New Italian franchise law

On 21 April 2004 the Senate, the upper house of the Italian Parliament, passed a new law regulating franchising in Italy. On 24 May, the new law was published on the Italian Official Gazette and, consequently, entered into force on 25 May 2004.

The purpose of the law is to introduce a clear definition and a general regulation of franchising in Italy and to grant a higher degree of transparency of the contractual relationship, by way of a preliminary disclosure of documents and information.

The general reaction of the business world to the enactment of the new law has been favourable. The Italian Franchising Association (Assofranchising), which during the past years has always monitored the long and difficult course of the bill, officially welcomed the approval of the new law during its last annual general meeting of 19 May 2004. According to the chairman of the association, the law is necessary and suitable to regulate a market that, in the past, generated abuses which damaged indiscriminately all the market players. In fact, not clearly lawful business enterprises have been undertaken too often under the name of “franchising” and consequently the association’s expectation is that the law will reduce such behaviours, opening the market only to serious franchisors.

The association has also welcomed the fact that the introduction of a register of franchisors operating in Italy, to be filed with the Chamber of Commerce, has not been included in the final version of the law, avoiding serious fulfilment for franchisors.

The definitive opinion of the association is that the law is “a good law that certainly will benefit the world of franchising, helping the growth of serious and well-developed business enterprises”.
According to the law, franchising is defined as a contract by which one party grants to the other, for a consideration, the use of a combination of intellectual property and/or industrial rights, know-how, technical and commercial assistance, as well as the opportunity to be part of a franchising network.

The franchise contract must be executed in writing, otherwise it is considered null and void.
The franchisor must have previously tested its own formula on the market.

The duration of a franchise contract must take into account the time necessary for the franchisee to recoup the investment and, in any event, must be at least three years, except for early termination in case of breach of the agreement.

The written contract must specify:

the exact amount of the franchising fee and of the franchisee’s investment
the method of payment of royalties and the determination of a possible minimum turnover to be guaranteed by the franchisee
an exact identification of the exclusive territory granted to the franchisee, if any
a description of the know how; a description of the services to be provided by the franchisor, such as technical and commercial assistance, planning and training
the contractual conditions relevant to the renewal, termination and the transferability of the contract
At least 30 days before the date of execution of the franchise contract, the franchisor must deliver to the franchisee a definitive draft of the contract, together with:

corporate information relating to the franchisor
when requested by the franchisee, the franchisor’s balance sheets for the three previous financial years
documentation relevant to the franchisor’s trade marks
description of the characteristic elements of the franchisor’s commercial system
a list of all the franchisees belonging to franchisor’s network, together with a list of the franchisor’s direct points of sale
an indication of any fluctuations in the number of franchisees during the previous three years
a concise description of any judicial lawsuits or arbitral procedures filed against the franchisor in the previous three years
Within 90 days from the date of entry into force of the law, a Ministerial Decree will be issued in order to clarify certain disclosure obligations related to foreign franchisors.

If one party provides false information to the other, the law expressly states that the latter may claim for termination of the contract and compensation for damages.

The law provides that in case of disputes, before filing suit or commencing arbitration, the parties may undertake to seek conciliation in accordance with the rules of the local chamber of commerce.
The law will be immediately applicable to franchise agreements to be executed after its formal enactment. A transitional period of one year for franchise agreements already in force which do not meet the new conditions is provided, after which all franchise contracts must comply with the provisions of the law.

The new law has been welcomed, on the whole. However, it remains to be seen how certain aspects of it will be interpreted by the Italian courts. For example, some networks cannot be considered franchising networks due to: the lack of one or more elements included in the definition of franchising; the duration and quality of the testing period; or the effective protection granted to franchisees in case of false or insufficient disclosure.

The global trend for governments to adopt franchise specific legislation continues unabated. The main emphasis of the new Italian law is upon trying to ensure that potential franchisees receive relevant information a reasonable time before committing themselves to the franchise.

It follows the example of both Spain and France. However, unlike Spain the Italian legislature decided, fairly late in the day, not to impose a registration requirement on franchisors. This may well be because of the failure of the Spanish franchise law in this respect. Not only did it take the Spanish authorities far too long to decide where franchise agreements had to be filed, but the complete lack of any policing or screening of the agreements that are registered has rather back-fired on those seeking to protect franchisees. By being able to register their franchise agreements with the government authorities, less scrupulous franchisors have now acquired a veneer of respectability.

The Italian law has been many years in the making and has finally seen the light of day due to various political alliances in the Italian parliament. The law should not present any appreciable difficulties for UK or other EU-based franchisors entering the Italian market so long as they take timely advice from experienced Italian franchise lawyers.

The Italian law is another timely reminder to UK franchisors that if they do not conduct themselves in an appropriate manner when recruiting franchisees, sooner or later they may find that the UK government follows the general trend. There have occasionally been suggestions that there is a need for an EU franchise law. Although this is not on the horizon yet, as more and more EU countries adopt such laws, an EU law becomes more and more likely.