Franchising and e-commerce: can franchisors (legally) limit online sales and social media by franchisees?
E-commerce is increasingly supporting the traditional sales channels, represented by physical stores in the territory. For some years now, franchising has grasped the potential of e-commerce. However, due to its nature and its operating methods, e-commerce presents a series of peculiar problems with reference to the regulation of the relationships between franchisors and franchisees, and among franchisees. Can a franchisor prohibit franchisees from marketing products and/or services online, to protect other franchisees having exclusive territory rights? How the supply of goods and services made by franchisees can be regulated through their own websites? Can a franchisor prohibit a franchisee from using social media to promote his commercial activity?
1. Franchising and e-commerce
For some years now, franchising has grasped the potential of e-commerce. The major advantages of e-commerce can be identified in the most rapid affirmation and viral diffusion of the brand, in the possibility to reach virtually and at the same time a considerable mass of potential customers, anywhere in the territory, and, last but not least, in a considerable reduction of costs and investments to be made.
For these reasons, e-commerce is increasingly supporting the traditional sales channels, represented by physical stores in the territory. However, due to its nature and its operating methods, e-commerce presents a series of peculiar problems with reference to the regulation of the relationships between franchisors and franchisees, and among franchisees.
In fact, protection of a “physical” exclusive territory granted to a franchisee with a physical point of sale does not create particular problems; but operating in a franchise network with e-commerce, is very different.
Can a franchisor make franchisees sign a contractual clause prohibiting him from marketing products and/or services online?
Can a franchisee challenge his franchisor for the infringement of his right of territorial exclusivity, by having the franchisor signed a contract with another franchisee who operates online, if customers resident in his exclusive territory are contacted by the latter?
2. EC Regulation n. 330/2010 on active on passive online sales
To answer these questions, it is necessary to refer to EC Regulation n. 330/2010 on vertical restrictions on competition – and its subsequent Guidelines – which makes a fundamental distinction, as far as online sales are concerned, between active and passive ones.
Online sales are considered passive when the franchisee offers goods and/or services on the web, without “actively” soliciting consumers to come to his website; this happens, for example, when a franchisee responses to unsolicited orders, or in general when he promotes his activity without specifically targeting at customers in a particular area, even if it happens to reach prospective customers outside his exclusive territory (and located in territories granted exclusively to other franchisees).
On the other hand, there is an active online sale when the franchisee carries out specific conducts aimed at attracting consumers to his website by sending them e-mails, or advertises the site widely, for example with hypertext banners or links on pages specifically intended mainly to certain groups of consumers.
Given the beneficial effects on competition – and therefore on consumers – online sales are, pursuant to the EC Regulation, allowed to all distributors, including those operating within franchise networks. Restrictions on the use of the Internet by franchisors are allowed only for active online sales made in territories, or aimed at groups of customers, granted exclusively to other franchisees.
Therefore, franchise agreements containing clauses that impose a ban on the franchisee from marketing the products and/or services online are prohibited by law. But a franchisee who enjoys a territorial exclusivity will not be able to contest anything to the franchisor who has signed an agreement with another franchisee who, while operating online, is limited to making passive sales.
The same Regulation then identifies cases in which there are specific reasons which, if adequately justified by the franchisor, allow limitations on online sales by network affiliates: for example, the need, for a luxury goods brand, to protect its own image that could be debased by an internet sale.
Under the terms of the EC Regulation, therefore, the right of a franchisee to advertise and sell the contractual goods and/or services through his website cannot be contractually excluded. However, franchisors can regulate, in the franchise agreement, the terms and conditions of use of the websites by the franchisees participating in the network, to protect their image and their distinctive signs.
Franchisors can also establish the contents and lay-out of the franchisee’s website, the purchase, by the franchisee, of an adequate stock of goods, as well as regulate the delivery times of the goods sold online, managing customer complaints for online purchases or the link to the website of the franchisor and/or other franchisees. These and other provisions, to be specifically included in the franchise agreement, are aimed at protecting the franchisor and his network, in order to ensure uniformity of image and the same quality standards of products and services, whether they are sold online or through traditional channels.
Finally, according to EC Regulation n. 330/2010, franchisors are not allowed to absolutely prohibit the franchisees from using e-commerce; the only allowed prohibition concerns active online sales, through which the franchisees specifically attract customers territorially located in an exclusive area of other franchisees. On the other hand, it is not allowed to limit passive online sales, such as the simple offer of products or services by a franchisee’s website.
3.The use of social media by franchisees
That said, the question arises whether or not a franchisor can prohibit a franchisee from using social media, or software platforms of third parties aimed at sharing information and/or content online, to promote his commercial activity.
Unfortunately, the EC Regulation does not clarify this point. Therefore, to answer the question we must refer to the general principles that can be inferred from the general rules governing franchising and e-commerce.
In fact, social media are a “virtual container” that operate under a name or rather a trademark other than that of the franchisor. Within this platform – think, for example, to Facebook or Google+ – pages named, for example, with the franchisor’s brand and the geographical connotation of the individual physical point of sale of the franchisee can be created and hosted.
As mentioned, only the franchisee’s active online sales can be prohibited by the franchisor: therefore, as regards the possible limitation of the use of social media, it should similarly be concluded that a franchisee can only be contractually precluded from using social media integrating active conducts. But are there cases in which the passive use of social media could also be prohibited or limited?
As it happens for marketplaces that group the goods of different sellers or different websites, in social media the franchisee’s “virtual showcase” is hosted on a site that is presented under a third party sign and/or brand.
According to the EC Regulation, even the online activity of the franchisee must be consistent with the franchisor’s distribution model; therefore, as it happens for physical points of sale, online media – whether it is a website, a marketplace or a social media – can be contractually regulated by the franchisor such as to protect its brand, its image and the uniformity of the service and business model of the franchise network.
This means that the franchisor, for example, can require the franchisees to respect a specific lay-out both for the creation of a website and for the creation of a page on a social media, neither more nor less than he can make franchisees, in their physical point of sale, comply with a lay-out, or the use of a specific furniture or specific methods of presenting products or providing services.
Finally: assuming that a franchisor cannot prohibit the use of social media by franchisees, can he prohibit the use of certain social media?
Starting from the assumption that franchisors can require the franchisees to conduct coherent with the image of the product and the distribution model of the franchise network, it can be reasonably concluded that they can prohibit the use of social media which, by content or by type of user to which they are addressed, are in contrast with the image of the brand/products/services or even demean their value.
From the above indications it can be easily figured out that issues concerning e-commerce and franchising are quite complex; lawful protection of franchisors’ brand and franchise network’s uniformity can be assured by addressing to a franchise lawyer having specific knowledge and experience in the field.
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.
