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Category Licence for Franchise Agreements [1994] IECA 372 (17th November, 1994)

COMPETITION AUTHORITY

Category Licence for Franchise

Agreements

Price:£1.80

£2.50 incl. postage

FRANCHISE AGREEMENTS CATEGORY LICENCE

Competition Authority Decision of 17 November 1994 granting a licence under Section 4(2) of the Competition Act, 1991, to categories of franchise agreements.

Decision No. 372

Introduction

1. Under Section 4(2) of the Competition Act, 1991, the Competition Authority may grant a licence for the purposes of Section 4 of the Act to any category of agreements:

1. ´which in the opinion of the Authority, having regard to all relevant market conditions, contributes to improving the production or distribution of goods or provision of services or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit and which does not -

(i) impose on the undertakings concerned terms which are not indispensable to the attainment of those objectives;

(ii) afford undertakings the possibility of eliminating competition in respect of a substantial part of the products or services in question.'

2. A large number of notifications has been made to the Authority concerning franchise agreements for the sale of products or the supply of services. Having considered the notified agreements in detail, the Authority has decided to grant a category licence under Section 4(2) of the Act. A draft of the category licence was published on 8 July 1994. Several submissions were received, and these have been taken into account by the Authority.

The subject of the Decision

3. This decision concerns arrangements whereby one of the parties supplies goods or provides services to end users under a franchise agreement. A franchise agreement consists essentially of a licence of industrial or intellectual property rights relating to trade marks or signs and know-how, which can be combined with restrictions relating to the supply or purchase of goods. The licence usually includes restrictions in relation to the assignment or use of industrial property rights, and the agreement usually involves also the exclusive distribution or exclusive purchase of goods. According to Bellamy & Child:

2. ´Each franchisee remains an independent trader bearing his own financial risk, but pays royalties to the franchisor. The franchisor's aim is to create a chain of franchisees using a uniform presentation and selling products or services of uniform quality; to the outside observer the outlets look like subsidiaries or branches of the franchisor. To achieve that uniformity the franchisor normally requires the franchisee to obtain his stock from the franchisor or from sources nominated by him or to produce it in accordance with the franchisor's specifications; the franchisor provides know-how and commercial assistance and a marketing image which usually has proven market appeal. He usually retains the right to supervise the location, layout and decor of the premises. In general terms, the franchising relationship involves a greater degree of co-operation and a greater involvement of the supplier in the licensed enterprise than is found in other kinds of vertical agreement.' (1)

4. This decision covers franchise agreements between two undertakings, the franchisor and the franchisee, for the retailing of goods or the provision of services to end users, or a combination of these activities, such as the processing or adaptation of goods to fit specific needs of their customers. It also covers cases where the relationship between franchisor and franchisees is made through a third undertaking, the master franchisee. The decision does not cover wholesale franchise agreements or industrial franchise agreements.

The Products and the Market

5. Franchise agreements operate in many lines of business. A very wide variety of goods and services forms the subject matter of the notified agreements, there being more than one notification of a particular agreement in some cases. These include the selling of groceries, builders' materials, posters, jeans and babywear; fast food and catering services; hotels; health and fitness; the cleaning of vehicles, carpets and video display units; vehicle tuning; video rental; and sharpening of knives and blades. Given the large number and the heterogeneous nature of the products and services concerned, and of those which may also be included in other agreements which have not been notified or which may be made in future, it is not possible to describe the relevant market conditions which prevail. It is not necessary to do so in the case of this category licence, however, in particular because the benefit of the category licence may be withdrawn in the case of an individual agreement if it is found that it does not satisfy all the conditions prescribed in Section 4(2), especially where competitive conditions in the market are inadequate.

6. Most of the notified agreements stipulate the territory concerned, this being either the whole or a part of the State, though the territory sometimes includes Northern Ireland. This decision covers agreements which relate to the State or any part of the State.

