Beauchamps Solicitors:
Changes in Competition Law

Restrictions on franchisees may need to be re-examined in light of changes in competition laws. Daniel Cashman, an associate at Beauchamps Solicitors, explains.

A franchise agreement is essentially an agreement whereby the franchisor grants a franchisee the right to exploit a package of intellectual property rights and usually involves also the exclusive distribution or exclusive purchasing of goods and/or services.

A major concern for franchisors is to ensure that their intellectual property rights are protected and not dissipated or damaged by mismanagement on the part of their franchisees. In this regard, franchise agreements usually restrict the manner in which the franchisee may conduct his business. Many of these restrictions are capable of contravening both Irish and EU competition law.

Since 1st January 2004, the Competition Authority Declaration in respect of Vertical Agreements and Concerted Practices (the 'Declaration') has been in effect. The Declaration provides legal certainty to franchisors and franchisees because a franchise agreement which complies with its terms is deemed not to be anti-competitive. It replaces the Category Certificate/Licence which had applied since 1998. The main changes introduced by the Declaration which are of interest to franchisors and franchisees are:

• The Category Certificate had provided that in the event of either the franchisor or franchisee holding in excess of 20% of the relevant product market, the Category Certificate would not apply. A threshold of 40% of the relevant product market was applied in respect of the Category Licence. The Declaration does not distinguish between a certificate or a licence, and simply applies a threshold of 30% of the relevant product market.

• The Declaration introduced a provision which provides that an 'in term' non-compete obligation cannot exceed a five year duration. The effect of this provision is that franchise agreements exceeding five years and which include in term non-compete covenants (as the vast majority of franchise agreements do) could be deemed anti-competitive and void. It is probable that the effect of this change will be to discourage franchisors from granting franchises for a term in excess of five years. The Declaration goes on to provide that a non-compete obligation that is tacitly renewable beyond a period of five years is deemed to have been concluded for an indefinite duration. This raises difficulties for both franchisors and franchisees as where the franchised business is successful, both parties generally would prefer that the franchise relationship continues beyond five years. The meaning of the term 'tacitly renewable' requires further clarification and this is an area where guidance from the competition authorities in Ireland and in Europe would be most useful.

• The Declaration has further restricted the ability of a franchisor to impose post term non-compete restrictions on a franchisee. In addition to the existing requirement that such obligation be limited in duration to one year, the Declaration now provides that any non-compete covenant must (i) relate to goods or services which compete with the franchisor's goods or services, (ii) be limited to the premises and land from which the franchisee has operated during the contract period, and (iii) be indispensable to protect know-how transferred by the franchisor to the franchisee.

It should be emphasised that a failure to comply with the Declaration does not render a franchise agreement anti-competitive automatically. However, it does remove the legal certainty afforded to both parties by compliance with the Declaration. For the most successful franchise networks with a significant presence in their product markets, non-compliance with the Declaration and a subsequent finding that the terms of the franchise agreement had anti-competitive effects could render the franchisor and its franchisees liable to the serious penalties contained in the Competition Act, 2002.