The legal risk associated with the issuance of market statements in the dip

The distributor now only has to demonstrate an error on the part of the head of the network, even unintentional, to hope to see his distribution contract cancelled. It seems to us that a trend in case law in the same direction could flourish when it comes to market conditions.

From the analysis of this case law, we can draw three rules of conduct for the brand:

• establish complete, sincere and truthful market reports by adopting a methodological approach and a tool for building market reports (databases, ad hoc software) that make it possible to guarantee the sincere and complete nature of the report, or failing that, to have the wisdom to rely on marketing research professionals;

• not to issue the market research candidate, as soon as the level of its legal liability increases significantly and puts itself at significant risk of nullity of the contract if it could be established that the study was fraudulent, or more simply that it misled the franchisee on the profitability of the franchisee contract and contributed to the vice of the franchisee’s consent;

systematically

• ask the candidate to carry out his own studies, that is to say to analyse himself or better still with the help of his advice (completely independent of the brand which must not participate in the financing of the study), so that after having carried out his research, which must include elements allowing an analysis (list of the products and prices of the competitors, studies of car / pedestrian flows in front of the chosen location and those of the competitors, etc.), a conclusion and the determination of hypotheses of forecast activity; a copy of this study of the candidate must be given to the franchisor and placed in the file of the franchisee, who will then be able to hardly assert a vice of the consent by having conducted due diligence studies which go well beyond the level of information delivered by the brand in the state of the market.

It seems important to us to recall that judges make an analysis in concreto, that is to say on a case-by-case basis, taking into account the person, the experience and the knowledge that distributor has of its market.

Thus, for example, the level of requirement of the courts may be different depending on whether it is a future distributor with no experience in the sector concerned, or whether it is a renewal for a franchisee with several years of experience in the same market.

This means in practice:

• that the information provided may, if necessary, need to be reinforced for some of the future distributors of the network, devoid of any experience of the market in question, both with regard to the products and the geographical sector;

• that, on the contrary, faced with a more experienced candidate profile, evidence of previous experience should be kept in the candidate’s file (application file will include this experience, CV, etc.).

In all cases:

• the dip must in our opinion mention that a state is not a study and require the candidate to carry out his own study to complete his consent to the contract;

• the contract must include prior declarations that the distributor has itself carried out the analysis of the general market and the local market, that it has conducted its own study and determined alone the suitability of the characteristics of its market for the creation of its company.

How to define the scope of the market report?

Before being able to provide the distributor with a market statement, he must determine which market is concerned by his activity and therefore delimit its scope. Two elements make it possible to define the scope of the market state that a head end must provide to its distributors:

the substitutability of products and/or services, on the one hand; and the geographic market, on the other hand.

Regarding the notion of substitutability of goods or services, according to the general idea that emerges from the case law, two goods or two services are substitutable if they can meet the same need because of their characteristics, their prices, their quality and the use for which they are intended. In order to know whether two products or two services are substitutable or not, it is necessary, in principle, to place oneself from the point of view of the user or the consumer.

To carry out such an analysis, several criteria must be taken into account, in particular, the nature of the product or service, its function and its use. The question that must be asked in order to know if a product or service is substitutable for another is whether a consumer could replace the contracted product or service with another.

For example, a Porsche brand car would belong to the luxury car market and not just the car market. Indeed, a consumer wishing to buy such a car will acquire it for its sporty, comfortable and luxury qualities, and will not wish to buy, instead, a car with a modest engine dedicated to family transport, for example.

The concept of substitutability has been defined quite precisely in competition law, and the regime of this concept for the application of Articles L. 330-3 and R 330-1 of the Commercial Code can in our opinion be largely inspired by competition law to fill the gaps in the case law relating to these articles.

With regard to the geographical market, a distinction must be made between the local state and the general market state.

Decisions that address the issue of the local market either refer to the catchment area or use a geographical reference (the city, the contractual exclusivity area). It does not seem to us to be well fixed and it is not clear that there is a reference to a market that would be geographically relevant with precise rules for defining this market.

The definition of the local market is nevertheless important in that it is likely, once again, to imply a defect in the distributor’s consent.

