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Franchising and the Block Exemption

Franchising and the Block Exemption

The European Union’s vertical restraints block exemption has historically had a substantial impact on how UK franchise agreements have been drafted and enforced. The great majority of franchisors have sought to ensure that their agreements do not contain any of the prohibited restrictions which are set out in the block exemption. Essentially, the restrictions which are most relevant to franchising are:-

  • Passive sales – Franchisors can prevent their franchisees from actively marketing outside their territory but cannot prevent passive sales – responding to unsolicited enquiries. Passive selling is deemed to include having a website and so franchisors cannot prevent their franchisees from having a website, although they can impose quality standards.
  • Resale Price Maintenance – Franchisors cannot set the prices at which their franchisees offer to sell their products or services.
  • Supplies – Unless a franchisor owns the premises from which franchisees operate, franchisors can only oblige franchisees to purchase more than 80% of their requirements for products from the franchisor or its nominated suppliers for a period of 5 years.
  • In-term non compete – In-term non compete covenants can only last for 5 years.
  • Post-term non compete – These covenants have to be limited to 1 year and must apply only to the premises (and not the franchisee’s allocated territory) of the franchisee.

The European Union has initiated a review of the current block exemption which is shortly to expire and its conclusions on proposed changes are eagerly awaited in the next few weeks.

The UK government has asked the Competition & Markets Authority (“CMA”) – the UK’s competition body – to provide advice as to whether the UK should continue (as it has done up till now) post Brexit to exempt franchise agreements that comply with the EU’s block exemption or would comply if there was an effect on trade between member states.

On behalf of the British Franchise Association, I participated in discussions with the CMA on changes that should be made to the block exemption in order to seek to ensure that issues experienced by franchisors were adequately addressed going forward.

On 17 June 2021, the CMA published its consultation document on its review and its proposal to recommend that the EU block exemption, when it expires on 31 May 2022, is replaced by a UK block exemption. Broadly the UK block exemption will be similar to the EU, and the CMA has taken a cautious view of the changes it will make in the UK block exemption which will last for only six years to allow, if required, none radical changes to be made in relatively quick order.

The proposed changes that will be introduced to the UK block exemption which are particularly relevant to franchising are:

  • There will be clarity concerning the difference between passive and active selling;
  • Franchisors will be able to impose different prices and impose different obligations in respect of goods/services to be made available on the internet to those supplied by a bricks and mortar outlet.
  • Up till now franchisors could only impose post termination non compete obligations on their franchisees if they had know-how to protect but what constitutes “know-how” was unclear. We asked for their requirement to be deleted but the CMA has responded in the following terms:-

“In light of the views raised during the CMA review, it is considering whether to provide further guidance in VABEO Guidance on the issues of the way in which know-how should be assessed for the purposes of the derogation in Article 5(3) of the retained VBER and the assessment of non-compete obligations in the context of franchise agreements. In this regard, the CMA is minded to draw upon existing guidance on these issues in paragraph 45 of Technology Transfer Guidelines.”

We will have to await publication of the UK guidelines for more details. As soon as they are available we will let you know.

John Pratt

Hamilton Pratt

21.6.21

Affiliate Member
Hamilton Pratt

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