On April 21, 2004, the Italian Senate approved a franchising law that requires presale disclosure at least thirty days prior to signing a franchise agreement. It also regulates the rights and duties of parties involved in a franchise relationship.
The law establishes that a franchise agreement must be in writing. In addition, the franchisor must guarantee the franchisee a minimum term of not less then three years, except for cases in which an early termination occurs because of a breach by one of the parties.
The franchise agreement must indicate the amount of the investment and initial franchise fees; the method of calculation and payment of royalties; the scope of any exclusivity; the specifics of the know-how to be provided by the franchisor to the franchisee; the technical and commercial assistance, planning and training that will be provided by franchisor; and the terms related to renewal, termination, and assignment of the franchise agreement.
At least thirty days before signing the franchise agreement, the franchisor must deliver to the prospective franchisee a complete copy of the contract to be signed, with presale disclosure. This disclosure must include information concerning the key components of the franchise, including the trademarks to be used in the system; a summary of the activities and operations under the franchise agreement; a list of franchisees currently operating in the system and company-owned outlets; an indication of any change, year by year, in the number of franchisees for the prior three years; and a description of lawsuits filed related to the franchise system, commenced against the franchisor, and terminated during the last three years. At the request of the franchisee, the franchisor must provide a copy of the franchisor's balance sheets for the last three years, or from the beginning of its business activities, if less than three years.
The law will become effective the day after its publication in the Official Bulletin [Gazzetta Ufficiale]. This is expected to occur by June 2004. The law will become immediately binding for franchise agreements signed after the effective date of the law. For those franchise arrangements already in effect, the law mandates that within one year after its effective date, any unwritten franchise arrangements must be reduced to writing and any written franchise agreements must be amended to comply with the new law. A decree clarifying certain of the disclosure obligations is to be issued within ninety days of the effective date of the law by the Ministry for Production Activities.
An unofficial translation of the law is provided below.
Rules on the Regulation of Franchising
Article 1. (Definitions)
1. A franchise agreement is an agreement, under any name or form, between two legal parties, juridically and economically independent, whereby one party grants the other, for consideration, a series of industrial or intellectual property rights related to trademarks, trade names, utility models, industrial designs, copyright, know-how, patents, technical and commercial assistance or consulting, with the object of having the franchisee join a system consisting of a number of franchisees operating in the territory to market certain goods or services.
2. The franchise agreement can be used in any sector of economic activity.
3. In the franchise agreement, the following terms will have the meaning indicated: (a) "know-how" means a proprietary series of practical, nonpatented knowledge derived from the franchisor's experience and tests, which is secret, substantial, and identified; "secret" means that the know-how, considered as a composite of general knowledge or in a precise configuration and the composition of its elements, is not generally known or easily accessible; "substantial" means that the know-how includes knowledge indispensable to the franchisee for the use, sale, resale, management, or organization of the contractual goods or services; "identified" means that the know-how must be described in a sufficiently comprehensive manner to verify whether it meets the secrecy and substantiality criteria; (b) "entry fee" means a fixed amount related to the economic value and development capacity of the network, paid by the franchisee at the time of execution of the franchise agreement; (c) "royalties" means a percentage required by the franchisor from the franchisee, proportional to the business thereof or in a fixed rate, which must be paid, including in periodic fixed installments; (d) "goods of the franchisor" means the goods produced by the franchisor or according to its instructions and marked with the name of the franchisor.
Article 2. (Scope of Application of the Law)
1. The provisions related to the franchise agreement, as defined in article 1, also apply to the master franchise agreement whereby a company grants another, juridically and economically independent from the former, for a direct or indirect sum of money, the right to execute 3 of 6 franchise agreements with third parties as well as an agreement under which the franchisee, in an area available to it, establishes a space dedicated exclusively to the commercial activity referred to in paragraph 1 article.
Article 3. (Form and Content of the Agreement)
1. The franchise agreement must be in writing; otherwise it will be deemed null and void.
2. Prior to commencing a franchising network, the franchisor must have tested its business concept in the market.
3. Whenever the agreement is for a determined time, the franchisor must guarantee to the franchisee a minimum term sufficient to amortize the investment; this term shall not be less than three years, except for those cases where the agreement is terminated due to a breach by one of the parties.
