Proposed Netherlands Franchise Law

Why franchising in the Netherlands could disappear.

By Carl E. Zwisler

For the last several years, committees assembled by the Netherlands government have been studying franchising issues there. At first, a group of franchisees developed a voluntary code of conduct for franchisors and franchisees.  Franchisors, who had not been involved in the process that developed it, largely, and emphatically, rejected that Code.  Then, franchisors were invited to participate in the development of a mandatory code of conduct. It, too, was rejected by the franchisor community and withdrawn from consideration. 

In late 2018, based upon a year of study, the Secretary of Economic Affairs and Climate Policy published a new proposal and requested comments by January 31, 2019.  That study resulted in the regulatory proposal described below.

Never has a study that was designed to further the understanding of franchising and to ameliorate the impact of a bad proposal resulted in suggestions that are far worse. How bad is it?  Every franchisee, and every representative group of franchisees (by a vote of 2/3 of the representatives), could refuse to accept and implement operational changes and contractual changes announced by the franchisor.  The right of rejection would apply, regardless of whether franchisees had given their franchisors the right to implement changes, and would apply to both existing and future franchise agreements.

How would franchisors adapt their franchise programs to take advantage of competitive opportunities and challenges?  How could franchisors deliver duties as trademark licensors to deliver a consistent consumer experience at franchised outlets when standards compliance is optional?  How quickly would the value of franchisors’ and franchisees’ investments in their businesses plummet? Those are only a few of the questions that should be addressed as the proposal is evaluated.

What's at Stake

Unfortunately, the right of rejection is only one of many problems with the proposal.  The draft code would also impose a duty on franchisors and franchisees to make ongoing disclosures to each other about all information “that they know or can reasonably suspect to be relevant or become relevant for the other party...[relating] to the performance of the agreement...” Unlike franchise disclosure rules in other countries, which usually require presale disclosure of specified material information by franchisors to franchisees, this is an ongoing, undefined and unlimited obligation.

Consider the types of information that might affect a franchisee’s performance of an agreement. It could be weather, new political leaders, proposed changes to taxes and tariffs, or interest rate fluctuation. The list goes on.

If that were not enough, franchisors also would be required to provide undefined “financial information regarding the intended location” of each franchisee’s business. Yet, franchisees residing in a location or who have negotiated leases for a location for their franchised businesses would likely know much more about the financial information than franchisors from different areas.

Manipulating Franchise Engagement

Franchisors would also be required to provide “substantiation of decisions [they make] that may have considerable financial consequences for the Franchisee.”  A duty to explain and substantiate every decision to do or not to do something is extremely burdensome, and it sets  franchisors up for lawsuits for making the wrong guesses regarding possible consequences of events. Every operational decision would seem to require disclosures similar to those typically contained in a US SEC prospectus, describing possible risks.

The proposal also requires a 30-day presale disclosure period, during which franchisees may negotiate changes that are for their benefit. Franchisors may not obtain any benefit for themselves as a condition of agreeing to changes requested by franchisees.

Another rule would be for franchisors to define how the “goodwill” of a franchisee will be calculated, and to compensate franchisees for “goodwill” upon termination or nonrenewal of their agreements. Some may see this as a compromise between camps that believe that upon termination or nonrenewal this entitles them to an “indemnity” payment. However, based upon its revenues generated and years of service to a brand, it is not clear that a franchisor could merely disclaim any duty to make a payment of a goodwill indemnity to a terminated franchisee, even when the franchisee has violated standards in its franchise agreement.

Undefined Problems

Although the legislation is more extensive than this brief summary suggests, it does contain one additional novel requirement: it requires franchisors and franchisees to be, respectively, “good franchisors” and “good franchisees.”  This requirement embodies a specific definition of what is considered “good,” as well as the risk of confusing what constitutes the characteristic.

When viewed as a whole, it seems that the Ministry has outlined a series of proposals to remedy unarticulated problems, and hopes that public comments will result in a “good” franchise law. Regrettably, the Ministry has not explained what problems it believes actually exist in franchising, which ones require new legal remedies, and how the new remedies proposed will accomplish their objectives in the manner that is least intrusive on business. As difficult as it might be to imagine how any stakeholders in franchising could support this proposal, the Ministry has said that it will present a revised proposal after reviewing the comments from January 2019.

The International Effect

Why is this important to all franchisors and franchisees? Foreign franchisors may be able to refuse to offer franchises in the future in the Netherlands if some version of this proposal is adopted. However, franchisors doing business there now may have difficulty extracting themselves from existing contractual relationships.

Although the Netherlands has a reputation of being a very pro-business environment, this proposal will alter that analysis for most franchisors. The impact of this proposal may extend far beyond the Netherlands. The European Commission is studying franchising, and the need for franchise regulation for the entire EU. It is studying unfair franchise practices and the need for remedial regulation. Thus, the Netherlands legislation could have an impact on other proposals in the EU or in its member countries. This is a disturbing proposal for everyone involved in franchising, and franchisors and franchisees alike should be aware of the international influence that could be at stake.

Carl E. Zwisler is Principal for Gray Plant Mooty. Find out more about Gray Plant Mooty here.