Background and Facts
The franchisee, a fitness studio operator in a franchise provided by the franchisor, informed its members of a price increase by posting a notice on the turnstile at the entrance of the studio. Members were required to pass through the turnstile to access the studio, and the act of passing through was deemed as implied consent to the new, higher price. If members did not accept the price increase, they were effectively barred from using the studio, even though their membership contracts remained valid.
Court’s Reasoning and Findings
The Augsburg Regional Court (decision dated October 6, 2023, case no. 81 O 1161/23) found that this practice constituted an aggressive commercial practice under Section 4a of the German Unfair Competition Act (Gesetz gegen den unlauteren Wettbewerb, “UWG”). The key issue was that members were forced to choose between accepting the price increase or losing access to the studio, despite their ongoing contractual relationship. This was seen as an impermissible exploitation of the studio’s position of power and a significant restriction of the members’ freedom of choice.
Franchisor’s Direct Liability
But this breach wasn’t that of the franchisee alone: The court also held the franchisor liable for the actions of its franchisee under Section 8(2) UWG. The court emphasized that the decisive factor was the close integration of the franchisee into the franchisor’s business organization. For example, the franchise agreements provided the franchisor with extensive influence over marketing, advertising, and corporate identity. Moreover, although franchisees were formally allowed to set their own prices in the case at hand, the franchisor retained the right to set maximum prices and benefited directly from price increases through a sales-based franchise fee.
The court further clarified that it was irrelevant whether the franchisor was aware of or had initiated the specific aggressive practice. What mattered was the franchisor’s ability to influence the conduct in question and the integration of the franchisees into its business organization. According to the court, it remains the responsibility of the franchisor to ensure compliance with the legal provisions by its franchisee.
Legal Implications and Recommendations
This decision highlights the far-reaching liability franchisors may face for competition law violations by their franchisees. It is therefore recommendable for franchisors to have their contractual arrangements with their Franchisees and the (actual) extent of their influence over franchisees reviewed and, if required, adapted. Such agreements should particularly contain adequate stipulations regarding marketing and pricing, as well as an obligation of the franchisee to indemnify and hold harmless the franchisor against any third party claims caused by conduct of the franchisee. Moreover, Franchisors should use their influence to ensure compliance with unfair competition law and to mitigate liability risks at the level of their franchisees.
Attribution: SZA Team