EU Treatment of Franchise Agreements

7. In 1986, the European Court of Justice issued an important judgment on franchise agreements in the Pronuptia case (2). The Court recognised that there were different forms of franchise agreements and indicated that it was only concerned with what it termed 'a distribution franchise'. The Court held that franchise agreements, which brought benefits to both parties, were not as such restrictive of competition. They often enabled a franchisor to exploit the expertise he had acquired, without having to invest in a retail network. They also gave inexperienced retailers access to trading methods which had already proved successful while enabling them to remain independent. The Court held that obligations in the agreement which were necessary to support the essential ingredients of the franchising relationship did not fall within Article 85(1) of the Treaty of Rome, but that certain other clauses could do so. One essential ingredient for a franchise system to work was that the franchisor had to be able to give the franchisee his know-how and assistance without fearing that the information would benefit competitors. A second essential ingredient was that the franchisor had to have sufficient control over the operation of the retail outlet to enable him to protect the common identity and reputation of the network trading under the franchisor's name. Clauses which were necessary to achieve these objectives, according to the Court, fell outside Article 85(1). The Court stated, however, that clauses which did not relate to these essential ingredients might fall within Article 85(1), especially where these concerned market-sharing or limitations on price competition. Some of these restrictive clauses might be capable of exemption under Article 85(3).

8. Following this judgment, and some individual decisions on franchise agreements, the EU Commission, in 1988, made a block exemption regulation, Regulation 4087/88, granting exemption under Article 85(3) to categories of franchise agreements (3). The Regulation applies from 1 February 1989, and expires at the end of 1999. The Regulation exempts agreements to which only two firms are party and whereby one firm, the franchisor, enters into an agreement with another firm, the franchisee, under which the latter is granted the right to exploit a franchise for the purposes of marketing specified types of goods and/or services. It does not cover industrial or wholesale franchise agreements. The Regulation specifies which clauses the franchise agreement can contain and which must not be included if it is to benefit from the block exemption. The obligations which are not normally restrictive of competition include those which are essential either to preserve the common identity and reputation of the network or to prevent the know-how made available and the assistance given by the franchisor from benefiting competitors. It is necessary, however, that parallel imports remain possible. The Regulation exempts the territorial protection granted by the franchisor to the franchisee, the location clause imposed on the franchisee and the obligation on the latter not to sell contract products outside the franchise network. It also exempts an obligation for the franchisee to resell exclusively the franchisor's goods which form the essential subject of the franchise, and a post-term non-competition obligation for a reasonable period not exceeding one year. Resale price maintenance is specifically prohibited, but recommended prices are allowed. An accelerated opposition procedure is provided for dealing with franchise agreements containing clauses not specified among those expressly exempted or prohibited. Benefit of the exemption may be withdrawn in any particular case where an agreement has effects which are incompatible with the conditions laid down in Article 85(3), particularly where competition is significantly restricted because of the structure of the relevant market.

Assessment

(a) Applicability of Section 4(1)

9. Section 4(1) of the Competition Act, 1991, prohibits and renders void all agreements between undertakings which have as their object or effect the prevention, restriction or distortion of competition in trade in any goods or services in the State or in any part of the State.

10. The franchisors, whether they are located outside or inside the State, are engaged in the supply of goods and/or the provision of services for gain, and the same applies to the franchisees, including master franchisees. Both franchisors and franchisees are therefore undertakings within the meaning of Section 3(1) of the Competition Act. The franchise agreements are agreements between undertakings. The relevant product or service in each case is as specified in the individual agreement. The relevant geographic market is the State or a specific part of the State, depending on the agreements concerned. This decision only applies to agreements to which only two undertakings are party - the franchisor and the franchisee. Several undertakings forming one economic unit (such as the franchisee and its owner acting as guarantor) count as one undertaking for the purposes of this decision.

(i) The franchise agreement as a whole

11. The Authority considers that, for the purposes of this decision, it should adopt the definitions of ´franchise' and ´franchise agreement' used in Regulation 4087/88. There, a ´franchise' is defined to mean:

3. ´a package of industrial or intellectual property rights relating to trade marks, trade names, shop signs, utility models, designs, copyrights, know-how or patents, to be exploited for the resale of goods or the provisions of services to end users.'

