Volume 6, Number 23, Page 2

Franchising and Antitrust Law in Venezuela

By Alfredo Zuloaga

The term franchise, is usually defined as “a [vertical] agreement whereby the owner of a trademark, commercial denomination or other distinctive marketing presentation (the franchisor) grants a license to a retailer (i.e. the franchisee) to use the respective trademark, commercial denomination or presentation, and to present their establishment in accordance with the distinctive elements or format associated with the franchisor.”1 Under such an arrangement, the franchisee continues to function as an independent business, assuming the relevant financial risks, while paying the franchisor agreed installments.

According to their classification under competition law, franchises are vertical agreements. Vertical agreements, in contrast to horizontal agreements, are defined as agreements between parties operating at different levels of the production or marketing chain. They generally refer to opposing interests, such as those of a seller and a buyer.

The objective of this article is to comment on the treatment afforded to franchises by Venezuelan law, both in terms of community antitrust law (I); and internal legislation, considering the Law for the Promotion and Protection of the Exercise of Free Competition (Procompetition Law)2 and its regulations (II).

I. Franchising Under Community Antitrust Law

Under community law, franchise agreements are covered by Article 85 of the Rome Treaty,3 which prohibits agreements between companies that restrict competition. The treatment afforded to franchise agreements under Article 85, specifically in subsection 85.1, is vague at best. Furthermore, some of the characteristics or peculiarities of the franchise agreement, at least in abstract terms, conform to the conduct specified as anti-competitive by Article 854, namely:

i) establishing sales prices recommended by the franchisor, which conflicts with the prohibition against “directly or indirectly fixing prices and other marketing conditions…”;

ii) exclusive supplying, as this defeats the principle of not “limiting production” or “distribution”; and,

iii) territorial exclusivity, as this is at odds with the prohibition of “partitioning markets, territorial areas…”

The treatment afforded to vertical agreements by norms and laws is largely based on the regulation of contractual clauses and their possible anti-competitive trends. The European Community (EC) Justice Court found that “all franchising systems cannot be deemed to be restrictive of competition,”5 embodying a more flexible trend with respect to the issue as defined by community law.

Recently the Justice Court seated in Luxembourg to “carefully examine the economic context of the agreement and the functionality of each arrangement with respect to the underlying objectives.” In this sense the Court reveals a certain fondness for the franchise agreement by reason of its capacity to stimulate small business, improve distribution and ultimately promote public interests.6

In fact, the first case in which the Court had occasion to review the franchise issue was Pronuptia de Paris, where it was established that franchise agreements were not “too restrictive” of competition. Additionally, the impact of Article 85.1 on the various clauses of the agreement was analyzed.7 On the basis of the analysis developed in this ruling, the EC Commission adopted its first decisions on this subject-matter,8 which constitute a reference guide to determine the sort of clauses that may conflict with Article 85.1.

These were times of experimentation on the part of the EC Commission. On the one hand, the EC Commission attempted to draw up new regulation. On the other, it created solutions directed to establishing exceptions to franchise agreements subject to the prohibitions provided by Article 85 (referred to above) in a series of pilot processes covering the various areas of the agreement.9 It did not take long for this process to lead to the exemption by category granted to franchise agreements under Community Regulation 4087/88.10

II. Franchising Under Venezuelan Legislation

Venezuelan free competition legislation, as mentioned above, is strongly influenced by Community antitrust law, which explains the similarity between it and the evolution of franchising in Venezuela, explained in the preceding section.

Article 18 of the Law specifically establishes the need to consider exceptions and allowed-practices regimes to reaffirm the precise prohibitions contained in Chapter II and the case posed in Article 10,11 which in spite of formally restricting competition, does provide economic efficiency. The lawmaker included “exclusive territorial representations and franchises” among these practices (Article 18.3 of the Procompetition Law).

Nonetheless, and in view of the confusing language of the Article in question,12 Decree No. 277513 was enacted, which contains Regulation No. 1 referring to the authorizations and exceptions regime. This Regulation served to develop the aforementioned Article 18.

The Regulation, identifies practices prohibited by Law that may be authorized for reasons of economic efficiency and also establishes categories for practices that may be subject to global exceptions.

Global exceptions are general authorizations for certain categories of agreements which follow, among others, the following principles:

i) exemptions by category shall not be applicable by any means when failing to meet the conditions required by the relevant regulation;

ii) should the agreement contain clauses not covered by the exemption regime, it is these clauses that are affected by the specific prohibition in question, and not the overall agreement; and,

iii) agreements benefiting from an exemption by category do not require authorization.

The Superintendency has issued its opinion in respect of Article 18, stating the following:

“The Law, in conformity with its Article 18, allows the performance of certain practices restrictive of competition, considering their contribution to economic efficiency and the advantages they offer consumers of goods or service users. Therefore, the practices permitted under the exceptions regime may be subject to authorizations, provided evidence exists of their beneficial effects. This evaluation is what is known in other jurisdictions as a rule of reason, whereby possible restrictions of competition derived from the performance of the practice are to be weighed against the beneficial effects their performance could have in terms of economic efficiency. This is the case, for instance, with certain multilateral practices such as the execution … of agreements for the exclusive distribution of products at a given marketplace.

