant to the franchise.
It is also possible to carry out similar searches regarding designs rights for Italian and EU designs.
ii Brand protection
If searches do not identify any obstacles, an Italian trademark application can be filed in respect of the goods or services that are the subject of the franchise. The application will be examined and then published by the Italian Patent and Trademark Office. If no objections are raised by third parties within three months of the date of publication, the relevant registration will be issued.
In Italy, rights run from the filing date of the application. Moreover, within six months of the filing date, it is possible to extend the protection in other countries, claiming priority under the Paris Convention (Article 4).
Italian and EU design applications can be also filed and the registration process is straightforward as no examinations are carried out by the relevant offices.
Franchise-related intellectual property rights can be enforced on an administrative and a judicial level.
It is possible to file oppositions against subsequent identical or similar trademarks referring to identical or similar products before both the Italian and the EU trademark authorities. Moreover, cancellation actions can also be brought before the European Union Intellectual Property Office, which administers the EU Trade Mark.
At the judicial level, trademark owners are entitled to start the following types of actions:
- infringement and non-infringement actions (including possible counterclaims for revocation or invalidation of the trademark at issue);
- action for revocation or invalidity; and
- all other actions regarding trademarks (i.e., licence disputes).
Infringement and non-infringement actions
The owner of a registered trademark is entitled to start proceedings based on its trademark rights. The owner of a non-registered trademark and the owner of an application for registration of a trademark have the same right.
In cases of infringement, the following remedies may be requested of the competent court:
- prohibition of the manufacturing, commercialisation and use of the infringing goods;
- seizure of the infringing goods;
- withdrawal of the infringing goods from the market;
- a penalty to be paid for every violation or non-fulfilment of the decision or for every day of delay in the execution of what was provided by the decision;
- destruction of the infringing goods;
- assignation of the infringing goods to the trademark owner;
- compensation of the damage suffered by the trademark owner;
- surrender of the profit enjoyed as a result of the infringement;
- publication of the decision at the defendant's expense; and
- administrative fines.
Moreover, as long as the two requirements of the fumus boni iuris (i.e., likelihood of the validity of the enforced trademark and of the infringement) and of the periculum in mora (i.e., urgency of the requested measures) are deemed to subsist, Italian legislation provides for the possibility for the trademark owner to ask for different preliminary measures.
In cases of trademark infringement, the two most important measures are seizure – which may apply to allegedly infringing goods as well as goods with which the infringement is carried out – and the preliminary injunction. In granting the injunction, the court may also impose a penalty for every violation or day of delay in complying with the court's order.
Another very typical measure of the Italian system is the 'description', which is aimed at gathering evidence of the claimed infringement when it is not otherwise available (e.g., when the purchase of goods is not feasible or not sufficient to provide evidence of the infringement).
In those cases in which the summoning of the counterparty is likely either to compromise the effectiveness of the granted precautionary measures or to irreparably damage the interests of the applicant, the above-mentioned precautionary measures can be granted ex parte and the court should set the hearing for the appearance of the parties no later than 15 days from the issuing of the order.
Along with the order granting the precautionary measures, the judge is required to provide a term for the parties to start the relevant proceedings on the merits (unless the measures themselves suitably anticipate the effects of a decision issued in proceedings). In the absence of the provision of this term, the proceeding may be started no later than 20 working days (or 31 calendar days, whichever term is the longer) from the communication of the order. If the parties fail to proceed within this term, the granted precautionary measures lose any effectiveness, with the exception of those measures that anticipate the effects of the decision in the action on the merits (injunction orders are deemed to be included in such measures).
Action for revocation or invalidity
Any interested party can seek the invalidity of a trademark for lack of distinctiveness, bad faith at the time of filing of the application or other absolute grounds for invalidity within a judicial proceeding aimed at obtaining the invalidation of a trademark, its revocation for non-use or because it has become generic or misleading.
In addition, the owner of an earlier trademark may claim before the relevant court the revocation of a trademark (1) for lack of novelty because of the existence of prior trademarks; (2) because the contested trademark infringes a third party's copyright, intellectual property or other exclusive right; (3) because the contested trademark infringes a third party's right on his or her name or portrait; (4) because the contested trademark has been registered by a non-entitled subject. Such actions can be started by the prior right owner or by the relevant assignee only.
