Franchise law

The franchise industry continues to be faced by various legal challenges. Notably, the judgment given by Augsburg Regional Court (Landgericht Augsburg) and key legislative changes have direct impact on the franchise industry.

Liability of franchisors for unfair commercial cractices by franchisees

The judgment of the Augsburg Regional Court (judgment of 6 October 2023 – 81 O 1161/23) concerns the responsibility of franchisors for unfair commercial practices by their franchisees.

The case involved a fitness studio franchise system where a franchisee independently attempted to increase the membership fees by falsifying members’ consent without the franchisor’s knowledge. The franchisee’s intention was that by passing through the turnstile at the entrance of the studio, its members were deemed to have consented to an increase in membership fees.

Due to this practice, a consumer association applied for a prohibitory injunction against the franchisor.

The court deemed this practice an unlawful influence that is likely to significantly impair the consumer’s freedom of choice (see section 4a(1), first sentence, paragraph 3 of second sentence and third sentence of the German Act against Unfair Competition Act (Gesetz gegen den unlauteren Wettbewerb)) and decided that the franchisor was independently liable alongside the franchisee (section 8(2) of the German Act against Unfair Competition Act). The court reasoned that the action took place within the franchisor’s business operation. The franchisee acted within a framework established by the franchisor, demonstrating integration into the franchisor’s business operations.

Central to liability was that the franchisee’s actions ultimately benefited the franchisor. Although the franchisor was unaware of the practices, the franchisor benefited indirectly from the franchisee’s actions through higher franchise fees.

Finally, the court argued that the franchisor could have taken steps to prevent unfair behaviour. This responsibility to act was not negated by any antitrust restrictions prohibiting price directives.

Whether the judgment will withstand appeals is yet to be determined. Nevertheless, it illustrates the need for franchisors to do their best to ensure that their franchisees’ commercial practices are in line with competition law by drafting contracts appropriately and taking organisational steps.

Legislative amendments and plans

In addition to the judgment of Augsburg Regional Court (judgment of 6 October 2023 – 81 O 1161/23), there are three more significant developments that are important for the franchise industry:

Text form (Textform) instead of written form (Schriftform) for commercial lease agreements

Effective 1 January 2025, the Fourth German Bureaucracy Reduction Act will amend the requirements for drafting commercial lease agreements from written form (“Schriftform”, according to Sec. 126b German Commercial Code (BGB)) to text form (“Textform”, according to Sec. 126b German Commercial Code (BGB)). This means these agreements can now be concluded via email, fax, or other digital messages (such as WhatsApp), provided they can be saved permanently and unchanged. This change allows for more flexibility but provides for more prudent contract management. It is crucial for franchisors to adjust administrative processes and clearly define which communication methods are acceptable to avoid legal uncertainties.

Antitrust challenges due to no-poach agreements

In its Competition Policy Brief on “Antitrust in Labour Markets”, issued in May 2024, the European Commission indicated that no-poach agreements are to be considered serious competition restrictions, impermissibly limiting competition for the best talent, and are justifiable only in exceptional While the policy brief lacks legal force, it remains to be seen whether no-poach agreements in franchise agreements, which have been common practice, will be deemed unlawful competition restrictions or justified exceptions in the future.

Potential repayment of COVID-19 aid

Some investment banks currently argue that franchise systems should be classified as groups of companies in terms of subsidy law. This would mean individual franchisees should not have independenly applied for COVID-19 aid. Instead, only the entire franchise system would have been entitled to do so as a group of companies. Since the aid amount per entity was capped, franchise systems could quickly exceed these Any excess aid provided would have to be paid back. For franchisors it is important to check in each case whether their structure fits the definition of a group of companies to protect themselves and their franchisees against possible repayment demands.

This article is part of the "Update Commercial 2025". All insights and the entire report as a PDF can be found here.