In a recent study entitled Legal Perspective of the Regulatory Framework and Challenges for Franchising in the EU, the European Parliament expressed the conclusion that current regulations governing franchising in the European Union (EU) need to be “re-engineered.” Published in early October 2016, the organization asserted “the failure of franchising to fulfill its full potential in the EU is due, at least in part, to the dysfunctionality of the EU’s regulatory environment.”
The study references “two distinct types of franchise regulation” that keep franchising from flourishing in Europe like it could: (1) competition laws and (2) the various regulations of EU member countries governing the relationship between franchisors and franchisees.
The European Parliament feels franchise regulation in Europe needs to be overhauled because these two regulation issues work in isolation of one another, not in tandem with each other, creating a dysfunctional business environment for franchises. “It has great potential to stimulate economic activity within the EU,” the study says of franchising. But “it can do this by improving the distribution of goods and/or services within and between member states [or countries].”
The Inadvertent Suppression by Competition Laws
Competition laws are essentially anti-trust laws governing policies such as resale price maintenance (e.g. a franchisor directly establishing a franchisee’s resale price or enforcing a maximum discount level). Within the study, the European Parliament expresses the belief that these laws don’t take into account the structure of franchising. As the study states:
Whilst EU competition law, embodied in these decisions and the vertical restraints regulation, does recognise some of the advantages of franchising, in reality it fails to appreciate the value that it can contribute to the single market both by enabling small and medium sized businesses to expand effectively throughout the EU and unleashing entrepreneurism in individual franchisees throughout the EU. It is too concerned with intra-brand issues between franchisor and franchisee and insufficiently concerned with the bigger picture of how SMEs and individuals can most effectively compete with big business.
It’s similar to the concerns US lawmakers have voiced recently about whether or not franchisees are indeed small to medium business owners, instead of simply an offshoot of the larger franchisor. In the study, researchers found that in trying to control big business, competition laws “cannot see the macro-economic wood for the anti-trust trees,” disabling individual franchise units and their franchisees from being able to compete the big businesses.
No Uniform Set of Franchise Laws
The second main type of regulation issue the European Parliament covered as a factor inhibiting European franchise growth is the variation of franchise regulations from country to country. From the study:
The self-regulatory environment in the EU is marked by a complete lack of homogeneity, the lack of a clear or consistent approach to enforcement, a significant conflict of interest between the interests of franchisors and franchising as a whole and an inability to have any influence whatsoever on nearly 80% of franchise chains in the EU, as they are not members of the national franchise associations.
It lacks transparency, consistency, accountability and proportionality – and so will never be able to provide franchisees, potential franchisees or indeed franchisors with the level of protection that they require.
There are franchise-specific disclosure laws in less than 10 EU member countries. Researchers found that “the lack of any uniform approach to pre-contractual [franchise] disclosure weakens the impact of franchise-specific laws…Each member state takes a different approach to [franchise-specific] issues in the lack of any homogeneous approach. This in turn substantially weakens their impact upon cross-border franchising within the EU and creates a technical barrier to franchising between EU member states.”
The study notes that while the United States has “only 60% of the population of the EU and a lower GDP, franchising’s turnover in the USA is more than double that in the EU.”
The organization believes bringing a unified set of regulations to EU member countries can only help in contributing to market growth as “an estimated 83.5% of [franchising’s] turnover is concentrated in only 25% of the member states.” (The study noted the contrast would change even more between the US and the EU if the UK ends up exiting the EU because of the “Brexit” ruling.)
The study also highlighted the lack of impact franchise associations are currently having in Europe, citing the fact many EU member countries don’t have a franchise association and “some of those that do exist are weak and under resourced.”
A Possible Solution
The European Parliament suggests that a “European Legal Act” be established to bring a unified approach to franchising regulation in the European Union. In the organization’s words, the act would enable small and medium sized businesses to “use franchising to better compete with larger corporations through an “Exchange of Benefits.”
The European Parliament believes that a European Legal Act for franchising should do the following things:
- Define franchising
- Require disclosure by both franchisors and franchisees
- Dis-apply other duties of care and consumer rights
- Allow franchisors to set retail prices and control use of the internet
- Prohibit “unconscionable behavior”
- Impose a specific and exclusive duty of good faith
- Support and establish a clear role for national franchise associations
For any of these changes to occur, they would have to be enacted by the European Commission. As of now, it’s unclear when or whether the recommendations of the European Parliament will be heard by the European Commission. However, the European Commission is currently conducting inquiries in related areas.
To read the full findings of the study, click here.