Building an online franchise network sets a number of issues not only on the structural or organisational side, but also from a juridical standpoint.
In this last respect, the most likely issues to be explored by literature and case law would relate to:
- the way in which the know-how would be transferred during the contract and how the franchisor could be protected upon termination of the agreement in that regard;
- the protection of the trademarks upon termination of the contract; and
- the scope of the possible exclusivity right upon the franchisee, since no specific reference could be made to territory.
The Italian Franchise Act is over 10 years old, having been approved by Parliament on 6 May 20047 after a gestation of more than seven years (the first bill having been proposed in 1997).
Italian law recognises a number of types of contract (which find their specific definition and regulation within the Civil Code or within ad hoc acts), though it also allows for parties regulating their respective relationships outside those recognised contracts (e.g., a trademark or patent licence is not a recognised contract in our jurisdiction; nevertheless such contracts are fully effective and enforceable on condition that they include those basic elements required under general Italian contractual law).
With the entry into force of the Franchise Act, the franchising contract has finally been recognised by Italian law,8 being defined (under Article 1) as:
the contract that, irrespective of the relevant naming, is executed between two juridical parties, legally and economically independent, with which a party grants to the other party, against a consideration, the right to dispose of a number of industrial and intellectual property rights related to trademarks, trade names, signs, utility models, design, copyright, know-how, patents, technical and commercial assistance and advice, including the franchisee in a system constituted by a plurality of franchisees distributed on the territory, to commercialise certain goods and services.
From a very first reading it can therefore be inferred that the franchising contract is distinguished by the following two main elements:
- the franchisor grants to the franchisee the right to use certain intellectual property (IP) rights and undertakes to provide to the latter certain services for the exploitation of the activity; and
- the franchisee pays a consideration in relation to the grant of IP rights and for the provision of the services mentioned.
From a subjective standpoint the legislature, on the one hand, has expressly not excluded that an individual may be a party to a franchising agreement; however, the mention of the commercial purpose of the activity would lead to the assertion that the parties must in any case be entrepreneurs; and, on the other hand, has required that franchisor and franchisee are 'juridically and economically independent', thus entailing that the parties to the contract should not belong to the same corporate group or be parties to a joint venture in which control is reserved for the franchisor.
Finally, a number of debates have arisen over the provision according to which the franchisee should be included 'in a system constituted by a plurality of franchisees distributed on the territory', and also in relation to the rule set out under Article 3, Paragraph 1, which states that 'for the purposes of the establishment of a franchising network, the franchisor shall have tested its commercial formula on the market'. While these questions certainly deserve a much deeper analysis, it is anticipated that the main issue will continue to be the applicability of the Franchise Act to the 'pilot contracts', through which the franchisee starts experiencing its commercial formula.
ii Pre-contractual disclosure
The legislature's requirements in the Franchise Act (which consists of nine articles) focus, in substantial part, on pre-contractual obligations.
In particular, Section 6 of the Franchise Act sets out generic information obligations upon the franchisor, stating that the latter should be timely in providing any data and information that it believes necessary or useful for the franchisee for the execution of the contract (to the extent that the data and information are not confidential or the relevant disclosure would not entail the violation of third parties' rights).
Section 4 provides a list of specific information to be provided to the franchisee at least 30 days before the date of the execution of the franchising agreement. Namely, as well as the full copy of the agreement to be executed, enclosures providing the following information are to be delivered to the franchisee:
- main data relating to the franchisor (including the corporate name, corporate capital and – if the franchisee so requires – a copy of the balance sheet for the past three years);
- an indication of the trademarks used within the franchising system (mentioning the data relating to the filing or registration of the licence granted to the franchisor by a third party or the documents attesting to the use of the trademark);
- a short description of the elements that feature the activity constituting the subject matter of the franchising;
- a list of the franchisees belonging to the network and of the direct points of sale of the franchisor;
- an indication of the variation, year by year, of the number of franchisees (including the relevant locations in the past three years or, if the shorter period, from the starting of the activity); and
- a short description of the possible judicial or arbitration cases started against the franchisor and concluded within the past three years in relation to the franchising system.
