Some people say franchising doesn’t play a big role in Germany. A number of recent court decisions has proven the opposite. One of the hottest topics under German distribution law is in the focus again. In February 2015 the German Federal Court of Justice (Bundesgerichtshof or “BGH“) had to decide the highly debated question whether or not a franchisee may claim an indemnity for loss of clientele similar to a commercial agent upon expiry or termination of the franchise agreement. The decision brings some good news, but also some bad news for both sides.

Franchise systems have long become an important factor in the German economy. As a consequence, the need for clear rules governing such relationships is enormous. Unlike other European countries (such as France, Belgium and Spain), Germany does not have specific franchise laws. As a consequence, many legal aspects are still under discussion.

One of the hottest topics under German distribution law is currently in the focus. In February 2015 the German Federal Court of Justice (Bundesgerichtshof or “BGH“) had to decide the highly debated question whether or not a franchisee may claim an indemnity for loss of clientele similar to a commercial agent upon expiry or termination of the franchise agreement. Obviously, indemnity payments to a person one is no longer willing to work with are often painful. On the other hand the franchisor may benefit from the customer base developed by the franchisee. Disputes on the existence of an indemnity claim for the franchisee are therefore not unusual. The court decision was supposed to bring more clarity for both sides.

The bad news is: The court has not settled that burning question. The good news for the franchisee is that the decision strongly indicates that a franchisee may have an indemnity claim if certain requirements are fulfilled (details see below). The good news from a franchisor’s perspective on the other hand is, however, the clear message that the barriers for such indemnity claim by the franchisee are quite high. In particular in anonymous mass businesses with mainly walk-in customers it will in many cases hardly be possible to comply with the requirements set by case law, meaning that an indemnity claim will not exist in such cases.

Over the years, German case law has developed more or less specific rules for franchise relationships. It is settled case law that specific statutory rules governing agency contracts may in analogy also apply to other distribution relationships, including franchising, if the business relationship is more than a simple seller-purchaser relationship. In the case of distributors it is, for instance, settled case law that the distributor may claim an indemnity in the same way as a commercial agent if two conditions are met:

• the distributor is integrated into the distribution organisation of the principal, similar to an agent; and
• the distributor has the contractual obligation to disclose customer data to the principal upon termination of the agreement at the latest, which will allow the principal to continue the business with those customers.
• In the case at hand the BGH expressly left open the highly disputed question whether the same rules may apply to franchise relationships. According to the BGH that question did not need to be decided, as the second requirement was not fulfilled anyway, i.e. an obligation for the franchisee to transfer customer data to the franchisor was not provided in the franchise agreement. Interestingly, the franchisee was, however, obliged to return the premises to the franchisor who could then factually continue the business and benefit from the existing, mainly anonymous, customer base there. The BGH held that such factual continuity of the customer base is not sufficient to justify an indemnity claim. The court also rejected the franchisee’s argument that in such cases the transfer of customer data is useless or impossible, which should not discriminate the franchisee. According to the court the mutual interests are not comparable to the interests of agents and principles. Therefore, the agency rules governing the indemnity claim cannot be applied in analogy.

Only shortly before this decision, in December 2014, a Higher Regional Court (OLG Schleswig) had rendered a similar decision in another case. This may indicate the clear trend that courts will more and more apply stricter requirements to the existence of an indemnity claim outside agency relationships. Having said that, this does not mean that franchisors in the fashion and retail mass business can automatically lean back and relax. Courts will still consider the individual case. For the time being the safest way for the franchisor to avoid an indemnity claim will be to avoid any contractual obligation for the franchisee to disclose customer data to the franchisor. Vice versa, the franchisee will have an interest to agree on a corresponding obligation, which may, however, be nearly impossible in mass businesses. It should be noted that such disclosure obligation does not need to be explicitly stated in the franchise agreement to trigger the indemnity claim, but it is sufficient that the franchisee in fact discloses the information and the franchisor accepts it. With those principles in mind both sides have at least a certain level of certainty as regards their mutual rights, which is eventually good news for all.