4. A ´franchise agreement' is defined as:

5. ´an agreement whereby one undertaking, the franchisor, grants the other the franchisee, in exchange for direct or indirect financial consideration, the right to exploit a franchise for the purposes of marketing specified types of goods and/or services; it includes at least obligations relating to:

-the use of a common name or shop sign and a uniform

presentation of contract premises and/or means of

transport,

-the communication by the franchisor to the franchisee of know-how,

-the continuing provision by the franchisor to the

franchisee of commercial or technical assistance

during the life of the agreement.'

6. The Authority also adopts the definition of ´know-how' in the Regulation, whereby ´know-how' means:

7. ´a package of non-patented practical information, resulting from experience and testing by the franchisor, which is secret, substantial and identified.'

8. It also adopts the definitions of ´secret', ´substantial' and ´identified' contained in the Regulation, as well as the other definitions therein.

12. The Authority also agrees with the view of the Court of Justice that a franchise agreement differs from an exclusive distribution agreement in that, for example, it imposes obligations regarding the use of a business name and methods and the provision of know-how. For this reason, the Court held that franchise agreements did not come within the block exemption for exclusive distribution agreements. Likewise, the Authority considers that franchise agreements do not come within the scope of its category licence for exclusive distribution agreements (4).

13. The Authority agrees with the view of the Court that franchise agreements as such are not restrictive of competition, nor are obligations in franchise agreements which are necessary to support the essential ingredients of the franchising relationship, namely clauses that:

(a) are essential to prevent the know-how made available and the assistance given by the franchisor from benefiting competitors; or

(b) that provide for the control essential to preserve the common identity and reputation of the network trading under the franchisors' name.

9. Franchise agreements which contain only obligations of this nature do not, in the Authority's opinion, have as their object or effect the prevention, restriction or distortion of competition, and so they do not offend against Section 4(1) of the Competition Act. Many franchise agreements, however, contain obligations which go beyond these parameters, and they may therefore offend against Section 4(1). Individual obligations under each heading are described below.

(ii) Clauses which do not offend against section 4(1)

14. The Authority considers, in the first place, that certain obligations on the franchisor do not offend against Section 4(1), because they form part of the basic services the franchisor provides to the franchisee. These include obligations on the franchisor to assist the franchisee with selecting the site and premises, shopfitting, promotion and advertising, training, news of products, innovations, etc.

15. The Authority considers that the following obligations on the franchisee are in conformity with the two parameters described above:

(a) to sell, or use in the course of the provision of services, exclusively goods matching minimum objective quality specifications laid down by the franchisor;

(b) to sell, or use in the course of the provision of services, goods which are manufactured only by the franchisor or by third parties designated by it, where it is impracticable, owing to the nature of the goods which are the subject matter of the franchise, to apply objective quality specifications;

(c) not to engage, directly or indirectly, in any similar business in a territory where it would compete with a member of the franchised network, including the franchisor; the franchisee may be held to this obligation after termination of the agreement, for a reasonable period which may not exceed one year, in the territory where it has exploited the franchise;

(d) not to acquire financial interests in the capital of a competing undertaking, which would give the franchisee the power to influence the economic conduct of such undertaking;

(e) to sell the goods which are the subject-matter of the franchise only to end users, to other franchisees and to resellers within other channels of distribution supplied by the manufacturer of these goods or with its consent;

(f) to use its best endeavours to sell the goods or provide the services that are the subject-matter of the franchise; to offer for sale a minimum range of goods, achieve a minimum turnover, plan its orders in advance, keep minimum stocks and provide customer and warranty services;

(g) to pay to the franchisor a specified proportion of its revenue for advertising and itself carry out advertising for the nature of which it shall obtain the franchisor's approval.

10. Accordingly, such obligations do not offend against Section 4(1).

16. The Authority considers that the following obligations on the franchisee also do not offend against Section 4(1), that is obligations:

(a) not to disclose to third parties the know-how provided by the franchisor; the franchisee may be held to this obligation after termination of the agreement;

(b) to communicate to the franchisor any experience gained in exploiting the franchise and to grant it, and other franchisees, a non-exclusive licence for the know-how resulting from that experience;

(c) to inform the franchisor of infringements of licensed industrial or intellectual property rights, to take legal action against infringers or to assist the franchisor in any legal actions against infringers;

