No significant obstruction to advertising franchise systems
Comments on the decisions of the German Federal Court of Justice in the Fressnapf case
On February 4 2016 (I ZR 194/14), the Federal Court of Justice criticised a Fressnapf advertising flyer 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. However, this point of view does not ultimately do justice to the decision. In other words, the decision's significance should not be overestimated. The judgment does not fundamentally question the typical advertising of franchise systems. This already follows from the judgment itself and has been clarified by a Federal Court of Justice decision from April 28 2016 (issued in the same proceedings in response to an objection that a fair legal hearing had not taken place). The court had to decide on a specific case, so the decision cannot be applied generally to other cases.
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 information or a footnote such as 'applies only 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 that is advertising with prices (or franchisees if they place an advertisement themselves) must specify its identity and company name and address in the advertising – generally referred to as the 'duty to include a legal notice'. This obligation is based on Section 5a(3)(2) of the Act Against Unfair Competition.
The Federal Court of Justice 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 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, arguing that it was unclear from the advertising which stores were offering the promotion.
2. The BGH decisions of 4 February 2016 and 28 April 2016
The Federal Court of Justice criticised this advertising in terms of competition law, saying that it was insufficient 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 in detail on the last page of the leaflet were participating in the promotion and were offering the advertised products at the specified prices. Otherwise, the court said material information would be withheld from consumers and the franchisor would be breaching its obligation to inform with respect to the stores located in the vicinity (judgment of February 4 2016 and decision of April 28 2016, I ZR 194/14).
In order to understand this decision correctly, two key things have to be taken into consideration.
On the one hand, the court based its decision on a modified and therefore ultimately atypical set of circumstances. On the grounds that in its opinion the footnotes 'exclusively non-binding recommended retail prices' and 'available only in participating stores' were printed too small, it treated this information as being non-existent. The court therefore did not rule on the promotional advertising of a franchisor that contains a sufficiently clear footnote. This is legally relevant because it is precisely one of the key (and currently disputed) basic questions regarding whether a franchisor's promotional advertising with such a footnote triggers the duty to include a legal notice required by Section 5a(3)(2) of the Act Against Unfair Competition. This question therefore remains unanswered.
The court 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 court said that for these eight stores it was necessary to provide potential customers with information about which were participating in the sales promotion. On the other hand, the court expressly left unanswered whether it would also be necessary for all franchisees belonging to the franchise system to specify the identity of all franchises participating in the sales promotion. 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 (eg, in the section 'shop finder'), without differentiating whether a franchisee is participating in a specific sales promotion.
In its April 28 2016 decision (I ZR 194/14) the court confirmed this interpretation of its February 4 2016 judgment by stating the following:
“The BGH [Federal Court of Justice] 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 'applies only in participating stores' (provided that the reference is sufficiently visible). This reference – which is also in line with standard practice in authorised dealer and purchasing group systems – was therefore not overturned by the court. Although it cannot be ruled out that the courts will one day deal with whether a franchisor must first ask all franchisees whether they want to participate in the promotional advertising and then specify the identity and address of all participating franchisees, the court did not deal with this issue in its current decision.
Any Questions? Please contact: Prof. Dr. Karsten Metzlaff, Dr. Tom Billing, Dr. Karl Rauser
Practice Group: Commerce & Trade