(end of April 2004) Italy became the latest nation to adopt a law regulating
the sale of franchises and the conduct of franchisors and franchisees. Two other
European countries, France and Spain, already have such laws.
law is principally a form of disclosure legislation, but with some provisions
that would normally appear in a relationship law. It imposes obligations
upon franchisees as well as franchisors and affects pre-contractual conduct as
well as the fundamental elements of the relationship.
The law had been debated
within the Italian parliament for more than a year, and the version which was
finally adopted underwent significant change during the course of debate and negotiation.
Those changes brought substantial improvements to international franchisors considering
entering the Italian market. But the law as adopted retains a number of troublesome
or problematic provisions which will likely prompt franchisors to give careful
consideration to the nature of the burdens imposed upon them. The Franchise and
Distribution practice group of Piper Rudnick LLP will shortly prepare a more detailed
examination of the new law. In the interim, this summary is designed to alert
our clients and colleagues to some of the more salient features of the legislation.
Changes Beneficial to International Companies
proposed, the Italian legislation would have prevented a non-European franchisor
from entering Europe via franchising in Italy. Any franchisor planning to do so
would have been required first to test its system in another European Union country
for a minimum period of time, with a minimum number of units, a portion of which
to be operated by pilot franchisees. Franchisors from the United States
and from other European countries joined those from Italy in arguing to legislators
that the proposal was manifestly unworkable; that it was treating other EU markets
like guinea pigs; and that it barred Italian consumers from access to the products
and services of well-known non-European franchisors. That proposal has been dropped
in the version as adopted.
The original provisions called for the franchisor
to provide a business plan forecast-based, if possible, on the experience
of franchisees in a similar position. Since few non-Italian franchisors
would be willing to forecast the experience in Italy based on the
experience of franchisees in a similar position elsewhere, this requirement
would have caused many franchisors to hesitate before entering the country. That
provision has been removed.
Among the required disclosures by a franchisor
to a prospective franchisee are a list of franchisees currently operating; information
on franchisees who have left the system; and information on judicial or arbitral
proceedings initiated against the franchisor both by franchisees and other private
parties, or by public authorities. Fortunately, however, the drafters have recognized
that this information is far more difficult to provide and, in the case of non-Italian
franchisors, of more attenuated relevance. As a consequence, the franchisor is
permitted to limit the disclosed information to its activities in the Italian
market. Within ninety days, a regulation will be issued outlining the information
to be required in the case of franchisors based elsewhere who have not previously
operated in Italy. This level of sensitivity to the different position in which
non-Italian franchisors find themselves reflects a greater sophistication and
appreciation of the realities of international franchising than was demonstrated
in the earlier debates on the legislation.
Aspects of the Italian Franchise
A principal provision of the new law is a requirement of pre-contractual
disclosure to prospective franchisees. The elements of disclosure are rather typical
and represent a selection of the more fundamental information required by traditional
U.S. disclosure laws. That list is considerably more limited than in the United
A second element of the law is a set of requirements as to provisions
of the agreement itself. In fact, however, these are largely of a disclosure
nature themselves. In other words, the requirement is simply that certain elements
of the relationship be explicitly articulated in writing. Thus, the agreement
must express the terms and conditions for renewal, termination or assignment,
if any. Few of these provisions will trouble experienced franchisors.
Law Also Raises Serious Questions for Franchisors
In a number of respects,
however, the new law raises questions and issues for franchisors. Among them:
is a strong suggestion that it will be necessary for a franchisor to acknowledge
that at least some portion of the know-how has been contributed by
the franchisee, perhaps presaging an obligation to accord to the franchisee certain
rights of ownership of that intellectual property.
- The franchisor must
guarantee the franchisee a minimum term which would allow the amortization
of the investment, but which in no event is less than three years. The notion
that there could be a much longer term required, and the ominous ring of the term
guarantee, will be offensive to many franchisors.
- There are
several passages in the law which impose obligations (on franchisees as well as
franchisors) of a rather vague nature; for example, the franchisor must
behave toward the prospective franchisee according to the standards of loyalty,
fairness and good faith.
- The information which must be provided
is not limited to that which is explicitly detailed in the statute. The franchisor
is required, in addition, to provide the prospective franchisee with any
data and information... necessary or useful. The open-ended nature of obligations
of this sort will surely be vexing to many companies considering entering the
The Law Applies Now
The statute will apply,
immediately upon publication in the Official Gazette, to all new contracts. Contracts
already in force must be made compliant with the statute within one year (although
much of the statute would appear to be inapplicable to existing agreements, since
directed at pre-contractual conduct).
Italy has created a major new law
for a major marketplace. There is much here for international franchisors and
their lawyers to study, and one can expect a stream of commentary to come.