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Italy: The Franchise Agreement – definitions and peculiarities

published on 5 October 2023 | reading time approx. 7 minutes

Franchise is in Italy a contractual instrument that has achieved a wide diffusion among companies and that, year by year, constantly registers growing numbers both in terms of the number of shops and in terms of turnover. For several years now, this trend has been annually reported in the “Assofranchising Report” published by Assofranchising, one of the main trade associations in the franchise sector. One of the key factors that have arisen in recent years is the capacity of franchise to be a resilient business model capable of absorbing the many situations of uncertainty and difficulty that have been experienced in recent years, and which allows operators to position themselves optimally from a strategic point of view by making use of brands and business proposals that are already well-known and appreciated by consumers.

This article is part of the article series “Franchising”. It is a cross border collaboration and is intended to highlight the key elements of a franchising agreement in selected countries. To the article series “Franchising” »

What is franchise? »
The know-how »
Franchisee assistance »
Types of franchises »
Difference with other agreements »
International Franchise – applicable Law »

What is franchise?

Italy is one of the countries that have chosen to introduce specific legislation on franchise into their legal system, this unlike from, for example, France and Germany, which have demanded it to case law to define the lines and regime of this matter. Pursuant to Article 1 of Law No. 129 of 6 May 2004 (hereinafter the “Franchise Law”), franchise is “an agreement, however it is named, between two legal entities economically and legally independent, whereby one party grants the availability the other for a fee, a package of industrial or intellectual property rights [...]”.

The same definition provided by law, clearly shows that franchise agreements fall within the scope of business-to-business agreements; in fact, both contractual parties are entrepreneurs. However, in franchise agreements, the franchisor is the party that has the greater contractual strength, proposing its own business formula to prospective franchisees and, in fact, setting its own rules for the operation of the system.

For this reason, with the Franchise Law the legislator intervened to protect the franchisee, in order to mitigate contractual imbalance. Among the interventions aimed at this purpose, is the of the information asymmetry typical of the franchise agreement by means of the introduction of pre-contractual information obligations set on the franchisor and in favour of prospective franchisees.

In this sense, Article 4 (3) of the Franchise Law provides a specific pre-contractual disclosure obligation by means of the preparation and delivery to the franchisee of the so-called Franchise Disclosure Document at least 30 days prior to signing the agreement itself.

This documentation must contain, inter alia, a complete copy of the franchise agreement to be signed and further information on trademarks, know-how and the elements characterizing the activity that is the object of the franchise as well as an indication of the number of franchisees and the relative variations in previous years. Additional information are provided for franchisors who have operated exclusively abroad and therefore wish to introduce a certain business formula in Italy for the first time.

The purpose of the Franchise Disclosure Document is to allow the franchisee to know and carefully assess the type of business of the agreement, the chances of development and, in particular, the timing of return on its investments.

With regard to the franchisee's ('rightful') expectation of a return of investment and thus of carrying out the business at a profit, the Franchise Law also foresees that the relationship shall have a least possible duration sufficient for the repayment of the investment, which set at three 3 years.

The know-how

Know-how is an essential and characteristic element of the franchise agreement and is defined by the Franchise Law as “an asset of unpatented commercial and processes knowledge derived from experience and tests carried out by the franchisor”.

The know-how must necessarily be:

Secret, i.e. “not generally known or easily accessible” outside the franchise network;
Substantial, i.e. it must include all essential knowledge for the franchise management, i.e. the business model (or formula) as a whole;
Identifiable, it must be described in the agreement (or in a separate document) in a comprehensible and sufficiently complete manner, to leave no doubt as to its secrecy and substantiality.

In order to take on an economic and legal value, know-how must be inaccessible. Indeed, its diffusion would devalue both the knowledge assets and the entire franchise network. Therefore, know-how must be protected by adopting safeguards both within the franchisor's network and within the franchisee's network. For this reason, it is necessary that both parties involved adopt appropriate internal (e.g. selective access to information) and external (towards suppliers, customers, etc.) organizational procedures. In order to of protect and keep know-how secret, agreements includes appropriate confidentiality clauses to bind parties not to disclose or use the information except within the contractual relationship.

According to national law, know-how may be described in the franchise agreement but may also be contained in the franchise package. Usually, the main instruments by which, in practice, know-how is transferred from the franchisor to the franchisee are the so-called operating manual and training. In any event, the law requires that an analytical and precise description of what is transferred to the franchisee must be provided by the franchisor.

Franchisee assistance

Still with a view to rebalancing the relationship between the franchisor and the franchisee, the Franchise Law provides as essential elements in a franchise relationship the technical and commercial assistance and advice offered by the franchisor to the franchisee. Specifically, the law set forth that the agreement shall contain “the characteristics of the services offered by the franchisor in terms of technical and commercial assistance, design and set-up, and training”.