(d) not to use know-how licensed by the franchisor for purposes other than the exploitation of the franchise; the franchisee may be held to this obligation after termination of the agreement;

(e) to attend or have its staff attend training courses arranged by the franchisor;

(f) to apply the commercial methods devised by the franchisor, including any subsequent modification thereof, and use the licensed industrial or intellectual property rights;

(g) to comply with the franchisor's standards for the equipment and presentation of the contract premises and/or means of transport;

(h) to allow the franchisor to carry out checks of the contract premises and/or means of transport, including the goods sold and the services provided, and the inventory and accounts of the franchisee;

(i) not without the franchisor's consent to change the location of the contract premises;

(j) not without the franchisor's consent to assign the rights and obligations under the franchise agreement.

(iii) Clauses which offend against Section 4(1)

17. The Authority considers that in certain circumstances the following obligations may involve a restriction upon competition:

(a) an obligation on the franchisor, in the State or in a defined area of the State, the contract territory, not to:

- grant the right to exploit all or part of the franchise to third parties,

- itself exploit the franchise, or itself market the goods or services which are the subject-matter of the franchise under a similar formula,

- itself supply the franchisor's goods to third parties;

(b) an obligation on the franchisee to exploit the franchise only from the contract premises;

(c) an obligation on the franchisee to refrain, outside the contract territory, from seeking customers for the goods or the services which are the subject-matter of the franchise;

11. The first three of these obligations could involve market sharing between the franchisor and the franchisee or between franchisees. The effect of these obligations is to protect each franchisee from competition from the franchisor or from other franchisees. The last obligation prevents the franchisee from dealing in competing goods. Where such restrictions restrict competition, they also, in the Authority's opinion, offend against Section 4(1).

18. Any provisions in a franchise agreement which restrict the franchisee's freedom to determine his own prices would always offend against Section 4(1), in the Authority's opinion. The franchisor is, however, entitled to recommend prices to franchisees, provided there is no concerted practice whereby franchisees are expected to abide by such prices.

(b) Applicability of Section 4(2)

19. Under Section 4(2), the Competition Authority may grant a licence in the case of any agreement or category of agreements which satisfies all the requirements of the Section, as quoted in para. 1 above.

20. In the opinion of the Authority, franchise agreements, in general, are likely to fulfil the conditions provided for in Section 4(2) and qualify for the grant of a category licence.

21. Franchise agreements which are covered by this decision normally improve the distribution of goods and/or the provision of services as they give franchisors the possibility of establishing a uniform network with limited investments, which may assist the entry of new competitors on the market, particularly in the case of small and medium-sized undertakings, thus increasing interbrand competition. They also allow independent traders to set up outlets more rapidly and with a higher chance of success than if they had to do so without the franchisor's experience and assistance. They have therefore the possibility of competing more efficiently with large distribution undertakings.

22. As a rule, franchise agreements also allow consumers and other end users a fair share of the resulting benefit, as they combine the advantage of a uniform network with the existence of traders personally interested in the efficient operation of their business. The homogeneity of the network and the constant cooperation between the franchisor and the franchisees ensures a constant quality of the products and services. The favourable effect of franchising on interbrand competition and the fact that consumers are free to deal with any franchisee in the network guarantees that a reasonable part of the resulting benefits will be passed on to the consumers.

23. In order to satisfy the requirements of the category licence, only specific obligations which are restrictive of competition may be included in franchise agreements. This is the case in particular for the granting of an exclusive territory to the franchisees combined with the prohibition on actively seeking customers outside the territory, which allows them to concentrate their efforts on their allotted territory. The same applies to the granting of an exclusive territory to a master franchisee combined with the obligation not to conclude franchise agreements with third parties outside that territory. Where the franchisees sell, or use in the process of providing services, goods manufactured by the franchisor or according to its instructions, and/or bearing the franchisor's name or trade mark, an obligation on the franchisees not to sell, or use in the process of the provision of services, competing goods, makes it possible to establish a coherent network which is identified with the franchised goods. However, this obligation should only be accepted with respect to the goods which form the essential subject-matter of the franchise. It should notably not relate to accessories or spare parts for these goods. The obligations referred to above thus do not impose restrictions which are not necessary for the attainment of the above mentioned objectives. In particular, the limited territorial protection granted to the franchisees is indispensable to protect their investment.

