Disclosure to potential franchisees: what it is provided for by Italian Franchise Law
Not differently from other foreign regulations, Italian Franchise Law imposes an obligation on franchisors – including foreign franchisors – to provide the potential franchisee with specific information on several items (duty of disclosure), at least 30 days before the signature of the franchise agreement, in order to give a cooling-off period. If the franchisor fails to provide potential franchisees with the mandatory information, or if it provides wrongful or incomplete information, it is exposed to serious legal consequences.
1. The purpose of Italian franchise disclosure law
As it is well known, the phase preceding the closing of franchising agreements is particularly important, and for this reason it is usually regulated by the law, both in Italy and abroad. The purpose of this regulation is essentially to rebalance the situation of “information asymmetry” between the franchisor and the (potential) franchisee, which is typical of franchising relationships.
Despite the fact that franchise agreements are signed by parties who are both entrepreneurs, falling within the scope of the c.d. business-to-business relationships (B2B) – since franchisees are not considered as consumers under a legal point of view – the franchisor is usually an expert in the field and with experience, while the franchisee often does not have the appropriate knowledge and experience about the franchised activity.
Moreover, franchising contracts are usually characterized by an accentuated situation of dependence of the franchisee towards the franchisor, in consideration of the strong power of interference of the franchisor in the management of the franchisee’s enterprise.
Finally, a potential source of vulnerability of the franchisee comes from the investments it makes in view of the commercial activity, which are often highly specific and hardly convertible at the end of the relationship (sunk costs).
For these reasons, all franchise laws enacted worldwide impose, with some differences, an obligation on the franchisor to provide the potential franchisee with a number of information (duty of disclosure), pertaining to the franchise, to be given within a certain amount of time before the signature of the franchise agreement. Such obligation is aimed at ensuring that the future franchisee has all the elements useful and/or necessary to evaluate the content of the franchise agreement, in an appropriate period of time (cooling-off period).
Italian law on franchising it is not different from other disclosure laws in such sense. Italian Franchise Law is contained mainly in the Law n. 129/2004).
To view the official Italian version of the Italian Franchise Law, please click here.
To receive an unofficial English translation of the Italian Franchise Law, please contact us.
2. The disclosure obligation for foreign franchisors in Italy
According to Italian Franchise Law (Law n. 129/2004), any franchisor must provide aspiring franchisees, at least 30 days before signing the franchise contract, with the complete copy of the contract to be signed, i.e. a document containing all the clauses constituting the franchise agreement, including those relating to the essential elements of the contract (investments, royalties, furniture, hardware/software equipment, purchase of products, training etc.).
This means that all potential franchise candidates must receive, at least 30 days before signing the franchise contract, the complete franchise agreement, including all investments that they will face during the franchise (entry fees, royalties, purchase prices, hardware/software equipment, purchase of products, training etc.).
Law n. 129/2004 also provides that before the signing of the franchese agreement, the franchisor must deliver to the aspiring franchisee some specific information. A special standard of disclosure is required for foreign franchisors who wish to enter into business with Italian franchisee or Master franchisee, as provided for by Min. Decree n. 204/2005.
You can view the official Italian version of the Min. Decree.
To receive an unofficial English translation of the Min. Decree, please contact us.
According to the Law n. 129/2004 and the Min. Decree n. 204/2005, foreign franchisors must provide prospective franchisees with the following information, in Italian language, at least 30 days before signing the franchise contract:
- the main data concerning the franchisor, including business name, share capital and, upon request by the prospective franchisee, a copy of its balance sheet for the last three years or from the date of commencement of its business, if it has been less than three years;
- the indication of the trademarks used in the system, with the details of the relative registration or of the deposit, or of the license granted to the franchisor by the third party, who may possibly own the same, or the documentation proving the concrete use of the trademark;
- a brief illustration of the elements characterizing the franchise;
- a list of the affiliates currently operating in the franchise system and the franchisor’s direct points of sale, divided by individual states; at the request of the aspiring affiliate, the franchisor is also required to provide a list containing the location and availability data of at least twenty operating franchisees, or the complete list of them if they are less than twenty;
- an indication of the change, year by year, and broken down by individual States, of the number of affiliates with their location in the last three years or the start date of the franchisor’s activity, if this has been done for less than three years;
- a description of any judicial or arbitral proceedings, brought against the franchisor and which have been concluded in the last three years, in relation to the franchise, both by franchisees and by private third parties or by public authorities, indicating at least the name of the parties, the judicial body and judgement.
The lists referred to in points d) and e) may also be provided electronically or published on the franchisor’s website.
At the request of the prospective franchisee, the foreign franchisor must also provide a list of at least 20 existing franchisees – or the complete entire franchisee’s list of less than 20 – containing the data relating to their location and contacts.
The franchisor has the possibility of not mentioning one or more of the above information, if there are “objective and specific reasons of confidentiality“, and provided that these reasons are mentioned in the franchise contract. Consider, for example, industrial or intellectual property rights, owned by the franchisor or third parties.
Finally, in addition to the mandatory information referred to above, the franchisor must provide the prospective franchisee with any other information or data that is necessary, useful or appropriate for the purpose of entering into the franchise contract, except in the case where such information is “objectively confidential or whose disclosure would violate third parties’ rights“.
In any case, the principles of fairness and good faith apply also to the prospective franchisee while dealing with the franchisor. The prospective franchisee shall provide the franchisor with any information necessary or appropriate for the purposes of the franchise agreement in a timely, correct and comprehensive manner, even if such disclosure is not expressly requested by the franchisor.
3. What happens if the franchisor is in breach of its disclosure obligation?
If the franchisor fails to provide potential franchisees with the mandatory information, or if it provides potential franchisees with wrongful or incomplete information, it is exposed to serious legal consequences.
Such consequences are not regulated by the Italian Franchise Law, but by general Italian law, particularly by the Italian Civil code.
Firstly, the franchisee may request termination of the franchise agreement, on the basis of mistake or fraud.
Secondly, the franchisee is entitled to ask for the restitution of all sums paid to the franchisee under the franchise agreement, as well as compensation for damages, if due.
Thirdly, the franchisor may face penalties for misleading advertising. The Italian Competition and Market Authority (AGCM) could in fact impose a pecuniary sanction on the franchisor, ex officio or on a franchisee’s request, which may be heavy.
In fact, failing to inform the potential franchisee as requested by the Italian Franchise Law, or providing the potential franchisee with false or incorrect information, is considered misleading advertising, and sanctioned as such by the Italian Antitrust Authority.
Consequences of non compliance with the Italian Franchise Law might be quite severe for foreign franchisors. Therefore, careful planning and adequate legal counseling from a local law firm is highly recommended.
Avv. Valerio Pandolfini
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The information contained in this article is of a general nature and is not to be considered an exhaustive examination of the various issues, nor is it intended to express an opinion or provide legal advice. Specific legal advice must be provided with regard to individual cases.