Although providing a detailed disclosure obligation for the franchisor, the legislature has omitted to state the sanction to be applied in the event that the franchisor fails to disclose any of the mandatory information. Indeed, Section 8 of the Franchise Act allows a party to claim the annulment of the contract only in cases of 'false information' having been disclosed, thus limiting the range of situations in which this sanction may be applied.
We consider, therefore, the general principles that apply in matters of pre-contractual liability; in brief, these entail that:
- the franchisor may be required to compensate the possible damage suffered by the potential franchisee through withdrawal from the negotiations as a result of conduct by the former contrary to the bona fide principle; and
- should the contract be executed despite conduct by the franchisor contrary to the bona fide principle, the possibility should be explored that the franchisee's will to execute the agreement may be affected by that conduct, allowing the possibility of claiming the annulment of the contract and compensation for the damage suffered (or even solely this latter, should the franchisee decide to maintain the contract in place).
Notwithstanding that the franchisee is plainly seen as the weak party of the agreement, the legislature actually intended there to be two-way disclosure obligations, stating that the franchisee (in addition to a general bona fide obligation) should in its turn, in a timely manner, provide the franchisor with exact and complete information and data that may be necessary or opportune to the franchisor in view of the execution of the contract (though not specifically required by the franchisor).
The wording used by the legislature in relation to the franchisee's obligations does not exactly mirror that used with reference to the franchisor, and is actually more favourable to the latter. This slip can be explained by recalling that the franchise contract is characterised by the intuitus personae and, thus, certain information (which could hardly be known or obtained by the franchisor otherwise) should be spontaneously disclosed by the franchisee.9
Franchisees should observe all corporate and administrative regulation regarding registration (e.g., registration with the Chamber of Commerce) and collection of the required licences, and which may depend on the subject matter of the franchise.
iv Mandatory clauses
Under Section 3 of the Italian Franchise Act the legislature sought to provide a sort of checklist of the elements that must and may be included within the agreement.
The following are mandatory elements of the agreement, lack of which renders the whole contract null and void:
- an indication of the investment required by the franchisee prior to the start of the activity;
- the modalities of calculating and paying royalties; in this respect according to a view in Italian legal literature, royalties may be omitted in a franchise contract under certain circumstances in specific cases;
- the specification of the know-how to be provided;
- the features of the services to be provided by the franchisor (i.e., technical and commercial assistance, dressing and design of the point of sale); and
- the terms and conditions for the renewal and termination of the agreement.
As mentioned, Section 3 also indicates those elements (i.e., possible entry fees, possible minimum takings, possible exclusivity related to a certain territory, possible provisions on the assignment of the contract and possible modalities for recognising the know-how provided by the franchisor) that, while not mandatory, may be included in the agreement. The inclusion of such a list has been questioned, given that the failure to include any of these elements within the agreement entails no specific consequence in terms of the nullity of the agreement.
By the same rule (implicitly), the term of the contract may be either open-ended or provide a specific duration. In the latter case, the term of the agreement should allow the franchisee to amortise the investment and, in any case, should be no less than three years. In accordance with the aforementioned principle, legal literature unanimously asserts that in the case of open-ended contracts no withdrawal should be allowed before the expiration of a three-year term from the date on which the contract becomes effective, and that no right of withdrawal should be admitted in a contract of a specific term before the expiration of the three-year term.
v Guarantees and protection
Although the Italian Franchise Act requires that the parties to a franchise agreement are autonomous and independent of one another, facts show how franchising networks produce close integration between franchisor and franchisees due, inter alia, to the use of the same trademarks and of the same layout of the points of sale, such that third parties (including, but not limited to, consumers) may consider franchisees' outlets as mere branches of the same company.
Case law has been required following such an event to evaluate whether a third party – having contracted with a franchisee while believing they had contracted merely with a branch of the franchisor – could start an action against the franchisor and, if so, whether the franchisor could require indemnification from the franchisee.
