Franchising in Italy: the regulation of misleading and comparative advertising: the sanctions for franchisors

Advertising a franchise in Italy is subject to a complex legislation, aimed at ensuring the proper functioning of the market and competition. The applicable rules are different depending on whether the advertising is aimed at potential affiliates or end customers. Italian law adopts a very broad concept of advertising, which includes business plan and disclosure information to potential franchisees. Legislative Decree 145/2007 prohibits misleading advertising, i.e., advertising that misleads recipients or competitors, and undermines the economic behavior of the recipients. Comparative advertising is considered lawful by Italian law, under some specific conditions. The body in charge of applying the regulation concerning misleading and comparative advertising in Italy is the Competition and Market Authority (AGCM). The AGCM is an administrative, non-judicial authority and has penetrating powers. If the AGCM ascertains the deceptiveness of an advertising message, it can impose heavy sanctions, including pecuniary sanctions up to 500.000,00 euros. But there are additional, and perhaps more serious, risks which the franchisor can meet in case of an AGCM decision misleading advertising, such as damage of image and compensation of damages suffered by ex-franchisees.

1. How is advertising regulated in Italy

As for any other business activity, advertising – carried out according to traditional methods (off-line) or via the Internet (online) – is very important also in the franchising context.

In general, advertising promotion in franchising can have two different recipients:

• potential affiliates, who are attracted by the franchisor to join the franchise network;
• end customers (mostly consumers), to whom products are sold or services rendered by franchisees within the franchising network.

While the first form of advertising (the one directed to potential franchisees), is performed only by the franchisor, the second type of advertising (directed to end-consumers), can instead be carried out also by franchisees, usually under the coordination and direction of the franchisor, to ensure the need for uniformity of the franchise network and protection of the image of the network itself.

Advertising a franchise in Italy is subject to a complex and varied legislation, aimed at ensuring the proper functioning of the market and competition.

The applicable rules are different depending on whether the advertising is aimed at potential affiliates or end customers.

In the first case, since the (potential) franchisees are considered from a legal point of view as entrepreneurs (and not consumers), Italian Legislative Decree n. 145/2007 on misleading and comparative advertising between companies (B2B), applies.

To view the official Italian version of the Legislative Decree n. 145/2007, please click here. To receive an unofficial English translation of the Legislative Decree n. 145/2007, please contact us.

If, on the other hand, advertising is aimed at final customers, Italian Legislative Decree n. n. 206/2005 (Consumer Code), which regulates unfair commercial practices in relations between businesses and consumers (B2C), applies.

To view the official Italian version of the Italian Consumer Code, click here. To receive an unofficial English translation of the Italian consumer Code, please contact us.

2. What is considered “advertising” in franchising from a legal point of view

According to the art. 2, paragraph 1 of the Legislative Decree. n. 145/2007, “advertising” is “any form of message that is widespread, in any way, in the exercise of a commercial, industrial, craft or professional activity in order to promote the transfer of movable or immovable property, the provision of works or services or the constitution o the transfer of rights and obligations on them “.

Italian law adopts therefore a very broad concept of advertising, regardless of the means by which the advertising message is disseminated, provided that it is aimed at promoting a specific business activity.

In fact, according to Italian Law, in the franchising context constitute advertising not only advertising messages in the strict sense (such as slogans, flyers, brochures, banners, etc.), but also:

• business plans;
• disclosure information to potential franchisees pursuant to the Law. n. 129/2004 ;
• journalistic articles, if the advertising aspect is predominant on the informative one, from the point of view of the communication impact for the recipient.

 3. What characteristics must advertisement have in the franchise to be lawful

Article 1, 2nd paragraph of Legislative Decree 145/2007 provides that advertising must be:

• overt;
• truthful;
• correct.

These characteristics must be present in the advertisement since the first contact with the recipient. The business communication must therefore be clear and complete from the beginning, regardless of whether the recipient can learn further items later, by referring to other information sources.

It follows that a misleading advertising (see par. 4) is not remedied by the fact that subsequently, during negotiations, the potential franchisee receives disclosure information  by the franchisor, pursuant to the Law n. 129/2004.

Art. 5 of the Legislative Decree 145/2007 also provides that advertising must always be “clearly recognizable” as such, and that advertising in the press must be distinguishable from other forms of communication to the public, with graphic modes of clear perception.

The recipients of the advertising message must therefore be allowed to recognize the promotional and non-independent nature of the same, so that a sufficient critical reaction and attention threshold is activated.

This rule may provoke critical issues about online advertising messages, due to the particular ways in which they are sometimes widespread. For example, banners can cause problems when their characteristics are such as to generate confusion with the context in which they are present.

