No significant obstruction to the advertising of franchise systems

With a judgment of 4 February 2016 (Case No. I ZR 194/14), the German Federal Court of Justice (Bundesgerichtshof – BGH) criticised an advertising flyer of Fressnapf in terms of competition law with respect to one specific point. One interpretation of this judgment is that it makes the advertising of franchise systems significantly more difficult. This point of view, however, does not ultimately do justice to the decision of the BGH. In other words, the significance of the decision should not be overestimated. The BGH’s judgment does not fundamentally question the typical advertising of franchise systems. This already follows from the judgment itself and has been clarified by a decision of the BGH of 28 April 2016 (issued in the same proceedings in response to an objection that a fair legal hearing had not taken place (Anhörungsrüge)). The BGH had to decide on a very specific individual case so that the decision cannot be applied generally to every other case.

1. Background

If a franchisor advertises goods or services with a specific price for the benefit of all franchise system participants, this price is often stated in combination with the information or an asterisk footnote such as “Only applies in participating stores”. This information is required by law to show customers that prices may vary. This is because franchisees are in principle at liberty to set their own prices and accordingly are not required to implement the prices advertised by the franchisor.

A franchisor who is advertising with prices (or franchisees if they place an advertisement themselves) must specify its identity and/or company name and address in the advertising – generally referred to as the “duty to include a legal notice”. This obligation is based on competition law (Sec. 5a (3) No. 2 of the German Act Against Unfair Competition (Gesetz gegen den unlauteren Wettbewerb – UWG).

The BGH case concerned an advertising flyer with approximately 20 pages, in which more than 100 products were advertised at promotional prices. All offers in the flyer were “exclusively non-binding recommended retail prices and only available in participating stores.” The addresses and telephone numbers of eight stores located in the vicinity were listed on the last page of the advertising flyer, but not their identity or any indication as to whether the franchisee store (located in the vicinity) was participating in the promotion. A consumer association took legal action against this arguing that it was not clear from the advertising in which stores the offers were in fact available.

2. The BGH decisions of 4 February 2016 and 28 April 2016

The BGH criticised this advertising in terms of competition law saying that it was not sufficient to specify only the identity (company name) and address of the stores located in the vicinity. The franchisor in fact already had to specify in the advertising leaflet clearly, understandably and unambiguously which of the stores specified by it in detail on the last page of the leaflet with names and addresses were participating in the promotion and were offering the advertised products at the specified prices. Otherwise, the BGH said, material information would be withheld from consumers and the franchisor would be breaching its obligation to inform, at any rate with respect to the stores located in the vicinity (BGH, judgment of 4 February 2016 and decision of 28 April 2016, Case No. I ZR 194/14).

3. Comments

In order to understand this decision correctly, two key things have to be taken into consideration:

On the one hand, the BGH based its decision on a modified and therefore ultimately atypical set of circumstances. On the grounds that in its opinion the asterisk footnote “exclusively non-binding recommended retail prices and only available in participating stores” was printed too small, it treated this information as being non-existent. The BGH therefore did not rule on the promotional advertising of a franchisor that contains a sufficiently clear asterisk footnote. This is legally relevant because it is precisely one of the key (and currently disputed) basic questions whether a franchisor’s promotional advertising with such an asterisk footnote triggers the duty to include a legal notice required by Sec. 5a (3) No. 2 UWG. This question therefore still remains unanswered.

The BGH above all based its decision on the peculiarity that the advertising flyer specified eight stores located in the vicinity without indicating the identity of the stores that were participating in the advertised sales promotion. The BGH said that for these eight stores it is necessary to provide potential customers with information about which of these stores is participating in the sales promotion. On the other hand, the BGH expressly left it unanswered whether it would also be necessary beyond this for all franchisees belonging to the franchise system (this can be hundreds of franchisees) to specify the identity of all those participating in the sales promotion. And this is precisely what takes the edge off this decision which it appears to have at first glance, because the majority of franchise systems list the identity and address of their franchisees online (e.g. in the section “shop finder”), without differentiating whether a franchisee is participating in a specific sales promotion or not.

In its decision of 28 April 2016 (Case No. I ZR 194/14) the BGH confirmed this interpretation of its judgment of 4 February 2016 by stating the following:

“The BGH did not state there that [the franchisor] was obliged to list all participating stores. It rather assumed that [the franchisor] if it listed the stores (located in the vicinity) it was obliged to specify the stores participating (in the advertised promotion) (BGH, judgment of 4 February 2016, Case No. I ZR 194/14). This obligation is based on the consideration that [the franchisor] by specifying these stores […] created the – incorrect – impression that these stores were participating in the advertised promotion. […]

The BGH expressly left it unanswered in its judgment of 4 February 2016 whether an obligation [of the franchisor] existed to specify stores not listed in the criticised advertising leaflet which were participating in the advertised promotion. The arguments of the appeal criticised in the objection (Anhörungrüge) as having been ignored were not relevant for the decision from the BGH’s point of view.”

In other words: a franchisor that places a promotional advertisement for the franchise system without listing the stores located in the vicinity can continue to use the reference “Only applies in participating stores” (provided the reference is made sufficiently visible). This almost time-honoured reference – which is also in line with standard practice in authorised dealer and purchasing group systems – was therefore not “overturned” by the BGH in its decision of 4 February 2016. Although it cannot be ruled out that the courts will one day deal with the decisive legal issue here, i.e. whether a franchisor first of all has to ask all franchisees whether they want to participate in the promotional advertising and then has to specify the identity and address of all participating franchisees, the BGH did not deal with this issue in its current decision.