According to the 'appearance principle', the guiltless trust of the third party who, on the basis of the seeming facts, believed they had contracted with a branch of the franchisor's business should be protected.
However, these appearances may be determined by the conduct of either the franchisor or the franchisee. Thus, the jurisprudence – moving from one orientation to another – has tried to fix the main principles according to which the franchisor might be directly liable towards the third party for the conduct of the franchisee; briefly (as the matter warrants much deeper examination), the Court of Appeal of Naples, on 3 March 2005 stated that the franchisor has an obligation to control the conduct of the franchisee and the way in which the franchise activity is performed.10 Lack of such control would thus entail an extra-contractual liability of the franchisor towards the third party in respect of the conduct of the franchisee.11
i Franchisor tax liabilities
Pursuant to Articles 85 and 109 of the Italian Tax Code (ITC) royalties arising from a franchising agreement are relevant for corporate income tax purposes (IRES). They qualify as revenues and are added to the taxable base of the franchisor on an accrual basis.
If the franchising agreement provides for an entry fee, this latter is subject to the aforesaid tax provisions, and as a consequence is relevant for IRES purposes and added to the taxable base of the franchisor on an accrual basis.
Pursuant to Article 5 of the Italian Regional Production Tax (IRAP) Law both royalties and entry fees are subject to this regional income tax and are included as taxable income.
Pursuant to Article 3 of the VAT Law both royalties and entry fees qualify as services and consequently value added tax (VAT) is applicable.
In cases of cross-border franchising, according to domestic law, royalties due to a non-resident franchisor are relevant for tax purposes in Italy and a withholding tax of 30 per cent is applied on the amount of royalties paid by the franchisee (or on 75 per cent of the amount of royalties paid, if certain requirements are met); however, a double-taxation treaty between Italy and a third country (i.e., the country of the franchisor) may entitle the franchisor to a lower withholding tax.
Clause-by-clause analysis of the particular franchising agreement is needed to determine whether, and to what extent, the entry fee constitutes remuneration for services or IP rights. Generally speaking if the entry fee qualifies as a consideration for the licence or right to use IP (e.g., trademarks, patents and know-how), the domestic and international tax treatment is that described above. If the entry fee qualifies as a consideration for services rendered by the franchisor (advisory services, technical assistance, etc.), upon certain conditions, the income deriving from such activity should be taxable only by the country in which the franchisor is resident.
ii Franchisee tax liabilities
Pursuant to Article 109 of the ITC, royalties arising from a franchising agreement are relevant for IRES purposes. They qualify as costs and are deductible from the taxable base of the franchisee on an accrual basis.
If the franchising agreement provides for an entry fee, according to Italian generally accepted accounting principles,12 this amount has to be capitalised as an intangible asset and subject to amortisation for a period equal to the life of the franchising agreement. Pursuant to Article 103, Paragraph 2 of the ITC, the amortisation charge recorded in the profit and loss is deductible for IRES purposes.
Pursuant to Article 5 of the IRAP Law both royalties and entry fee are relevant for IRAP and are deductible from the taxable base.
VAT charged on royalties and entry fees can be deducted by the franchisee.13
Registration tax is applicable under the following conditions:
- if all the provisions included in the franchising agreement are relevant for VAT purposes and it is concluded as private deed, the agreement is subject to registration tax (€200) only in cases of use;14 and
- if the franchising agreement is concluded as a public deed or with authenticated signing, registration tax is due (€200) within 20 days of the signing.
In cases of cross-border franchising, the reverse-charge mechanism for VAT should be applied by the franchisee both for entry fees and royalties.
iii Tax-efficient structures
The franchising agreement may provide that the franchisor allows the franchisee to use an immovable property in which to carry out its business and the compensation for this use is included in the royalties amount. In such an event, the tax authorities15 have stated that the use of an immovable property qualifies as a lease and therefore it has to be treated for registration tax purposes as a separate agreement. As a consequence, the compensation for the lease is subject to registration tax (1 per cent).