The franchisee, therefore, through the franchise agreement, becomes part of a structured network that also includes assistance and advice from the franchisor, not only in the start-up phases of the new business activity, but throughout the entire contractual relationship. In fact, the franchisor undertakes to supply the products to be resold and to bear the costs of assistance and other possible costs such as, for instance, advertising costs.

Assistance is usually provided by sending of franchisor’s employees, entrusted with the task of verifying the correct set-up of the retailer, the exact correspondence of the distinctive signs as well as the use of the names or signs transferred by the franchisor.

The consultancy phase, on the other hand, relates to the franchisee's training and this may be carried out by means of special training courses or, more in general, by sending the operating manual, i.e. a real vademecum of the business.

The assistance and consultancy provided by the franchisor are, therefore, additional services, functional to the franchisor's correct and complete transmission of the business model, and it is exactly this support activity that the franchisor provides to the franchisee, and the latter's inclusion within a network, that has enabled the franchise to better absorb the economic shocks that have occurred in recent years, including in particular the consequences caused by the Covid19 pandemic, thus making it a particularly resilient instrument.

Types of franchises

Franchise can take three different forms:

The distribution of goods franchise where the object of the agreement is the distribution and then the sale of one or more products to third parties. The franchise of distribution of goods franchise, depending on the role played by the franchisor, may take the form of (i) a manufacturer's franchise, where the franchisor itself produces the goods and products to be marketed (e.g. famous clothing brands with retailers distributed worldwide and usually managed by franchisees who purchase the products to be sold by the franchisor) or (ii) distributor franchise, when, on the contrary, the franchisor is a wholesaler who does not produce the goods or products directly but buys them from external suppliers or producers in order to market them. The latter formula has found widespread use in the large-scale retail sector.
The service distribution franchise where the franchisee provides services that have been designed, developed and tested by the franchisor. Therefore, in this type of franchise, there is a transfer from the franchisor to the franchisee of know-how, marketing capacity, etc., but there is no transfer of ownership of the products since they are services. The franchisor is the creator of the service while the franchisee merely provides it to the third party.
Industrial franchise where an industrial enterprise – the originator (as well as the experimenter) of a production process or the marketing of a product, identified by a brand name – can franchise another industrial enterprise in order to produce and/or market its products.

Difference with other agreements

It is necessary to be careful not to confuse the franchise agreement with other distribution agreements; in fact, the similarity with other types of distribution can easily mislead. Specifically, the franchise agreement differs:

from the sales license, as the franchise involves the supply not only of the products to be distributed, but also of different non-material services, such as technical and commercial assistance, marketing solutions and staff training;
from the mandate and the agency because the franchisee, as an autonomous and independent entrepreneur, always acts in his own name and on his own behalf and the remuneration he receives does not take the form of a commission on successful business. Thus, whereas in mandating and agency the subject acts on behalf of others, in franchise he acts in its own name and on its own behalf;
from the licence of use, since the franchise agreement, in addition to the use of the franchisor's trade marks, provides for a number of further elements such as, for example, the inclusion of the franchisee in the franchisor's “system” or distribution chain, the transmission of know-how, possible training of personnel, etc.

These are relevant differences that might be negligible during the ordinary course of the relationship between franchisor and franchisee but these assume particular importance when, and it sometimes happens, the relationship between the parties should break down and arise disputes to be decided by a judge who will have to apply the correct legal principles and categories.

International Franchise – applicable Law

Lastly, going back to the point from which we started from, i.e. the presence in the Italian legal system of a franchise law and some of the principles set forth by it, it is worth recalling, however, that also in the case of the franchise agreement the parties may, in the exercise of private autonomy, choose which (national) law shall be applicable to their relationship.

This issue is particularly relevant in cases where one of the parties, usually the franchisor, is a foreign entity that develops a franchise network in Italy and thus concludes its franchise agreements with local franchisees. Usually, international franchise agreements provide that the applicable law is that of the franchisor's country, as this provision enables the franchisor to manage its international network more efficiently and easily. Such a provision is almost always adopted in so-called master franchise agreements, in which it is the master franchisee, as the first and principal franchisee, who assumes vis-à-vis the franchisor the task of developing the network within its own country, but it is also often found in traditional agreements between a foreign franchisor and the individual domestic franchisee.

While it is true that this choice avoids the franchisor having to know different rules and legal principles for each country in which it develops its business, in drafting the contractual model and in the management of the relationship it will still have to comply with those principles considered imperative and mandatory by the legal system of the country in which it will operate (e.g. tax, intellectual property, antitrust, etc.) and take into account that the imposition of a foreign law may push the potential franchisee to choose other (perhaps domestic) brands that do not have such an obstacle to entry.) as well as take into account that the imposition of a foreign law may push the potential franchisee to choose other (perhaps domestic) brands that do not have such an entry barrier.

On the other hand, the franchisee will bear the full burden of having to apply laws other than those of its own country, with the consequent need to be assisted by advisors who – especially in the legal sphere – are capable, due to their experience and widespread presence in various countries, of adequately protecting the franchisee's interests.