Franchise Agreements in Luxury Goods Sector

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.