As regards cross-border franchising, if the master franchisee and the franchisor are respectively resident and non-resident in Italy for tax purposes, and they qualify as 'related parties', pursuant to Article 110, Paragraph 7, the transactions between the two entities must take place at fair market value. Therefore it is important to support the master franchising agreement with a transfer pricing study.
Impact of general law
i Good faith and guarantees
See Section IV.ii.
ii Agency distributor model
Under Italian law franchise agreements and agency agreements appear alike in many respects.
First, both the franchise and the agency distributor model are characterised by the stability of the contractual relationship between the parties involved. The relevant contracts, in fact, do not aim at regulating one or more affairs concluded by the franchisee or the agent individually considered, but rather they regulate the entirety of the affairs concluded by the franchisee or the agent while carrying out their activity.
Furthermore, the contracts at issue are also characterised by the fact that the franchisee as well as the agent autonomously undertake the business risk and bear the costs necessary to perform their activities.
However, notwithstanding the aforementioned resemblances, the franchise agreement and the agency agreement also show several structural differences that distinguish the two types of contracts from one another and make any overlap, even partial, impossible.
In fact, according to the Italian Franchise Act, the franchisee, unlike the agent, pursues his or her activity in the name and on behalf of him or herself, albeit through the franchisor's brand and trademarks. The franchisee then remunerates the franchisor – in fees and royalties – because the latter makes it possible for the franchisee to start up his or her business, whereas the agent is remunerated by the principal in light of the business volume generated by the agent's activity.
iii Employment law
The subjection of the franchisee to strict control by the franchisor regarding the organisation of the business may take franchising agreements close to employment contracts.
The Italian courts, however, have denied the existence of such a subordinate, job-like relationship between the franchisor and the franchisee on the grounds that both parties are necessarily autonomous entrepreneurs and that the franchisee does not lose such status as a result of the contractual bonds to which the affiliate company is subject.
Moreover, one of the main features of an employment contract is the absence of work-related risk for the employee, who carries out the activity under the direction of the employer, who undertakes the business risks.
On the contrary, the franchisee retains a certain degree of organisational autonomy (i.e., in involving other people as well as in managing or financing the activity), and the controlling powers of the franchisor are largely related to the franchise agreement only.
iv Consumer protection
As stated previously, the franchise agreement is a contract between entrepreneurs. However, in a large number of cases the franchisee actually acquires this status on joining the franchise network.
In the past, this has given rise to the question of whether the protection provided by Legislative Decree No. 206/2005 to consumers, because of their weaker contractual position with respect to entrepreneurs, was applicable to franchisees as well.
The answer to this question can only be negative because, as previously explained, the franchisee carries out an entrepreneurial activity and, therefore, does not meet the criteria required by law to qualify as a consumer. However, provisions on unfair commercial practices under Legislative Decree No. 206/2005 may also apply to franchisees that are microenterprises.
Nonetheless, since, as stated previously, pursuant to the Italian Franchise Act the franchisor must provide the franchisee with the general terms and conditions of the contract the parties are going to enter into, Articles 1341 and 1342 of the Italian Civil Code apply, requiring the specific written approval of certain onerous clauses (also at a business-to-business level) unless the clauses have been specifically negotiated. Thus the franchisee, while not considered a consumer, is still granted a particular level of protection in light of the assumption by the Italian legislator of the weaker contractual position of the franchisee with respect to the franchisor (again, solely in the event that general terms and conditions have not been specifically negotiated with reference to those categories of clauses listed under Article 1341 of the Italian Civil Code).16
v Competition law
The domestic antitrust law, Act 287/1990 (the Antitrust Act),17 applies to the sole extent that the concerned vertical agreements, abuse of dominant position or concentrations do not fall within the scope of the EU rules (this principle being explicitly provided under Section 1 of the Antitrust Act). In other words, domestic antitrust law applies solely to those franchise agreements that do not jeopardise intra-EU commerce. Pursuant to consolidated EU case law, even agreements affecting the whole of a national territory are seen as affecting trade among Member States.
However, not only is the domestic regime substantially the same as that of the EU, but Article 2 on anticompetitive agreements is also very similar in its wording to Article 101 of the Treaty on the Functioning of the European Union and must be interpreted consistently with EU competition case law. In fact, the relevant articles of the Antitrust Act should be interpreted in accordance with the principles of the EU in matters of competition.
