Germany

• Author: Marco Hero - Karsten Metzlaff
• Pages: 196-212

196 International Franchise Sales Laws

Germany

I. What Is a Franchise?

A. Scope of Law

1. Status Quo

In contrast to other countries, Germany does not have any specific laws or regula-

tions regulating the offer and sale of franchises. Therefore, the legal considerations

applicable to such transactions in Germany include influences from civil and com-

mercial law, consumer law, and unfair trade and antitrust law, among others. In

particular, the provisions of the German Civil Code concerning standard terms will

apply where the Franchisee has signed a franchise agreement on a take-it-or-leave-

it basis.

Furthermore, this lack of specific franchise legislation has resulted in jurispru-

dence having a tremendous impact on the offer and sale of franchises. There are a

variety of decisions concerning franchising relationships, especially regarding the

issue of pre-contractual disclosure. Moreover, numerous decisions tackle the ques-

tion of whether Commercial Agents’ Law can be applied to franchising issues, and

indicate that this area of law is partly applicable to the law of franchise relation-

ships.

In particular, while pre-contractual disclosure is not regulated by any special

statute or monitored by a specific agency, general provisions stipulate that good

faith shall apply to contractual negotiations. Accordingly, parties intending to enter

into a contract (as evidenced by their entering into a “pre-contractual relationship”

(Section 311 of the German Civil Code)) must negotiate honestly and openly with

each other.

2. Definition of Franchise

Due to the lack of franchise-related legislation, there is no statutory definition of

“franchising” in Germany. The German Franchise Association (DFV) defines fran-

chising as a sale and distribution system through which goods, services, and tech-

nologies are marketed. It is based on close and ongoing cooperation between legally

and financially independent parties—the Franchisor and the Franchisee. The

Franchisor grants its Franchisees the right, and also obligates them, to run a busi-

ness according to its concept. This right and obligation entitles the Franchisee to

utilize the system’s name, the trademark, the logo, or other intellectual property

rights, know-how, economic and technical methods, and the business system of the

Franchisor, under ongoing technical and business support by the Franchisor, in re-

turn for direct or indirect remuneration, within the framework and for the duration

Germany 197

of a contract signed between the parties. This definition of the DFV is partly recog-

nized by German courts.

3. Issue of Discussion: German Franchise Code

The question of whether a special regulatory regime governing franchise relation-

ships is necessary is an issue of ongoing debate in Germany. While critics regret the

lack of a special German Franchise Code, public opinion maintains that there is no

desperate need for the codification of such a legal system, when considering all the

legal sources franchise law is based upon. Most recently, however, there seem to be

legislative attempts to codify German franchise law, in particular with regard to the

requirements of pre-contractual disclosure, as the German Federal Ministry of Jus-

tice tendered a related research project.

B. Applicability to Master Franchises

Given the absence of specific franchise law, there is no statutory distinction be-

tween a regular franchise and a master franchise. Nevertheless, even though there

are structural differences, the essential components of the German understanding of

a franchise system are applicable to master franchising, as is the definition of the

DFV (see I.A.2., above). The master franchise system can be characterized as hav-

ing three levels of distribution: (1) Master Franchisor; (2) Master Franchisees; and

(3) Sub-franchisees. In contrast to a regular franchise where Franchisees are not

allowed to grant a franchise to third parties, a Master Franchise system authorizes

the Master Franchisee to grant Sub-franchises. It is for the parties to decide whether

the Master Franchisee may run unit franchises in addition to developing a franchise

system within its contractual territory. Differences between regular franchising and

master franchising may arise, especially in terms of liability issues within the rela-

tionship between the Master Franchisor and the Sub-franchisee.

C. Exemptions

There are several other recognized distribution systems in Germany besides fran-

chising, such as commercial agency, distributors, and commission agency relation-

ships.

Commercial agents, in contrast to Franchisees, execute contracts on behalf of

the principal and not in their own name. The law of commercial agents is regulated

in the German Commercial Code. Distributors, on the other hand, enter into con-

tracts in their own name, like a Franchisee, but are not bound by the system’s uni-

form image or marketing concept. Furthermore, there is no ongoing technical or

business support provided by the distributor’s principal. Finally, commission agents

are entitled to undertake transactions in their own names, but for the principal’s

account.

While commercial and commission agents are regulated by the German Com-

mercial Code, there are no special regulations for distributors. Just like Franchisees,