Editor’s Note: This series of posts we’re calling “Around the World” come from a larger piece written by Shannon McCarthy and published in the October 2014 edition of the International Bar Association’s International Franchising Newsletter. Updates were provided by speakers at the Annual IBA/IFA Joint Conference that took place in Chicago in May 2014.
Dr. Dagmar Waldzus of Buse Heberer Fromm gave us an update on a couple of recently-decided cases, but first provided a framework for understanding these latest trends. Germany is a civil law country and has no franchise law legislation; however the German Civil Code obligates all contracting parties to act in good faith: ‘an obligor has a duty to perform according to the requirements of good faith, taking customary practice into consideration.’
While there are no statutory pre-contractual disclosure requirements, guidelines for pre-contractual franchise disclosure or communications come from other commercial areas of law such as M&A, consumer protection, product liability and franchise law. Additionally, the Code of Ethics of the German Franchise Association applies to all members.
Over time, there has developed a list of ‘must have’ disclosure items before a franchisor contracts to sell a franchise in Germany, including how the system works, ‘know-how’ relevant to the operation of the business, major obligations of the franchisor, any lack of protection of essential intellectual property rights, sufficient evidence of successful pilot operations, franchisee’s costs and capital requirements, and franchisee’s required commitment to work. Other disclosures are required and depend on the proposed location of the franchised business, profitability prospects, pending litigation if the outcome might determine the franchisee’s potential for success, and clarification of statistical projections if requested by the franchisee.
In recent years, courts in Germany have provided further guidance about the type of disclosures franchisors should be giving. In 2011, the Higher Regional Court of Hamm held that profitability forecasts must take into consideration the franchisee’s planned location. In 2013, the Higher Regional Court of Dusseldorf held that franchisors must present data and information sufficient to permit the franchisee to create a realistic forecast of the profitability of the proposed franchised business. The franchisor need not provide calculations for profitability, but it must provide relevant and current data; old data is not sufficient. The courts will hold experienced franchisors to a higher standard, requiring more information from more experienced franchisors.
A franchisor considering entering the German market should be well aware of these pre-contractual obligations, despite the fact that Germany has no statutory franchise law.