Act 57/2001 sought to recognise that the abuse of economic dependence might produce anticompetitive effects, and thus provided the Italian Antitrust Authority with the power to intervene in such cases.
Furthermore, the prohibition of the abuse of the economic dependence18 of a third party, as set out under Article 9 of Act 192/1998, which is specifically aimed at regulating the sub-supply, is now considered a general principle of our jurisdiction.
From an antitrust standpoint, such an abuse has been defined by one author as a situation of relative dominant position.19 Nonetheless, from a practical point of view, the abuse of economic dependence as an abuse of a dominant position has a very restricted application.
On the other hand, where Article 9 of Act 192/1998 applies, the franchisee, as the weaker party, may claim before the ordinary judicial authority the abuse of economic dependence, and seek the protection afforded to the weaker party.
Furthermore, where the abuse of economic dependence is deemed to be detrimental to the competitive dynamics of the market, the Italian Antitrust Authority (AGCM) may exercise its investigative and sanctioning powers. On 17 November 2020, the AGCM opened an investigation into an Italian company for an alleged abuse of economic dependence pursuant to Article 9, Paragraph 3 bis of Act 192/1998, with regard to two franchise agreements entered into with an independent retailer.20
vi Restrictive covenants
As far as the non-compete obligation is concerned, the consensus in the legal literature is that it does not represent a 'natural element' of the franchise agreement. The enforcement of the non-compete obligation therefore requires that the contract include a specific provision in that respect.
As admitted by Commission Regulation (EU) No. 330/2010 (under the conditions provided therein) and explained under the Commission Guidelines of May 2010, such an obligation ratione temporis may concern either the period in which the contract is in full force and effect between the parties or may represent a post-contractual obligation upon the franchisee.
On the enforceability of such a clause, the Court of Pesaro, in the decision issued on 3 April 2008 in the context of a preliminary injunction proceeding, recalling the principles and conditions stated under Regulation (EC) No. 2790/1999 on vertical restraints, confirmed the validity of a post-contractual non-compete clause (the violation of which was the subject of the plaintiff's complaint), and finally prohibited the franchisee from marketing, either directly or indirectly through third parties, products competing with those of the franchisor, throughout the whole period set out in the non-compete clause.21
In practice, termination of the franchise contract presents a number of issues in terms of management of the conflicting interests of the parties.
As the Franchise Act is silent on the subject, should the franchise contract omit any reference to goodwill compensation, the franchisee would have no statutory right to such compensation upon termination or non-renewal. While Article 1751 of the Italian Civil Code guarantees this right for commercial agents, there is no legal precedent extending this provision by analogy to franchisees.
Another contentious issue related to the termination of a franchise contract is the management of leftover stock. In particular, commentators from both sides of the debate have questioned whether the franchisor should be considered to be obliged to repurchase leftover stock according to the general principle of bona fide (according to which each party would have an obligation to safeguard the other party's interest to the extent that this does not entail a substantial sacrifice) in the absence of any contractual provision to this effect.
viii Dispute resolution
Pursuant to Section 7 of the Italian Franchise Act, the parties may agree to try to amicably resolve the disputes arising from the franchise agreement before resorting to the courts or to arbitration. The parties are, in fact, free to opt for such a dispute resolution procedure, which, under Italian law, is not mandatory in the context of franchise claims.
The same principle has recently been confirmed by Law No. 69/2010 (concerning mediation aimed at settling disputes in civil and commercial matters), which does not include franchises among the areas in which mediation is mandatory.
The mediation procedure can be carried out before public or private entities; to this end, the chambers of commerce have created specific bodies to promote and facilitate mediation for the resolution of disputes arising from franchise agreements.
Furthermore, to foster fair contractual practices, the national franchise associations Assofranchising and Federfranchising have been set up; these associations are responsible, inter alia, for promoting awareness of the franchise system, of setting contractual and behavioural standards between industry operators, and thereby helping to prevent issues arising in relation to franchise agreements.
