Judicial enforcement of franchise and marketing fees in arrears
One of the principles of German procedural law is the need to sufficiently substantiate a claim. If a party fails to present all the facts, the court must assess whether a claim appears to be founded. It can be rejected by this fact alone.
The amount of exposition required depends on the reaction of the opposing party. The more detailed the opposing party's reply, the more details that the claimant must present. A lack of substantiation is usually assumed when a party apparently talks at large or when the opposing party disputes the presented facts in such detail that further explanation and substantiation by the claimant is required.
It is unnecessary that the facts remain undisputed all circumstances (ie time and place of an event). A lack of substantiation is assumed only when the ruling court is unable to identify the facts on which the claim is based.
A franchisor in the food service industry took legal action for payment of franchise and marketing fees in arrears. According to the franchise agreement, the franchisee had to pay a weekly franchise fee of 8% of gross sales. In addition, the franchise agreement provided for a weekly marketing fee of 3.5% and, from January 1 2008, 4.5% of gross sales. The franchise agreement also obliged the franchisee to report its sales within two days of each business week. In case the franchisee failed to report its sales in time, the franchisor was allowed to estimate.
The franchisor based its claim on a receivables list of franchise fees netting weekly gross sales and marketing fees, incoming payments, costs, charge backs, default interest and adjustment postings. In total, the franchisor based its claim on 127,660 postings.
After the Potsdam Regional Court dismissed the action as unfounded on January 24 2013, the Brandenburg Higher Regional Court issued its judgment (Kart U 3/13) on March 17 2015.
It held that the claim was unfounded due to a lack of substantiation. The court could not ascertain whether there were unpaid franchise or marketing fees. The franchisor had failed to present sufficient facts demonstrating the exact amount of the weekly franchise and marketing fees in the respective timeframes.
According to the court, the statement was insufficient, particularly in regard to the weekly gross sales on which the calculation of the franchise and marketing fees was based.
The franchisor stated that it had taken gross sales numbers from the franchisee's reports or, where there was a lack of reported numbers, it had estimated gross sales. However, the franchisor failed to explain which gross sales numbers were based on reports and which were estimated. The franchisor also failed to plausibly set out which criteria had been used for the estimates.
The franchise agreements did not determine how non-reported gross sales should be estimated. The franchisor pointed out that the manual provided that estimates were based on the average reported gross sales of the past four weeks. However, calculations showed that the estimated gross sales numbers did not correlate with previously reported numbers. As a result, the court found that the entire data presented by the franchisor had no proper basis for finding that gross sales had reached an amount that led to franchise and marketing fees higher than the payments already made by the franchisee.
The decision shows the importance of a substantiated presentation of a claim, as well as the importance of accurate, transparent and comprehensible billing by franchisors. The decision left open whether a provision in the manual on how estimates should be calculated would have been sufficient, as the franchisor was unable to plausibly explain its estimates to the court.
It is advisable – if franchise and marketing fees are based on gross sales – to include a provision on how numbers will be estimated in case reports are missing in both the manual and franchise agreement. The franchisor must also apply these rules when estimating gross sales.
In case gross sales cannot be estimated, German law provides for a procedural solution of action by stages. With action by stages, the court – at the first stage – examines whether the franchisee is obliged to report certain numbers. Only after these numbers have been presented must the franchisor further specify its claim.
Any Questions? Please contact: Prof. Dr. Karsten Metzlaff, Dr. Karl Rauser
Practice Group: Commerce & Trade