Franchise Agreements in Luxury Goods Sector
Introduction
A popular business model for expanding market reach and brand recognition worldwide is franchising. Despite being less common than distribution agreements in the form of mono-brand store agreements, franchising is another significant method for extending luxury brands' distribution networks. Luxury brands use franchising as a strategy to enter new markets as they benefit from the expertise and market knowledge of local partners. The foundation of franchising relationship is the franchise agreements. This article explores the franchise agreements in general, main obligations of franchisor and franchisee, how they differentiate in luxury franchising and expiry and termination of franchise agreements.
Franchise Agreements in General
There is no regulation governing franchise agreements nor a definition of franchise under Turkish law. Parties may freely determine the terms and conditions of franchise agreements provided that they comply with applicable Turkish legislation mainly contracts law, commercial law, intellectual property law and competition law.
The 19th Civil Chamber of the Court of Cassation, in its decision dated 25.06.2001, defined franchise agreements as follows: "Franchising is a contractual relationship comprising a long-term and continuous business relationship between two independent parties arising from the privilege granted by the party having the franchise right of a product or service to the second party to carry out the transactions subject to the franchise right by providing information and support regarding the management and organization of the business within a certain period of time and within the conditions and limitations.”[1]
To put it more simply, franchise agreements are long-term commercial agreements, where franchisor provides franchisee with the right to use its trademarks, products and system in exchange for a fee and adherence to certain obligations; and franchisee, in return, agrees to operate a retail location in accordance with the franchisor's standards and guidelines.
Main obligations of a franchisor in franchise agreement are: (i) to inform franchisee regarding its franchise system and terms and conditions of the franchise agreement before the execution of the agreement, so that franchisee can have a picture of its obligations, (ii) to provide the products and other related materials to the franchisee, (iii) to provide license to franchisee on the franchisor’s trademarks and trade name, (iv) to provide know-how, (v) to provide the franchisee with training and support, (vi) to provide ongoing marketing and advertising support, (vii) not to conclude any franchise or distribution agreements within the exclusive territory of the franchisee.
Whereas, franchisee’s main obligations can be summarized as: (i) to pay the initial fees and ongoing royalties (paid at the rate agreed by the parties based on franchisee's turnover), (ii) to protect the interests of franchisor and not to compete during the term of the agreement, (iii) to use best efforts to increase the sales of the franchisor’s products, (iv) to comply with franchisor's standards and guidelines, (v) to use franchisor's trademarks, trade name and products according to the franchisor's specifications, and (vi) to participate in the franchisor's training and support programs.
Characteristics of Luxury Franchising
In the luxury goods sector, franchise agreements are designed to ensure that the brand's image and reputation are maintained. The obligations of both the franchisee and franchisor may differ slightly in comparison to other sectors due to the luxury goods industry's distinctive characteristics, which include high-end products, exclusive branding, and a strong focus on the customer experience.
Luxury brands typically have strict marketing and sales guidelines, and may require franchisees to adhere to stringent standards. Franchisees must maintain a certain level of exclusivity and luxury experience for customers. Franchisees will need to invest more heavily in the interior design of their stores which results in higher amounts of initial investment compared to other sectors. Nevertheless, franchisor’s obligation to provide the franchisee with training, and to provide ongoing marketing and advertising support are heavier due to the luxury brand’s strict standards. As a result, franchisees should expect more frequent and stricter audit and inspections made by franchisor.
Although many luxury brands do not require any payment of royalty or fee, the royalties and fees paid by franchisees in the luxury goods sector are often higher than other industries, if requested by franchisor.
Furthermore, before Covid-19, most luxury brands did not have online sales and many of them still don’t have today. Thus, it is essential to determine under the franchise agreement whether the franchisee will be entitled to sell the products online. If so, franchisor’s guidelines regarding the web site design should be explicitly set out under the agreement as online shopping experience for customers is as important as physical store experience.
Expiry and Termination of Franchise Agreements
Franchise agreements usually have a set term. In the absence of any automatic renewal clauses, franchise agreement expires at the end of the term, unless the parties agree on extension of term. Termination clauses are generally drafted as one-sided, which only grants termination rights to franchisor in cases of material breach of the agreement by franchisee.
