The transmission of know-how: A decisive element in the qualification of the franchise agreement

The transmission of know-how from the franchisor to his franchisees characterizes the very essence of the franchise operation and serves to distinguish it from other distribution schemes (not to be confused with “selective distribution”, for example). Several Courts of Appeal have thus clarified the scope of the franchisor’s obligations with respect to the transfer of know-how.

The concept of franchise

Franchising is defined as an agreement that includes “licenses of intellectual property rights, including trademarks or distinctive signs and know-how for the use and distribution of goods or services[1]”.

The purpose of a franchise agreement is to allow a franchisee to implement a know-how associated, on the one hand, with the provision of distinctive signs and, on the other and, with commercial and/or technical assistance.

The notion of know-how

The franchisor’s know-how is defined as “a package of non-patented practical information, resulting from experience and testing by the franchisor, which is secret, substantial and identified[2]”.

By « secret » it must be understood that the know-how will generally not be known or easily accessible;

The “substantial” nature of the know-how means that it must be “significant” and “useful” to the franchisees who will be able to use it in the re(sale) of products and/or services covered by the franchise agreement;

Finally, the term “identified” means that the know-how must be described in a sufficient manner to verify whether it meets the conditions of confidentiality and substantiality. 

The words « experienced, renewed, profitable and lawful” may also be used to describe the franchisor’s know-how. However, they are complementary and not strictly necessary to the qualification of the agreement.

The transfer of this know-how is essential for the qualification of the agreement as a “franchise agreement” and justifies in particular, the payment of entry fees and royalties by the franchisee(s).

In a nutshell, the know-how is a set of commercial, technical, logistical, informatic and/or management methods (…) tested and experimented by the franchisor. This know-how is difficult to access by someone outside the network, provides a competitive advantage and is identified/written down in an operating manual (also called “bible”).

The transmission of know-how & obligations of the franchisor

In practice, the transfer of know-how from the franchisor to the franchisees often results in training obligations and technical and/or commercial assistance.

Therefore, a training obligation in the contract, insofar as it allows the transfer of know-how, will be decisive for the qualification of the agreement as a “franchise agreement”.

A Court of Appel [3]was able to note, with regard to a two-day training session included in an agreement improperly referred to as a “concession contract”, that:

(…) by this training obligation, the company (…) undertook to transmit its know-how in the field of air conditioner disinfection and cleaning; because of this transmission of know-how, the contract must consequently be qualified as a franchise contract and not as a service concession contract or a selective distribution contract”.

It follows that know-how and its transmission are indeed decisive elements in the qualification of a “franchise contract” (and therefore distinguish it from other “related” contracts).

It is to be noted that a “technical” training, which could have been acquired through practice and/or experience, cannot characterize a know-how as described above.[4]

Modification and/or improvement of the know-how during the execution of the contract

The Paris Court of Appeal [5]considered that the franchisor was not required to make available to its franchisees a “technological evolution” since it was not included in the know-how.

Technological evolution (such as the development of a mobile application for online ordering), not integrated into the know-how, does not oblige the franchisor to transmit it to its franchisees.

If, on the other hand, this technological evolution were to be considered as an update of the know-how, the franchisor would then be obliged to transfer it to the franchisees of his network.

Particular attention must therefore be paid to documenting and securing your know-how (to be set apart from other information transmitted within the framework of an agreement, whether confidential or not) and your activities, as well as when entering into contracts with your partners.

Indeed, it results from several decisions that the transmission of a know-how is likely to lead to a requalification of your contracts, independently of the titles which would be attributed to them.

The lack of transmission of your know-how could therefore lead to the requalification of your franchise agreement as a simple license agreement, for example.

Such a requalification would have serious consequences, particularly in terms of obligations and responsibilities.

REGIMBEAU has a competent and experienced Contracts, IP Valuation & Data Department and is at your disposal to discuss this matter.

[1] Guidelines on Vertical Restraints of June 28, 2022

[2] Definition of the EU Regulation 2022/720 of the Commission of 10 May 2022

[3] Court of Appeal of Aix-en-Provence ch. 3-1, Sept. 23, 2021, n° 18/02584

[4] CA Poitiers, November 24, 2020 n°19/02311

[5] Court of Appeal of Paris – Pôle 05 ch. 04 – November 24, 2021 n°18/14501

Published by

Marion Jouy

Legal Counsel Contracts & IP