Franchise, PDD, significant imbalance, L442-6 I 2°, an educative Appeals Court decision

The Appeals Paris Court dismisses the grievance of fraud raised by a franchisee on the following grounds:

• if the franchisor is not required to communicate to the future franchisee financial forecasts, when the franchisor hands such a document over to the franchisee, the information contained therein must be sincere and established seriously; in this matter the PDD received by the franchisee indicated that the franchisor had been recently registered and the list of franchisees contained only one name, so that the future franchisee could not be unaware that he was participating in the formation of the network which was then very recently constituted ;
• the market presentation made in the PDD was incomplete, because not specifying any state of competition in the area of ​​franchisee location and not providing any information on its economic dynamism, but the franchisee had to proceed himself to a precise market study enabling it to assess the potential and, hence, the viability of the business which it intended to create;
• the PDD contained a simulation of forecast accounts, headed with the indication: « Beware: this is just a simulation. It is up to the candidate for the franchise, like any entrepreneur, to make his own forecasts with a view to making an informed decision « , so that the attention of the future franchisee was drafted to consider these accounts with caution;
• franchisees located in an area close to the claimant, actually exceeded or approached the figures given in the forecast provided by the franchisor.

The existence of a discrepancy between the forecast and the actual turnover and profits obtained is not sufficient to prove the unrealistic nature of the forecast, and it was the responsibility of PC Com to supplement it with local data.

The inexperience of the franchisee in the area of ​​the franchise concerned does not makes the franchisee unable to evaluate the feasibility of the project, whereas it was his responsibility to carry out a specific implementation analysis allowing him to appreciate the viability of the business he was planning to create, which he did not make, while the manager of the franchisee had experience as an entrepreneur.

The know-how is described in a « book » containing documents from third parties, but this remains of a nature to help the franchisee in the exercise of his activity, and the franchisee thus had a document enabling him to acquire immediately useful knowledge that he would not have been able to acquire otherwise than in a much longer time.

The franchisee also criticized significant imbalances in the agreement breaching Article L.442-6 I 2° of the French Commercial Code, allegedly arising from its obligation to pay an entry fee, the obligation of the franchisee to devote all his time to the operated franchise, when the franchisee alleged to be an independent trader and supposedly to be completely free to act and to undertake.

The appeals court of Paris replies that the franchise agreement stipulates that the flat-rate fee for initial training is paid in exchange for the franchise, the right to use the marks, the right to use know-how and initial training, elements constituting the concept proposed by the franchisor. The fact that this concept was developed by a third company is irrelevant insofar as the rights of the franchisor on the concept are not disputed and it was created to develop the franchise.

The existence of monthly payments besides the entry fee is common in franchise contracts.

Similarly, the reduction in the cost of initial training, from EUR 40 000 to EUR 25 000 while the network was developing, cannot be sufficient to demonstrate that it was a “manifestly disproportionate advantage” or without any real compensation received By the company PC Com. (Court of Appeal, Paris, Pole 5, Chamber 4, 17 May 2017, no. 14/18290).

 

Frédéric Fournier
Partner