24. The category licence must specify the conditions which must be satisfied for the licence to apply. To guarantee that competition is not eliminated for a substantial part of the goods which are the subject of the franchise, it is necessary that there should not be absolute territorial protection for franchisees. Therefore, cross deliveries between franchisees should always be possible. Furthermore, where a franchise network is combined with another distribution system, franchisees should be free to obtain supplies from authorized distributors.

25. The category licence must also specify restrictions which may not be included in franchise agreements if these are to benefit from the exemption granted by the licence, by virtue of the fact that such provisions are restrictions falling under Section 4(1) for which there is no general presumption that they will lead to the positive effects required by Section 4(2). This applies in particular to market sharing between competing manufacturers, to clauses unduly limiting the franchisee's choice of suppliers or customers, and to cases where the franchisee is restricted in determining its prices. However, the franchisor should be free to recommend prices to the franchisees to the extent that it does not lead to concerted practices for the effective application of these prices.

(c) Miscellaneous considerations

Withdrawal of the category licence

26. Section 8(3) of the Competition Act states:

12. ´Where the Authority is of the opinion that, having regard to the requirements of Section 4(2) and to the basis upon which a licence under that subsection was granted:-

(a) there has been a material change in any of the circumstances on which the decision was based,

(b) any party commits a breach of any obligation attached to the decision,

(d) any party abuses the permission granted to it by the licence,

the Authority may revoke or amend the licence and, without prejudice to the generality of this subsection, may in particular insert in a licence conditions the effect of which is to prohibit specific acts by any party thereto which would otherwise be authorised pursuant to such a licence.'

13. The Authority considers that it also has the power, in accordance with Section 8(3), to withdraw the benefit of the category licence in individual cases. This would be the case where an individual agreement had effects incompatible with Section 4(2).

Duration of the Category Licence

27. As in the case of exclusive distribution agreements, the Authority considers that the specified period for the licence should be five years, so as to allow the possibility for early review. At the end of this period, the period of the category licence may be extended, with or without amendments to the licence, if it is considered by the Authority that the requirements of Section 4(2) continue to be fulfilled. The Authority considers that the category licence should expire on the same date as Regulation No. 4087/88. The category licence shall enter into force on 17 November 1994. It shall expire on 31 December 1999. The category licence is at the end of this Decision.

Notification

28. In accordance with Section 4(3)(b) of the Competition Act, where a licence covers a category of agreements, agreements within that category which comply with the terms of the licence need not be notified under Section 7 to benefit from the licence while it is in force. Nevertheless, where there is a real doubt, in a particular case, an undertaking may request the Authority to declare whether its agreements comply with this category licence. This would have to be done by way of full notification under Section 7.

29. It is expected that franchisors and franchisees who wish to benefit from this category licence in future will ensure that new franchise agreements satisfy the conditions specified in the licence. Parties to agreements which have been made prior to the coming into force of the category licence will also presumably seek to amend these agreements if necessary so as to satisfy the conditions of the licence, especially in the case of agreements which were in existence on the date of commencement of the Act, that is agreements which were entered into prior to 1 October 1991. Appropriate provisions are necessary in the circumstances.

Agreements already notified

30. In the case of franchise agreements which were in existence on 1 October 1991, and which have been notified to the Authority before 1 October 1992, this licence shall have effect from 17 November 1994 where the agreements already fulfil the conditions of that licence. Where such notified agreements do not fulfil the conditions of the licence, they do not qualify for the benefit of the licence. The Authority will inform notifying parties whether their agreement fulfils the conditions of the licence, and, if it does not, the reasons for this. Where such notified agreements are amended to fulfil the conditions of the licence, the licence shall have effect from the date when the conditions of the licence are fulfilled.

31. In the case of franchise agreements which came into existence after 1 October 1991, and which have been notified to the Authority before 17 November 1994, this licence shall have retroactive effect from the date of notification, if the agreements already fulfilled the conditions of the licence, or from the date, being not earlier than the date of notification, when the conditions of the licence were fulfilled. The Authority will inform the parties whether their agreement fulfils the conditions of the licence or not. For other agreements which came into existence after 1 October 1991, and which have not been notified, or those which come into existence in the future, this licence shall have effect from the date, at or after the date of grant of the licence, upon which its conditions are fulfilled.

