Franchising in Switzerland
Franchising in Switzerland has become economically very important. Compared to other European countries, franchising had a rather slow start in Switzerland. During the last decade, however, it has become more popular and has shown considerable growth. In particular, small- and medium-sized companies have recognized the advantages that franchising systems offer. In addition to the entry of foreign franchise systems into the Swiss market, an increasing number of Swiss franchise systems are established every year.
Swiss contract law is very liberal, with few mandatory provisions, and thus offers parties ample freedom to tailor agreements to their individual needs.
There is no specific franchising legislation in Switzerland that would require or restrict certain terms in franchise agreements. Rather, under Swiss law, franchise agreements are governed by general contract law.
Swiss contract law is based on the principle of freedom of contract, meaning that the parties are generally free to agree on the terms of their agreement, both with respect to form and content. Freedom of contract is limited by a few mandatory provisions of Swiss contract law, some of which also apply to franchise agreements. Issues not addressed in the agreement have to be resolved by applying general contract law and the existing default rules for similar contracts.
The Swiss Franchise Association, by way of self-regulation, enacted a code of ethics for franchising. This code contains definitions as well as minimum standards for franchise agreements and guidelines with respect to disclosure. Although the ethics code is not binding law in Switzerland, it may be considered as best practice and should be taken into account by franchisors.
Registration and Disclosure
There is no obligation to register franchise agreements in Switzerland.
Based on general principles of Swiss contract law, a franchisor has a duty to disclose certain information to the franchisee before entering into a franchise agreement. The amount of information to be disclosed depends on the franchisee's level of experience and sophistication. The less experienced and sophisticated the franchisee, the more the franchisor has to disclose. Typically, the information to be disclosed includes the following:
- Description of the relevant market, as well as the products and services that are franchised;
- Details on how the franchisor and its business are organized;
- Description of the franchising package;
- Description of the franchisor's experience in the relevant field;
- Description of the franchisee's obligations;
- A copy of the template franchise agreement, including any annexes, or its material terms, which must be provided to the franchisee early in the negotiations; and
- Information regarding other sales channels of the franchisor for the franchised products or services.
If the duty of disclosure is violated, under Swiss law, the franchisee may, in certain circumstances, terminate the agreement and claim damages (not including lost profits).
Term and Termination
Franchise agreements are usually entered into for a minimum fixed term. Unless the parties agree otherwise, the agreements may not be ordinarily terminated during the fixed term. Franchise agreements without a fixed term may be terminated according to the agreement's termination provisions. Lacking a termination provision in the agreement, it is generally considered that a franchise agreement may be terminated with six months' notice.
Franchise agreements are long-term agreements. As such, they may be terminated without notice by each party for good cause. The right to terminate for good cause is mandatory under Swiss law. Good cause is assumed if serious circumstances (such as a fundamental breach of contract) make it unbearable for the terminating party to continue to be bound to the agreement. By way of example, if the franchisee conducts additional business not permitted by the agreement or repeatedly fails to pay the agreed fees, the franchisor could, as a rule, terminate the agreement for good cause without notice.
Damages for Unamortized Investments
Under Swiss law, it is disputed whether the franchisee may claim damages for investments that were made at the franchisor's request to the extent they are not amortized at the time the franchise agreement ends due to ordinary termination or lapse of the fixed term. No claim for damages exists if the agreement is terminated for good cause without notice by the franchisor.
The Swiss Federal Supreme Court ruled in a landmark decision that, under certain circumstances, exclusive distributors have a mandatory compensation claim for the client base built-up by the franchisee upon termination of the distribution agreement. The main prerequisites for such a mandatory claim are (i) the distributor was so closely integrated in the supplier's network that he was in a position similar to an agent, and (ii) the supplier substantially benefits from the customer base established or increased by the distributor. It is disputed in Swiss doctrine, and it has not been decided by the Swiss Federal Supreme Court yet, whether franchisees also have such a mandatory compensation claim if these prerequisites are met.
Franchise agreements typically contain a license of specific intellectual property rights (e.g., trademarks, patents, or know-how) to the franchisee. As for franchise agreements, there are no specific provisions and limitations for license agreements under Swiss law.
If registered intellectual property rights (patents, trademarks, and designs) are licensed in a franchise agreement, the agreements can (but do not have to) be recorded in the patent, trademark, or design register of the Swiss Federal Institute of Intellectual Property. For such a recordal of a license, there is no need to file the entire agreement. If, however, the license is not recorded and the licensor transfers the subject intellectual property to a third party, that third party will not be bound by the license agreement between the licensor and the licensee. Consequently, the licensee may lose its rights to the intellectual property.
Competition and Antitrust Law
According to Swiss competition law, agreements that significantly restrict competition in a market for specific goods or services and are not justified on grounds of economic efficiency, and all agreements that eliminate effective competition, are unlawful. Agreements may be justified on grounds of economic efficiency if they are necessary in order to reduce production or distribution costs, among other reasons.
Franchise agreements often contain provisions obliging the franchisee to purchase all or most supplies from the franchisor, to exclusively use the franchisor's marketing concept and corporate design, and/or to buy and use a certain infrastructure. Also, they frequently contain noncompetition clauses. In the context of franchising, however, such exclusivity and noncompetition clauses are generally justified on grounds of economic efficiency. These determinations are made on a case-by-case basis. Provisions directly or indirectly stipulating minimum and fixed prices for products are generally impermissible.
Andrea Mondini is a partner of Schellenberg Wittmer Ltd and heads the firm's Intellectual Property and Information Technology Group. His main areas of practice include intellectual property and unfair competition law. He also regularly advises clients on contractual matters such as distribution, franchising, licensing, R&D and technology transfer agreements. Raphael Meier is an associate of Schellenberg Wittmer Ltd. Robert A. Smith is a partner and chair of the Franchise Group at Wiley Rein LLP. Maureen A. O'Brien is special counsel 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