On expiry or termination of the franchise agreement, franchisee loses the right to use franchisor's system and intellectual property rights and must immediately cease operating the store, selling franchisor’s products and using intellectual property rights and know-how of franchisor; and return to franchisor all products, confidential information, guidelines and any other materials related to the products and intellectual property rights. Franchisee’s obligation to protect and not to disclose or use franchisor’s confidential information survives termination or expiration and continues for an indefinite term. In addition, whether franchisor will have an obligation to re-purchase the stocks of franchisee in cases of expiry or termination, should be explicitly set under the agreement.
Article 122 of the Turkish Commercial Code No. 6102 (“TCC”) sets out the indemnification claim of the agent in an agency contract. Accordingly, "If, after the termination of the contractual relationship, (i) the principal continues to derive substantial benefits from the new clients found by the agent, (ii) the agent, as a result of the termination of the contractual relationship, loses the right to the fee that it would have received if the contractual relationship had continued, for the work done or shortly to be done with the clients brought into the business by the agent, and (iii) the agent may claim an appropriate indemnification from the principal if, taking into account the facts and circumstances of the case, such indemnification is just and equitable." Article 122/5 of the TCC stipulates that this provision shall also apply to the termination of exclusive distribution and other similar permanent contractual relationships granting monopoly rights, unless it is not fair. Article 122/5 of the TCC constitutes the basis for the application of the rules regarding the agency's indemnification claim to franchise agreements, provided that the necessary conditions are met.[2] Nevertheless, whether the franchisee can claim indemnification in franchising for luxury goods should be examined very carefully in each concrete case, because luxury brands are world-renowned brands and the international reputation of the luxury brand is often much more important than the activities of the franchisee in acquiring new customers.
Conclusion
Franchise agreements in the luxury goods sector include a range of terms and conditions unique to this sector, such as strict brand guidelines, requirements for luxurious store fittings, and high minimum investment thresholds. Termination of these agreements can be complex and can lead to legal disputes. Therefore, agreements for luxury franchising should be carefully drafted and negotiated to ensure that the agreement facilitates the continued growth and success of both parties.
- 19. CC of the Court of Cassation, E. 2001/819, K. 2001/4917, T. 25.06.2001 https://www.lexpera.com.tr/ictihat/yargitay/19-hukuk-dairesi-e-2001-819-k-2001-4917-t-25-06-2001
- Yeniocak, Umut: Franchise Agreement, 1st Edition, Ankara, Seçkin, 2016, p. 142
All rights of this article are reserved. This article may not be used, reproduced, copied, published, distributed, or otherwise disseminated without quotation or Erdem & Erdem Law Firm's written consent. Any content created without citing the resource or Erdem & Erdem Law Firm’s written consent is regularly tracked, and legal action will be taken in case of violation.
Other Contents
The Turkish automobile and light commercial vehicle market left the 2000s behind with steadily rising sales figures and the 2010s with high and stable sales figures as well. In this period, the growth of the market was driven not only by high purchase power but also by easy access to credit and product diversity...
Turkish Commercial Code No. 6102 ("TCC") provides the right to exit from the company to the shareholders of limited liability companies and the right to squeeze out the shareholder from the company, unlike the structure of joint stock companies, with the exit and squeeze out institutions specially regulated for...
Turkish Commercial Code No. 6102 (“TCC”) preserves the rule that the board of directors shall manage and represent joint stock companies. The TCC regulates how the power of representation shall be exercised, the registration and announcement of the persons authorized to represent, the transfer of the...
Ordinary partnerships are regulated under Turkish Law between Articles 620 and 645 of the Turkish Code of Obligations No. 6098 (“TCO” or the “Code”). The Law defines an ordinary partnership contract as a contract where two or more persons undertake to combine their labour or property to achieve a common...
Merger and acquisition processes are one of the legal processes that most seriously affect the identities and legal status of companies. After the completion of legal, tax, financial and operational due diligence reports, the parties initiate the negotiation process in case they reach an agreement on proceeding with the...
In the decision dated 14.06.2022 and numbered 2019/149 E. 2022/894 K., the Court of Cassation General Assembly (“CCGA”) evaluated the theory of piercing the corporate veil in the context of the relationship between the guarantor and the borrowing company in a dispute arising from a loan agreement...
The European Union continues to be an important investment center for foreign investors. According to data from the European Commission's "Second Annual Report on the monitoring of foreign direct investment in the European Union", the European Union received €117 billion worth of foreign direct investment in...
Transfer of shares is arguably the first legal transaction that comes to mind among the legal transactions regarding the shares of a capital company, and the most common transaction in practice. However, the shares of a capital company may also be subject to various transactions, other than share purchase...