4. Misleading advertising according to Italian Law

Article 2, lett. b) of the Legislative Decree 145/2007 prohibits misleading advertising, defined as “any advertising that, in any way, including its presentation, is likely to mislead individuals or legal entities to whom it is addressed or that it reaches and that, due to its deceptive nature, may affect their economic behavior, or that, for this reason is likely to harm a competitor “.

To view the official Italian version of the Legislative Decree n. 145/2007, please click here .To receive an unofficial English translation of the Legislative Decree n. 145/2007, please contact us [link a: https://franchisinginitaly.com/contacts/].

It is therefore considered as misleading the advertising message that, in any way, including its presentation (way in which the message is inserted in the newspaper or website, etc.), and independently of the intent of the operator (i.e., objectively), is suitable to:

• mislead recipients or those who reach (therefore also competitors);
• undermine the economic behavior of the recipients, even if only potentially (i.e. regardless of whether the message produces damage).

Pursuant to art. 3 of the Legislative Decree n. 145/2007, in evaluating the deceptive nature of an advertising message it is necessary to consider:

• the characteristics of the goods or services (availability, nature, execution, composition, method and date of manufacture or performance, suitability for use, use, quantity, description, geographical or commercial origin, results that can be obtained with their use, results and basic characteristics of tests or checks carried out on goods or services);
• the price or manner in which it is calculated and under the conditions under which the goods or services are supplied;
• the category, qualifications and rights of the advertiser (identity, patrimony, capacity, intellectual and industrial property rights, any other right on the company’s intangible assets and the prizes or awards).

5. Comparative advertising according to Italian Law

Comparative advertising is a way of advertising communication with which a company promotes its goods or services by comparing them with those of competitors, identified generically or specifically. Comparative advertising can be:

• direct, when the competitors are recognizable or by express mention of their name or brand (e.g.: “The car X is more comfortable than Y and costs less“), or by indicating elements that make it unequivocally recognizable (e.g.: “There are bananas only with the stamp and there are healthy bananas like Paquita“).
• indirect, when the person who attributes to his product unique qualities implicitly affirms that these qualities are not owned by all the competing products (e.g.: “The only silent car like the night“).

The comparison can be expressed through words or images able to obtain the same result, often more effectively.

Comparative advertising is considered as lawful when:

• it is not misleading;
• compare goods or services that meet the same needs or propose the same objectives;
• objectively compares one or more essential, relevant, verifiable and representative characteristics, including the price, of such goods and services;
• does not create confusion on the market between professionals or between the advertising operator and a competitor or between the brands, the trade names, other distinctive signs, the goods or services of the advertiser and those of a competitor;
• does not cause discredit or denigration of brands, trade names, other distinguishing marks, assets, services, activities or position of a competitor;
• for products bearing the designation of origin, it refers in any case to products having the same name;
• does not unduly benefit from the reputation of the trademark, the trade name or other distinctive sign of a competitor or the designations of origin of competing products;
• does not present a good or service as imitation or counterfeiting of goods or services protected by a registered trademark or trade name.

6. The Italian Competition and Market Authority (AGCM): role, powers, procedures

The body in charge of applying the regulation concerning misleading and comparative advertising in Italy is the Competition and Market Authority (AGCM).

The AGCM has powers that are very penetrating and far greater than those of a judge; it can in fact:

• access any relevant documents;
• ask anyone for relevant information and documents, with the right to sanction any refusal or transmission of false information and documents;
• carry out inspections;
• avail of the Guardia di Finanza (tax police);
• arrange appraisals;
• consult experts.

The AGCM is an administrative, non-judicial authority. Therefore, the AGCM is not a third party as a judge, and the person subjected to a proceeding before the AGCM has no right to full contradiction (as opposed to what happens in front of a judicial authority).

The AGCM is generally very fast in its proceedings, which usually terminate within six months from the beginning of the investigation (contrary to what happens in judgments before the ordinary judicial authority, which usually last several years).

The AGCM can be activated ex officio or following a complaint, which can be carried out by anyone interested (including franchisees and competing companies).

In the pre-investigation phase, if the Authority has reasonable grounds to believe that the advertising message constitutes misleading advertising or unlawful comparative advertising, but at the same time no particularly serious profiles emerge, he can invite the professional to remove the profiles of possible deception or illicit (moral suasion). If the professional adheres to the invitation, the file is archived.

The AGCM also files the complaint if no elements of deception emerge, also considering the scope of the message and the fact that the denunciation or the message are isolated and sporadic.

Otherwise, the AGCM starts the preliminary phase, giving notice to all interested parties and on the AGCM website. Any interested party may participate in the investigation (for example, other franchisees and former franchisees, competitors).

