INNOVATION OR KNOW-HOW IN FRANCHISING ?

Guy GRAS – Eurocommerce SME Day – 21/10/2013 - Brussels

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Reminder of what the European Franchise Federation is

• A non-profit association created in 1972.

• An association bringing together 20 national franchise associations.

• An association promoting and supporting the development of ethical franchising in Europe.

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What is franchising ?

1 - A system of marketing goods and/or services through a network of SMEs.

2 - Agreements concluded between independent traders (a « franchisor » / several « franchisees »).

3 - A system based on the transmission to franchisees of an efficient « business package » belonging to a franchisor.

4 - The obligation, for franchisees, to respect and apply rules fixed by the franchisor.

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Franchising in the world

Franchise Brands(Estimate)

Franchise outlets/ points of sale(Estimate)

North America 4,000/5,000

830,000/840,000

Latin America 4,000/5,000

190,000/200,000

Asia 14,000/15,000

1,200,000/1,300,000

Pacific 1,500/2,000

90,000/100,000

Middle East / Africa 1,000/1,500

30,000/35,000

Europe 13,000/ 14,000 540,000/550,000 4

Source : National franchise associations from each country members of the WFC – Data consolidated by the EFF (August 2013).

Franchising in Europe: 3 keys figures

Number franchise brands/systems→Min. 13.000

Number of franchised POS/enterprises →Min. 540.000

Number of employees in the points of sales

→Min. 3.000.000

Generally speaking, when we talk about “franchising”:

We talk about “know-how”,

But we rarely speak about “innovation” and "transfer of technology"!

WHY ?

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1 - What is know-how in franchising ?

In Europe, know-how in franchising is the cornertone of the business system.

For example, in franchise agreements, provisions that are not justified by the implementation of the know-how are forbidden.

« The provisions of franchise agreements which are strictly necessary for the functioning of the system of franchise do not constitute restrictions of competition for the purposes of article 101 (1) of the treaty »(Pronuptia Case 1988)

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1 - What is know-how in franchising?

A know-how with two characteristics:

1 – An efficient commercial know-how:

Transmission of a competitive advantage in the market to franchisees.

A commercial know-how more and more complicated, increasingly expensive for the franchisor, and covers a large scope of different kinds of expertise (marketing, IT systems, communication, …).

1- What is know-how in franchising ?

2 - This commercial know-how is different from industrial know-how or transfer of technology.

The commercial know-how is not considered as transfer of technology.

Since the beginning, industrial franchise agreements have not been covered by the European regulation applying to franchising:

“ Industrial franchise agreements should not be covered by this Regulation. Such agreements, which usually govern relationships between producers, present different characteristics than the other types of franchise. They consist of manufacturing know-how, combined with trade-mark licenses.” BER 4087/1988.

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1- What is know-how in franchising ?

This situation was confirmed by the last European regulation in 2010:

«The exemption shall apply to vertical agreements containing provisions which relate to the assignment of IPRs, provided that these provisions do not constitute the primary object of such an agreement.» BER 330/2010

So, the agreements relating to IPRs are not covered by the regulation applying to franchising but by the BER 772/2004 relating to the technology transfer agreements.

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QUESTION

Does it mean that franchising does not promote innovation and not constitute a transfer of technology in the market ?

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2. What is innovation ?

Innovation goes far beyond R&D!

“It goes far beyond the confines of research labs, and extends to users, suppliers and consumers everywhere : in government, business, and non-profit organisations; across borders, across sectors, and across institutions”

(OECD Forum 2010)

Innovation is not limited to industrial innovation !

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The OECD (in its Oslo manual for measuring innovation) defines four types of innovation :

1 - Product innovation:A good or service that is new, or has been significantly improved. This includes significant improvements in technical specifications, components and materials, software in the product, user-friendliness, or other functional characteristics.

2 - Process innovation:A new or significantly improved production or delivery method. This includes significant changes in techniques, equipment and/or software.

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2. What is innovation ?

3 - Marketing innovation:A new marketing method involving significant changes in product design or packaging, product placement on shelves, product promotion or pricing.

4 - Organisational innovation:A new organisational method in business practices, workplace organisation, or external relations.

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2. What is innovation ?

3. What is innovation in franchising ?

• Concretely, the commercial know-how in franchising includes innovation as defined by the OECD :Product innovation: - development of new product adapted to the market

Process innovation- development of new commercial techniques for cross-channel or multi-

channel business models

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3. What is innovation in franchising ? • Concretely, the commercial know-how in franchising includes innovation as defined by the OECD :

Marketing innovation- new commercial promotions, determination of the right recommended prices

depending on the market,

Organisational innovation - new ways of selling flowers, pastries or chocolate in shops.

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Innovation in franchising is:The transformation of commercial knowledge into a business idea, creating added economic value in the market.

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3. What is innovation in franchising ?

•Legally, innovation in franchising is implicitly recognized in the European Regulation:

‘intellectual property rights’ includes industrial property rights, know how, copyright, and neighbouring rights” BER 330/2010

According to the guidelines of vertical restraints (pt189) :« 2.5. Franchising Franchise agreements contain licenses of intellectual property rights relating, in particular, to trade marks or signs, and know-how for the use and distribution of goods or services. In addition to the license of IPRs, the franchisor usually provides the franchisee, during the life of the agreement, with commercial or technical assistance.”

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3. What is innovation in franchising ?

So, my conclusion is a question:If the commercial know-how (including the notion of innovation) is at the heart of franchising;

If the know-how is included in the notion of IPRs;

If the BER, on vertical restraints, does not apply to agreements whose provisions on IPRs constitute the primary object of such a contract;

then, could franchise agreements possibly be regulated by the regulation applying to technology transfer agreements, and not by the regulation applying to vertical restraints ?

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Conclusion