For example, by limiting the local market state to the territorial exclusivity granted, the head of the network takes the risk of not citing in its state direct competitors of the distributor who would be in the catchment area or would create a strong commercial evasion, which could imply for the distributor a disappointment in terms of the number of customers and therefore in terms of its operating results. Typically, the example is that of the furniture distributor not mentioning in its local market state, the presence of an IKEA in a neighboring regional metropolis, 80 km away, which customers in the distributor’s catchment area do not hesitate to cross to source furniture from IKEA.

Conversely, if the local market presented in the state clearly goes beyond the distributor’s actual catchment area, it is led to believe that the number of potential consumers will be large, when in reality it will be much smaller in reality.

Thus, the assessment must be made on a case-by-case basis. If the catchment area is larger than the contractual exclusivity area, it seems prudent that the information presented covers not only the exclusivity area but also the catchment area. However, the assessment of its size must remain reasonable so as not to lead the candidate to believe that the market is significantly larger than it actually is. Thus, our opinion is that the local state should not necessarily be satisfied with presenting the exclusivity zone, but rather the geographically relevant market.

With regard to the general state of the market, again, no legal or regulatory definition exists.

However, the general condition can most often be defined as a presentation of the national market for the product or service in question.

Indeed, the regulation, the price positioning of products or services of the brand, the state of purchasing power in the country, that of competition, the cost of factors of production, are most often different from one country to another, so that it makes sense to present the market at the national level. This point has not been criticized by the judges to our knowledge.

What should a market report contain?

It is accepted that four categories of information must be transmitted to distributors in a market state:

• the request,
• the offer,
• the prospects for market developments;
• mentions of date and source of the information transmitted.

All this information must be limited to the previously defined market.

With regard to information on demand in the relevant market, reference should be made to consumer demand. From this point of view, it is necessary to take into consideration the objective characteristics of consumers, that is to say the characteristics in particular in terms of age, sex but also in terms of socio-professional category, if they are natural persons, or in terms of field of activity, turnover, if they are companies.

Thus, for example, in the women’s lingerie sector, the relevant information would be that relating to the gender of consumers (excluding men), age (depending on the qualities and prices of the products, women consumers will not be the same).

The toy sector would involve a presentation of the application defining  the targeted consumer, the child, but also having to take into account age and gender. By way of illustration, in the case of a doll, the request would be restricted to female children of a specific age.

It is therefore necessary for the head end to delimit precisely what is the typology of consumers specific to the products and services concerned by its activity.

Regarding the offer, it is necessary to make a statement of the products or services and the companies present on the market to distribute them, according to the existing distribution channels. We emphasize the need to clearly identify distribution channels.

To continue on the example of the sale of lingerie, it is necessary for the brand to list all the actors of the specialized distribution of lingerie, but without omitting the non-specialized distributors who can distribute on the territory, like supermarkets and hypermarkets, department stores or popular stores, but also distance selling companies (on catalog or online via websites), or even at home.

The market development outlook is to report on existing opportunities and threats to the development of the relevant market.

For example, if the relevant market is that of electronic cigarettes, the project of creating, by the State, a new tax on the sale of electronic cigarettes, would risk increasing the cost of these products and reducing the number of purchases by consumers, directly influencing, and in a negative way, the operating result of the distributor. As this tax may have an impact on the distributor’s operating result, this government project should be included in the market development prospects if it existed.

Even if the case law considers in this regard that the franchisor has only an obligation of means, and not of result, the fact remains that these prospects must be achieved rigorously, not be of poor quality or fanciful, so as not to vitiate the consent of the future distributor.

Finally, case law considers that the provision of too old information in the Pre-contractual Information Document contributes, once again, to vitiate the consent of the distributor.

The Market Statement must therefore contain the most recent information possible. Thus, it is important for the head end to date the information transmitted in the market report. The same reasoning must be adopted with regard to the sources of the information transmitted, and to update them as much as possible. A procedure for checking the update of the dip and the market reports must imperatively be put in place by the brand. This procedure will define the frequency of verification and who is responsible for it.

Ultimately, the control of the risk related to the local state depends on:

• the ability of the brand to integrate a production process thereof taking into account the requirements of case law, as set out above;
• of the brand’s faculty to require the candidate to study his local market effectively and seriously himself.

In a nutshell, the ball is in your court if you were to improve the process of refurbishing your dips on this point.