Other category licences

32. Agreements may benefit from the provisions either of this category licence or of another category licence, according to their particular nature and provided that they fulfil the necessary conditions of application. They may not benefit from a combination of the provisions of this category licence with those of another category licence.

Divergences from EU Regulation 4087/88

33. This Decision and the category licence itself are based to a very large extent upon EU Regulation 4087/88, which grants a block exemption from the prohibition of Article 85(1) of the Treaty of Rome to certain categories of franchise agreements. One difference between the category licence and the Regulation, however, is that references to the common market or to a defined area of the common market in the Regulation are altered to the State or to a defined area of the State in the category licence. In addition, references to exemption and the Regulation are altered to references to the category licence.

34. The main difference is that the category licence omits Article 6 of the Regulation which provides for an accelerated opposition procedure. This allows for agreements which contain clauses not specifically covered by the Regulation to be notified to the EU Commission and for exemption to follow provided that the Commission does not oppose the application for exemption within a specified period of time (six months). The Authority does not consider that there is a need for such a procedure in the case of this category licence. The procedure appears to have been of little practical use, and it is significant that the Commission is proposing to eliminate similar procedures from revised block exemption Regulations for intellectual property licences. Consequently, Article 7 of the Regulation, which imposes an obligation of secrecy upon the Commission and the authorities of the Member States in connection with this procedure, is also omitted from the category licence.

35. In addition, unlike the Regulation, which contains no transition provisions, the category licence has to make provision for agreements which have been notified to the Authority, which are contained in Article 7 of the category licence. Finally, the Authority does not consider it necessary to include the following parts of the Regulation in the category licence:

(i) Article 2(b), which permits an obligation on the master franchisee not to conclude franchise agreements outside its contract territory (because in general the contract territory in such agreements covers the whole State);

(ii) Article 4(b) and (c), which impose conditions for the application of the exemption, namely concerning the honouring of guarantees by franchisees and the indication by a franchisee of its status as an independent undertaking; and

(iii) Article 8 where specific examples are given of the circumstances in which the benefit of the Regulation may be withdrawn in a particular case.

14. Any franchise agreement, however, which comes within the scope of Article 85(1) of the Treaty would have to satisfy the conditions of the Regulation in order to benefit from the block exemption afforded by the Regulation, irrespective of whether it satisifies the conditions for this category licence.

The Decision

36. The Competition Authority considers that franchise agreements, which contain certain clauses which restrict competition, constitute agreements between undertakings which have the object and effect of preventing, restricting or distorting competition in goods and/or services in the State, and thus they offend against Section 4(1) of the Competition Act, 1991. In the opinion of the Authority, having regard to all relevant market conditions, such agreements generally satisfy all the conditions required for the grant of a category licence under Section 4(2) of the Competition Act. Accordingly, the Competition Authority grants a licence to the specified category of agreements, subject to the specified period and specified conditions as required under Section 8(1) of the Competition Act, as follows:

The Category Licence

Article 1

1. Pursuant to Section 4(2) of the Competition Act, 1991, and subject to the provisions of this licence, the Competition Authority grants a category licence to franchise agreements to which two undertakings are party, which include one or more of the restrictions listed in Article 2.

2. The category licence provided for in paragraph 1 shall also apply to master franchise agreements to which two undertakings are party. Where applicable, the provisions of this category licence concerning the relationship between franchisor and franchisee shall apply mutatis mutandis to the relationship between franchisor and master franchisee and between master franchisee and franchisee.