During the investigation, the interested parties can file defensive briefs and access the documentation, except for reasons of confidentiality (e.g., trade secrets). The person in charge of the procedure can arrange hearings of the interested parties.

During the preliminary investigation, the AGCM may order a temporary suspension of misleading or comparative illicit advertising, in case of urgency.

The company can, within 45 days from the reception of the communication initiating the procedure, present a commitment to put an end to the infringement, to stop the dissemination of the message or to modify it in order to eliminate the reasons for its illegitimacy.

The commitment is evaluated by the AGCM, which can propose amendments. If the AGCM accepts the commitment, it may not proceed with the investigation of the infringement. The AGCM can also oblige the company to publish the declaration of assumption of the commitment at its own expense. If the company does not implement the commitment, pecuniary sanctions are imposed, and the activity can be suspended up to 30 days.

However, the AGCM cannot accept commitments in cases of serious and manifest deceptiveness of the message or if the commitment is not considered suitable to remove the deception.

The AGCM may have – and generally has – that the trader will provide proof of the material accuracy of the actual data contained in the advertisement. If such proof is not provided or is deemed insufficient, the factual data are considered incorrect.

It is therefore necessary to pay particular attention from the outset to pre-establish documentation suitable to demonstrate the truthfulness of the information conveyed through advertising. In the case of economic data, objective evidence must have an economic/statistical value.

7. The sanctions that can be imposed by the AGCM on franchisors

If the AGCM ascertains the  deceptiveness of an advertising message, it can:

• prohibit the dissemination or continuation of the message;
• oblige the operator to make the decision of the AGCM public at his expense through the press, or via radio or television, or possibly through the publication of a specific declaration of correction;
• order the operator to pay a pecuniary sanction, which, considering the gravity and duration of the violation, may range from 5,000.00 to 500,000,00 euros. The penalty must be paid within 30 days.

If the emergency measures and the injunctions or the removal of the effects of the AGCM’s message are not respected by the recipients, the AGCM applies a further pecuniary sanction from 10,000.00 to 150,000.00 euros and, in the case of repeated violation of these measures or decisions, it can order the suspension of the business activity up to 30 days.

The quantification of the pecuniary sanction is based on several criteria set out in art. 11 of the Law n. 689/81, such as:

• the seriousness of the violation;
• the extent of the damage caused to the recipients (for example, the financial disbursement required to join the franchising network);
• the duration of the violation (if more than 1 month the violation is already serious, and increases with the increase in the period of diffusion of advertising);
• the mode of dissemination, the breadth and capacity for penetration of the message (if the message is disseminated via the Internet, it is likely to reach a large number of consumers, with consequent greater severity of the sanction);
• the work performed by the operator to mitigate or eliminate the infringement;
• the economic conditions of the operator (turnover);
• the qualities of the recipients (the penalty is more serious if the advertising is aimed at consumers or small entrepreneurs, such as the franchisees).

The AGCM decision can be appealed in front of the administrative judge (TAR – Consiglio di Stato). However, the TAR and the CdS can only check the mere legitimacy (violation of the law – excess of power), or the unfounded groundlessness of the decision of the AGCM in terms of the logic, consistency and completeness of the motivation. The merits, that is, the deception of the message is not evaluated.

For this reason, in most cases the TAR confirms the decision of the AGCM. Therefore it is advisable to appeal against the decisions of the AGCM only in the event of manifest groundlessness or illogicality of the AGCM decision.

Apart from pecuniary sanctions, there are additional, and perhaps more serious, risks which the franchisor can meet in case of an AGCM decision misleading advertising.

A ruling by the AGCM for misleading advertising in fact causes the franchisor a significant indirect economic damage, given by the commercial discredit and the damage of image resulting from the publication of the decision and the news in the media.

This type of damage can be very serious, because it can concern the entire franchise network, hinder its development and causing internal repercussions that can jeopardize its existence on the market.

There is also a further potential economic damage, consisting of the possibility of compensation actions before the ordinary judge.

In fact, the subjects who consider themselves damaged by the misleading advertising message (franchisees, former franchisees) can (as well as make a complaint to the AGCM), resort to the court before the ordinary judge, to claim compensation for damages.

In this case, the injured party (for example, an ex-affiliate) could demonstrate that misleading advertising has caused a defect in the formation of his will, determining the consent to the conclusion of the franchise contract (fraud or error).

Or, a competitor of the franchisor (e.g. another franchise network, operating in a similar sector) could demonstrate that the misleading advertising message constituted an act of unfair competition, pursuant to art. 2598 of the Italian Civil code.

Consequences of non compliance with the Italian Law on advertising 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.