While offering enormous advantages in terms of cost and time saving, mediation has not had much success in Italy so far. Parties have been more inclined to resort either to the courts or to arbitration, consequently suffering the slowness of Italian proceedings, which usually last an average of between two and five years.
An exception is represented by preliminary injunction proceedings, as provided for by Article 669 et seq. of the Italian Civil Procedure Code, which usually last a few months (one to six months, save for the necessity of particular technical assessments). Said provisions apply also with regard to enforcing clauses included in franchise agreements, if the legal requirements (such as the likelihood of the right at issue and the urgency requirement) are met. Preliminary injunction proceedings, because of their brevity, are particularly suitable for settling disputes regarding the breach of non-compete clauses by the franchisee (see Section VI.vi).
Another particularly relevant issue to be considered is that of damage compensation and fees and costs allocation between the parties. Under Italian law, damages are awarded and calculated on the basis of whether they arise from contractual liability (pursuant to Article 1218 et seq. of the Italian Civil Code) or tort liability (pursuant to Article 2043 et seq. of the Italian Civil Code); however, Italian courts usually do not award very high amounts for damage compensation.
Ultimately, the allocation of fees and costs of the proceedings will be provided by the judge according to liabilities ascribable to the parties as ascertained during the proceedings, as well as to the specific circumstances of the case at issue.
1 Claudia Ricciardi is a partner at Studio Legale Bird & Bird.
2 From a study by the Italian Association of Franchising (Assofranchising Italia). See http://www.assofranchising.it. The Italian franchising sector is mainly represented by two national associations: Assofranchising Italia and Federazione Italiana del Franchising. Both associations have adopted ethical codes on the basis of the experience accrued in other European countries.
3 The Italian Franchise Act, enacted in 2004, is mainly aimed at regulating the pre-contractual stage, by setting the legislature's requirements regarding the disclosure obligations of the parties to the agreement (see Section IV.ii).
4 The Italian Franchise Act does not allow the franchisor and franchisee to belong to the same corporate group, requiring that the parties to the agreement are independent, from an economic and a juridical standpoint.
5 The responsibilities of the Ministry of Manufacturing Activities have been devolved to the current Ministry of Economic Development.
7 The Franchise Act was published in the Official Gazette on 24 May 2004 and entered into force on 25 May 2004.
8 Previously, since its adoption by the European Court of Justice on 28 January 1986, the decision within the high-profile Pronuptia case constituted the main reference for both literature and case law.
9 The failure of the franchisee to comply with these obligations will entail the same consequences as those outlined regarding the possible failure of the franchisor to comply with obligations set out under Section 4 or Section 6 of the Franchise Act.
10 This principle was recently confirmed by the Regional Administrative Court (TAR) of Rome, decision No. 235 of 8 January 2019.
11 Relevant decisions have been issued by the Court of Milan on 21 July 1992; by the Court of Crema on 23 November 1994 and by the Court of Fermo on 3 November 2001.
12 See Italian Accounting Standard OIC No. 24 – Intangible Assets.
13 The VAT Law provides some limitations on VAT deductibility connected to some activities. It is possible, therefore, that the franchisee may not be able to deduct the VAT, partially or entirely, depending on the activity carried out.
14 A case of use (caso d'uso) is when the agreement has to be used during a judgment in front of a court.
15 Ministerial Resolution No. 49/E, 13 March 2007.
16 Failure to obtain in writing the specific approval of these clauses renders them null and void, and consequently unenforceable.
17 The present paragraph is limited to the domestic provisions relevant in antitrust issues and does not deal with the provisions set out under EU regulations.
18 According to the stated provision, economic dependence is the 'situation in which a company is able to determine, in the relationship with a third party, an excessive imbalance of rights and obligations' (such a situation is to be evaluated taking into consideration the possibility of the third party finding possible satisfactory alternatives on the market).
19 A Frignani, 'Abuso di posizione dominante', in Diritto Antitrust Italiano.
20 AGCM resolution No. 28447 of 17 November 2020 (A543 – ICA).
21 Accordingly, see also the decisions of the Court of Torino issued on 29 November 2007 and on 23 April 2008.