3. For the purposes of this category licence:

(a) ´franchise' means a package of industrial or intellectual property rights relating to trade marks, trade names, shop signs, utility models, designs, copyrights, know-how or patents, to be exploited for the resale of goods or the provision of services to end users;

(b) ´franchise agreement' means an agreement whereby one undertaking, the franchisor, grants the other, the franchisee, in exchange for direct or indirect financial consideration, the right to exploit a franchise for the purposes of marketing specified types of goods and/or services; it includes at least obligations relating to:

- the use of a common name or shop sign and a uniform presentation of contract premises and/or means of transport,

- the communication by the franchisor to the franchisee of know-how,

- the continuing provision by the franchisor to the franchisee of commercial or technical assistance during the life of the agreement;

(c) ´master franchise agreement' means an agreement whereby one undertaking, the franchisor, grants the other, the master franchisee, in exchange for direct or indirect financial consideration, the right to exploit a franchise for the purposes of concluding franchise agreements with third parties, the franchisees;

(d) ´franchisor's goods' means goods produced by the franchisor or according to its instructions, and/or bearing the franchisor's name or trade mark;

(e) ´contract premises' means the premises used for the exploitation of the franchise or, when the franchise is exploited outside those premises, the base from which the franchisee operates the means of transport used for the exploitation of the franchise (contract means of transport);

(f) ´know-how' means a package of non-patented practical information, resulting from experience and testing by the franchisor, which is secret, substantial and identified;

(g) ´secret' means that the know-how, as a body or in the precise configuration and assembly of its components, is not generally known or easily accessible; it is not limited in the narrow sense that each individual component of the know-how should be totally unknown or unobtainable outside the franchisor's business;

(h) ´substantial' means that the know-how includes information which is of importance for the sale of goods or the provision of services to end users, and in particular for the presentation of goods for sale, the processing of goods in connection with the provision of services, methods of dealing with customers, and administration and financial management; the know-how must be useful for the franchisee by being capable, at the date of conclusion of the agreement, of improving the competitive position of the franchisee, in particular by improving the franchisee's performance or helping it to enter a new market;

(i) ´identified' means that the know-how must be described in a sufficiently comprehensive manner so as to make it possible to verify that it fulfils the criteria of secrecy and substantiality; the description of the know-how can either be set out in the franchise agreement or in a separate document or recorded in any other appropriate form.

Article 2

15. The category licence provided for in Article 1 shall apply to franchise agreements which include some or all of the following restrictions, notwithstanding the fact that, in some circumstances, these may not constitute restrictions of competition:

(a) an obligation on the franchisor, in the State or in a defined area of the State, the contract territory, not to:

- grant the right to exploit all or part of the franchise to third parties,

- itself exploit the franchise, or itself market the goods or services which are the subject-matter of the franchise under a similar formula,

- itself supply the franchisor's goods to third parties;

(b) an obligation on the franchisee to exploit the franchise only from the contract premises;

(c) an obligation on the franchisee to refrain, outside the contract territory, from seeking customers for the goods or the services which are the subject-matter of the franchise;

(d) an obligation on the franchisee not to manufacture, sell or use in the course of the provision of services, goods competing with the franchisor's goods which are the subject-matter of the franchise; where the subject-matter of the franchise is the sale or use in the course of the provision of services both certain types of goods and spare parts or accessories therefor, that obligation may not be imposed in respect of these spare parts or accessories.

Article 3

1. The category licence provided for in Article 1 shall apply notwithstanding the presence of any of the following obligations on the franchisee, in so far as they are necessary to protect the franchisor's industrial or intellectual property rights or to maintain the common identity and reputation of the franchised network, since these are not deemed to constitute restrictions of competition in such circumstances:

(a) to sell, or use in the course of the provision of services, exclusively goods matching minimum objective quality specifications laid down by the franchisor;

(d) not to acquire financial interests in the capital of a competing undertaking, which would give the franchisee the power to influence the economic conduct of such undertaking;

(g) to pay to the franchisor a specified proportion of its revenue for advertising and itself carry out advertising for the nature of which it shall obtain the franchisor's approval.

2. The category licence provided for in Article 1 shall apply notwithstanding the presence of any of the following obligations on the franchisee:

(a) not to disclose to third parties the know-how provided by the franchisor; the franchisee may be held to this obligation after termination of the agreement;

(b) to communicate to the franchisor any experience gained in exploiting the franchise and to grant it and other franchisees a non-exclusive licence for the know-how resulting from that experience;

(d) not to use know-how licensed by the franchisor for purposes other than the exploitation of the franchise; the franchisee may be held to this obligation after termination of the agreement;

(e) to attend or have its staff attend training courses arranged by the franchisor;

(f) to apply the commercial methods devised by the franchisor, including any subsequent modification thereof, and use the licensed industrial or intellectual property rights;

(g) to comply with the franchisor's standards for the equipment and presentation of the contract premises and/or means of transport;

(i) not without the franchisor's consent to change the location of the contract premises;

(j) not without the franchisor's consent to assign the rights and obligations under the franchise agreement.

