Franchising in Denmark
As a business format, franchising has experienced rapid growth in Denmark over the past decade. This growth is partly based on foreign franchise systems entering the Danish market, but also reflects the growth of Danish businesses expanding through the use of franchising. As an initial matter, there is no Danish law specifically governing franchising. However, a number of general rules of law are applicable to aspects of franchise systems and franchise agreements.
Disclosure and Registration
Under Danish law, there is no required pre-sale disclosure. However, it is common practice for franchisors to give potential franchisees an opportunity to review the franchise agreement with counsel or to provide franchisee candidates other relevant information. Similarly, there is no requirement that the franchisor register the franchise offering with any governmental body or that the franchise agreement be registered with any governmental body.
The overarching principle of Danish contract law is the principle of freedom of contract, including freedom of form and language. However, there are important exceptions and restrictions, which are included among others, in the Competition Act, the Marketing Practices Act, the Business Lease Act, and the Product Liability Act.
The basic rules of Danish contract law may be found in the Contract Act. Of particular note is a provision in the Contract Act that states that agreements may be changed or set aside if they are either unfair or contrary to honest conduct. Even though this provision is rarely applied between business partners, franchisees may contend that certain provisions of the franchise agreement should be modified as they are too one-sided.
Unless otherwise addressed in the franchise agreement, an assignment of the franchise agreement requires the agreement of all parties.
Competition and Antitrust
Since Denmark is a member of the European Union (EU), competition law in Denmark is heavily influenced by the competition rules of the EU. Among other things, Danish law prohibits agreements restricting competition and the abuse of a dominant position. Provisions mandating that franchisees purchase all or a high percentage of supplies from the franchisor may, depending on the circumstances, be subject to attack under Denmark's competition rules. Clearly, non-compete clauses also come within the scope of the competition rules. Generally, in-term non-compete clauses are permitted, but post-term non-compete clauses must be more limited. Post-term non-compete clauses limited to the premises of the franchise and a period of one year are presumed valid.
As part of the franchise relationship, franchisors grant franchisees certain intellectual property rights, such as licenses to use trademarks. There are no specific restrictions on the granting of licenses under Danish law, and the parties are free to determine questions of payment, duration, penalties, and other matters. Similarly, there are no requirements to file registered user or summarized license agreements with the Danish trademark office.
In addition to granting franchisees the right to use its trademarks, a franchisor provides franchisees its know-how (i.e., knowledge regarding business processes or practices). Although Danish law does not specifically define know-how, the Marketing Practices Act does provide some protection. The Marketing Practices Act protects trade secrets and technical drawings and includes a general standard protecting all conduct that is not in accordance with “good marketing practices.”
Product liability is a generic term used for claims that arise when a product causes damage to a person or property. Under Danish law, product liability is governed by the Product Liability Act, which is mainly based on the EU Directive on product liability, and case law from before the implementation of the Directive.
Under the Product Liability Act and the case law, any supplier is subject to the same product liability exposure as the manufacturer of the product. If one of the parties has to pay damages to a claimant, that party cannot validly be barred from seeking to be made whole by a party in the next level of the distribution chain or the manufacturer. However, a franchisor and franchisee may make provisions in the franchise agreement as to how product liability should be allocated between them.
Although the population of Denmark is less than 6 million, the high standard of living, the high level of income equality, and the low barrier to entry make Denmark an attractive country for foreign franchisors seeking to grow internationally.
Dan Bjerg Geary is a senior associate in the Aarhus, Denmark office of Gorrissen Federspiel. He acts for many Danish and international franchise systems and regularly advises about international expansion to Denmark. Robert A. Smith is a partner and chair of the Franchise Group at Wiley Rein LLP. P. Nicholas Peterson is an associate at Wiley Rein LLP.
You may also be interested in the other articles in Wiley Rein's International Franchise Development Series:
Franchising in India
Franchising in Italy