The agreement must also expressly indicate: (a) the amount of the investment and possible entry fees to be incurred by the franchisee prior to commencing the franchised business; (b) the method of calculation and payment of royalties, and an indication of a minimum amount, if any, to be collected by the franchisee; (c) the scope of the possible territorial exclusivity granted to the other franchisees and in relation to channels and unit sales directly managed by the franchisor; (d) the specific character of the know-how provided by the franchisor to the franchisee; (e) possible methods of recognition of the contribution of know-how by the franchisee; (f) the details of the services offered by the franchisor in terms of technical and commercial assistance, planning and outfitting, and training; (g) conditions for renewal, termination, or assignment of the agreement.
Article 4. (Obligations of the Franchisor)
1. At least thirty days before signing a franchise agreement, the franchisor must deliver to the prospective franchisee a complete copy of the agreement to be signed, together with the following addenda, except for those covered by objective and specific confidentiality requirements, which must however be cited in the agreement: (a) relevant information concerning the franchisor, including the company name and registered capital and, at the request of the prospective franchisee, a copy of its balance sheet for each of the last three years or from the start-up of its business, if less than three years; (b) an indication of the trademarks used in the system, with information on their registration or application, or of the license granted to the franchisor by any third party that may be the owner thereof, or documentation proving the actual use of the trademark; (c) a summary of the activities and operations that characterize the activity being franchised; (d) a list of franchisees currently operating in the system and the outlet directly operated by the franchisor; (e) details of the change, year by year, in the number of franchisees with their respective location in the last three years or from the beginning of the activity of the franchisor, if less than three years; (f) a summary of court or arbitration proceedings in the last three years involving the franchisor and related to the franchise system and commenced by any franchisee or private third parties or by public authority in connection with the Italian regulations on privacy.
2. In the addenda referred to in (d), (e), and (f) of paragraph 1, the franchisor may limit itself to provide information concerning the activities carried out only in Italy. A decree of the Minister of Productive Activities will be issued within ninety days from the enactment of this law setting forth the information that must be supplied in connection with the provisions set forth in the aforementioned letters (d), (e), and (f) for franchisors who previously operated exclusively abroad.
Article 5. (Obligations of the Franchisee)
1. The franchisee may not move its headquarters, whenever indicated in the agreement, without prior consent of the franchisor, except in the event of a force majeure.
2. The franchisee undertakes to observe, and shall cause its own associates and employees to observe, including after the termination of the agreement, the maximum confidentiality in connection with the franchised business.
Article 6. (Precontractual Behavior Obligations)
1. The franchisor must exercise loyalty, fairness, and good faith at all times in its dealings with the prospective franchisee and must timely provide to the prospective franchisee any data and information it deems necessary or useful for the purposes of the franchise agreement, except in the case of objectively confidential information or information that, if disclosed, would constitute a violation of the rights of third parties.
2. The franchisor must provide a justification to the prospective franchisee for not disclosing any information and data requested by it.
3. The prospective franchisee must exercise loyalty, fairness, and good faith at all times in its dealings with the franchisor and must timely provide to the franchisor exact and complete information and data necessary or useful for the purposes of the franchise agreement, even if such disclosure is not expressly requested by the franchisor.
Article 7. (Conciliation)
1. For disputes arising from franchise agreements, the parties may agree that, before resorting to the courts or arbitration, they will make an attempt at conciliation through the Chamber of Commerce operating in the area in which the franchisee's registered office is located. The provisions set forth in articles 38, 39, and 40 of legislative decree No. 5 of January 12, 2003, will apply to the conciliation proceeding insofar as they are compatible.
Article 8. (Cancellation of the Agreement)
1. If a party provides false information, the other party may request the termination of the agreement pursuant to article 1439 of the Italian civil code, or sue for damages, if appropriate.
Article 9. (Transitory and Final Rules)
1. The provisions of this law apply to all franchise agreements in force in the Italian territory on the enactment date of the law.
2. Franchise agreements entered into prior to the enactment date of this law, if not compliant with article 3, paragraph 1, must be reduced to writing pursuant to the provisions of this law within one year from the aforementioned date. By the same deadline, the prior agreements set forth in writing must be adapted to the provisions of this law.
3. This law becomes effective the day after its publication in the Italian Official Bulletin [Gazzetta Ufficiale].
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