3. In the event that, because of particular circumstances, obligations referred to in paragraph 2 fall within the scope of Section 4(1), they shall also be licensed even if they are not accompanied by any of the obligations licensed by Article 1.

Article 4

16. The category licence provided for in Article 1 shall apply on condition that the franchisee is free to obtain the goods that are the subject-matter of the franchise from other franchisees; where such goods are also distributed through another network of authorized distributors, the franchisee must be free to obtain the goods from the latter.

Article 5

17. The category licence provided for in Article 1 shall not apply where:

(a) undertakings producing goods or providing services which are identical or are considered by users as equivalent in view of their characteristics, price and intended use, enter into franchise agreements in respect of such goods or services;

(b) without prejudice to Article 2 (d) and Article 3 (1)(b), the franchisee is prevented from obtaining supplies of goods of a quality equivalent to those offered by the franchisor;

(c) without prejudice to Article 2 (d), the franchisee is obliged to sell, or use in the process of providing services, goods manufactured by the franchisor or third parties designated by the franchisor and the franchisor refuses, for reasons other than protecting the franchisor's industrial or intellectual property rights, or maintaining the common identity and reputation of the franchised network, to designate as authorized manufacturers third parties proposed by the franchisee;

(d) the franchisee is prevented from continuing to use the licensed know-how after termination of the agreement where the know-how has become generally known or easily accessible, other than by breach of an obligation by the franchisee;

(e) the franchisee is restricted by the franchisor, directly or indirectly, in the determination of sale prices for the goods or services which are the subject-matter of the franchise, without prejudice to the possibility for the franchisor of recommending sale prices;

(f) the franchisor prohibits the franchisee from challenging the validity of the industrial or intellectual property rights which form part of the franchise, without prejudice to the possibility for the franchisor of terminating the agreement in such a case;

(g) franchisees are obliged not to supply within the State the goods or services which are the subject-matter of the franchise to end users because of their place of residence.

Article 6

18. The Competition Authority may withdraw the benefit of this category licence where it finds in a particular case that an agreement nevertheless has certain effects which are incompatible with the conditions laid down in Section 4(2) of the Competition Act.

Article 7

1.(a) As regards agreements which were in existence on 1 October, 1991, and were notified before 1 October 1992, this category licence shall have effect from 17 November 1994, where the agreements already fulfil the conditions of the licence.

(b) As regards agreements which were in existence on 1 October 1991, and were notified before 1 October 1992, and which do not fulfil the conditions of the licence, but which are later amended to fulfil the conditions of the licence, this category licence shall have effect from the date when those conditions were fulfilled.

2. As regards agreements which came into existence after 1 October 1991, and which were notified before 17 November 1994, this category licence shall have retroactive effect from the date of notification where the agreements already fulfil the conditions of the licence, or from the date, being not earlier than the date of notification, when the agreements were amended so as to fulfil those conditions.

Article 8

19. This category licence shall enter into force on 17 November 1994. It shall expire on 31 December 1999.

For the Competition Authority

Patrick M. Lyons

Chairman

17 November 1994

Notes

1. Bellamy & Child, Common Market Law of Competition, 4th

edition, Sweet & Maxwell 1993, para 7-163.

2. Judgment of the Court of Justice of 28 January 1986 in the

case of Pronuptia de Paris GmbH v Pronuptia de Paris Irmgard

Schillgalis. [1986] ECR 353.

3. Commission Regulation (EEC) No. 4087/88 of 30 November 1988

on the application of Article 85(3) of the Treaty to

categories of franchise agreements. OJ L359, 28.12.88, p.46.

4. Licence for Categories of Exclusive Distribution Agreements,

20. Decision No. 144, 5 November 1993.