This means that the Superintendency is left with the task of performing an empirical evaluation, following the criteria and conditions established in Regulation No. 1 of the Law, an instrument which in addition to enhancing and developing the parameters for authorization of Article 18 of the Law, identifies the anti-competitive practices subject to the exceptions regime and, accordingly, to the “rule of reason”, and those which cannot ever be allowed to be performed, as in practice they could not by any means meet the purposes of economic efficiency and other requirements established by Law in this sense”14

It is therefore clear franchise agreements are to be deemed vertical agreements that “increase the level of efficiency in the production and distribution organization, where the beneficial effects derived from such economic efficiency for the development of the relevant goods or services and, accordingly, for the consumer, are substantially greater than the relevant competition-hindering effects.”

In view of the foregoing, Article 4 of Regulation No. 1 of the Procompetition Law, which builds on Article 18, provides that “the following practices do not hinder, restrict, falsify or limit free competition in the relevant market” including the non-exclusive grant of territorial representations included in non-exclusive sale or distribution contracts, and franchises which not prohibit trade in other products.”

Article 16.7 of the Regulation in turn allows the possibility of establishing global exceptions against franchising, in providing: “The Superintendency may exempt categories of practices and conduct that are destined for, among others, the following: (omissions) 7.- The granting of franchises.”

By reason of the foregoing, once a specific global exception for franchise agreements is issued, (currently being prepared by the Superintendency) the same shall no longer require authorization. The exception is expected to specify the aspects thereof that could tend to be used to eliminate rivalry and, therefore, to elude the application of the Law.15

At the same time, global exception of franchises should indicate the following:16

i) what restrictions apply to the exception;

ii) a white list, with clauses which, due to their harmlessness, may be included in the agreement without their constituting a waiver of the exemption; and those which hinge on their being necessary to protect the industrial or intellectual property rights of the franchisor, or to maintain the common identity and reputation of the franchised network;

iii) a black list, with such clauses that, due to their hindering of competition, imply a waiver of the exemption, meaning that they cannot be included in the agreement; and,

iv) an opposition procedure, to allow the regulating authority to oppose any given agreement within a set term.

Alfredo Zuloaga is a specialist partner of Torres, Plaz & Araujo and a Professor of Administrative-Economic Law at the Universidad Central de Venezuela.

1 BELLAMY, Christoher & CHILD, Graham, Competition Law at the Common Market, Civitas, 1992, Page 363.

2 Extraordinary Official Gazette No. 4.353, dated December 30, 1991.

3 It should be noted that the Procompetition Law is based on Articles 85 and 86 of the Rome Treaty, and on the subsequent development thereof at the community seat. The difference between the two Articles stems from the fact that Article 85 refers to bilateral or multilateral behavior that is restrictive of competition, while Article 86 refers to unilateral behavior, such as the abuse of a dominant position.

4 The aforesaid Article 85 prohibits agreements between companies that constrain free competition, specifically those consisting of: a) setting purchase or sale prices; limiting or controlling production or distribution; market partitioning; applying unequal conditions to equivalent work and demanding supplementary work. It also mentions that the agreements in question are invalid. Finally, in a third indent, it provides the possibility of an exemption for any agreement representing an economic efficiency, for instance, by improving the production and/or distribution of the relevant products or services. In this sense, see GALAN, Jose Luis, and DIEZ, Enrique Carlos, Franchise Practices, Editorial McGraw Hill, 1998, pages 158 and 159.

5 FRIGNANI, PARDOLESI, et al., Diritto Antitrust Italiano, Zanichelli, 1997, page 287.

6 See FRIGNANI, op. cit., page 287.

7 The Decision of Pronuptia de Paris was issued in resolution of a prejudicial matter presented to the Court by a German Tribunal hearing litigation presented by a franchisee seeking not to pay an installment claiming that the franchise agreement establishing such payment contradicted Article 85.1 of the Rome Treaty and, accordingly, should be ruled null and void. See BELLAMY, op. cit., pages 363 and 364.

8 Pronuptia de Paris (12/17/86), Ives Rocher (12/17/86) and Computerland (7/13/87).

9 In this sense, see FRIGNANI, op. cit., page 287.

10 The said Regulation is effective as of February 1, 1989. In this sense, after the Pronuptia decision, the Commission began to study the feasibility of enacting a regulation for exemptions by category, applicable to franchise agreements, upon the basis of the analysis of the precedents referred to herein, in addition to other more frequent ones such as Service Master (11/14/88) and Charles Jourdan (12/2/88).

11 Article 10 of the Law prohibits: “agreements ... or arranged practices destined for: 1.- directly or indirectly fixing prices and other marketing and service conditions; 2.- limiting production, distribution and the technical or technological development of investments; 3.- partitioning markets, territorial areas, supply sectors or sources of provisions among competitors; 4.- applying different conditions for equivalent work; 5.- subordinating or conditioning the execution of agreements on the acceptance of supplementary work”.

12 See DE LEON, Ignacio, Venezuelan Free Competition defense norms, Revista Fundacion Procuraduria General de la Republica. No. 9, 1994, pages 339 and 340.

13 Official Gazette of the Republic of Venezuela No. 35.202, dated May 3, 1993.

14 Case: Gases Industriales, Superintendency Resolution No. 028/93, dated November 15, 1993, pages 18 and 19. In this sense, see BREWER-CARIAS, Allan, et al., Law for the Promotion and Protection of Free Competition, Editorial Juridica Venezolana, 1996, pages 83 and 84.

15 See GONCALVES, Maria Odilia, Franchises: facing a free competition market, essay reviewed in mimeographed draft, Page 15.

16 These basic components are based on the structure of Regulation 4087/88 which, as mentioned above, contains the exemption by category for franchises within the community regime. For a comprehensive review of the regulation, see BELLAMY, op cit., pages 269 to 376.