Law No. 6563 on the Regulation of Electronic Commerce (E-commerce Law or Law) has recently undergone a radical change in order to regulate the behavior of the players in the rapidly growing and developing e-commerce sector. The new regulations that came into force as of January 1, 2023 envisage important...
On 11 June 2021, the German Federal Parliament approved the German Supply Chain Due Diligence Act (Lieferkettensorgfaltsgesetz) (“Act”) which affects not only German entities but also their suppliers in foreign countries (including Turkish entities). The main focus of the Act, which entered into force on...
On 21 December 2007, the Federal Council approved the draft revision of the Swiss Code of Obligations, which also includes amendments to company law. On 28 November 2014, the Federal Council referred the draft revision for consultation. Following extensive discussions and a long enactment process, the...
The Turkish Commercial Code No. 6102 ("TCC") regulates maritime trade contracts under the fourth part of the fifth book of the Code. Among the types of contracts regulated in this section, the most frequently used contract in international maritime transport practice is the freight contract regulated under...
Prohibition on hidden income shifting is one of the most important issues that is broadly regulated under Capital Markets Law No. 6362 (“CML”). In conjunction with CML Article 21, which has a broader context than Article 15 of the abrogated Capital Markets Law No. 2499, another significant step has been taken...
As a result of developing commercial activities and large-scale investments, especially concluded in the fields of construction, energy and mining, companies are seeking to participate in these investments by uniting their powers and expertise to take advantage of financial opportunities together. This tendency...
The Turkish Commercial Code (“TCC” or “Law”) has enabled companies to apply different structural models and to implement new legal formations by including spin-off provisions to its Article 159 et seq. In accordance with the provisions of the law, companies may transfer a certain element, or elements, of their...
The International Federation of Consulting Engineers is a professional association established in 1913, known as the FIDIC (Fédération Internationale Des Ingénieurs-Counseils). Its members are duly elected from consultant-engineer associations of various countries, and membership to the association is...
Incoterms are a set of rules introduced by the International Chamber of Commerce (ICC) to explain the commercial terms that are widely used in international trade. The purpose of Incoterms rules is to facilitate and expedite international trade in a safe and secure manner...
The regulation applicable to all Turkish ports prepared by the Ministry of Transport, Maritime Affairs and Communications that entered into force after being published in the official gazette on October 31, 2012 (˝the Regulation˝), consolidates all the bylaws, regulations and instructions in a single Regulation...
As a rule, rights and obligations arising from an agreement have legal consequences only between the creditor and the debtor which are parties to the agreement. This principle is referred to as "privity of contract." In general, contracts for the benefit of third parties, where the fulfillment of an...
The rules of e-commerce, which grow and develop with the digitalizing world, are changing. E-commerce has become the driving force of the digital economy. However, considering the growth rate of e-commerce and the transformation it has undergone in a short time, it is obvious that some...
The dissolution of a company is a specific type of dissolution, which results in the cancellation of the legal personality which was gained by registration at incorporation. The specific proceeding which leads to the dissolution, and thus, the termination of a company upon the constitutive decision...
Companies in which shares or authority to manage is held by members of a family are considered to be “family businesses”. Family members can hold shares that control the company, as well as retain management authority. Having a family business means opportunity, security and income for...
Turkey ratified the Convention on the Contract for International Carriage of Goods by Road (“CMR”) in accordance with Act No. 3939 dated 7 December 1993, and the CMR entered into force in Turkey on 31 October 1995. In accordance with Article 1 / 1 of the CMR, the carriage of goods by road...
Ordinary partnerships are governed by Article 620 et seq. of the Turkish Code of Obligations No. 6098 (“TCO”). An ordinary partnership agreement is defined as an agreement whereby two or more persons undertake to join efforts and/or goods to reach a common goal...
The concept of disguised profit transfer in joint stock companies, in its broadest meaning, covers the transfer of company assets to related parties and may occur in different ways. This concept is regulated in detail under capital markets legislation...
Share subscription agreements, which are commonly encountered in start-up investments, set out the terms and conditions of an investor’s participation in a company as a shareholder by subscribing the new shares issued in a capital increase...
The electronic signature, which has the same legal consequences as wet signatures if it meets certain conditions, has taken its place in many legal systems and has enhanced commercial life. Although there are various types and applications in different legal systems...
INCOTERMS are a set of rules introduced by the International Chamber of Commerce (ICC) to explain the commercial terms that are widely used in international trade. The purpose of the Incoterms rules is to contribute to and facilitate the safe and swift conduct of international trade...