1. Is there a legal definition of a franchise and, if so, what is it?
It will be useful for the reader to be aware that no Franchise Act has been enacted in Norway, nor is there any franchise-specific legislation in Norway. This means that the legal framework governing franchise relationships in Norway is based on non-statutory Norwegian general law of contracts and the principle of contractual freedom. Consequently, there is no legal definition of franchise in Norway, neither in statute nor in unwritten law. In legal theory, the definition of franchising in the DCFR (IV. E. – 4:101) is sometimes referred to when discussing how to distinguish franchise relationships from e.g. distribution relationships.
DCFR (IV. E. – 4:101): This Chapter applies to contracts under which one party (the franchisor) grants the other party (the franchisee), in exchange for remuneration, the right to conduct a business (franchise business) within the franchisor’s network for the purposes of supplying certain products on the franchisee’s behalf and in the franchisee’s name, and under which the franchisee has the right and the obligation to use the franchisor’s tradename or trademark or other intellectual property rights, know-how and business method.
2. Are there any requirements that must be met prior to the offer and/or sale of a franchise? If so, please describe and include any potential consequences for failing to comply.
There are no formal requirements to be met prior to the offer and/or sale of a franchise.
3. Are there any registration requirements for franchisors and/or franchisees? If so, please describe them and include any potential consequences for failing to comply. Is there an obligation to update existing registrations? If so, please describe.
There are no franchise-specific legal registration requirements for franchisors and/or franchisees. All businesses must register at the registrar of companies (the Brønnøysund Register Centre – www.brreg.no).
4. Are there any disclosure requirements (franchise specific or in general)? If so, please describe them (i.e. when and how must disclosure be made, is there a prescribed format, must it be in the local language, do they apply to sales to sub-franchisees) and include any potential consequences for failing to comply. Is there an obligation to update and/or repeat disclosure (for example in the event that the parties enter into an amendment to the franchise agreement or on renewal)?
There are no statutory disclosure requirements, neither for franchisees nor for sales to sub-franchisees. Any such requirements must be based on the franchise contract. However, in connection with entering into the franchise agreement and any amendments of it, both parties must adhere to the general contractual duty not to misrepresent or fail to disclose relevant information about the contractual item the to the other party.
5. If the franchisee intends to use a special purpose vehicle (SPV) to operate each franchised outlet, is it sufficient to make disclosure to the SPVs’ parent company or must disclosure be made to each individual SPV franchisee?
There are no statutory provisions requiring the franchisor to make franchise-specific disclosures to the franchisee in the pre-contractual phase. Under non-statutory general law of contract a seller or other performance debtors must disclose flaws or other negative facts about the contractual item of which he is aware and not misrepresent relevant information to the other party. If such information is disclosed to the franchisee parent company this will suffice as disclosure to the SPV if and to the extent such information has actually become known to the SPV. However, under Norwegian company law, each company within a group of companies, including subsidiaries, are independent entities, which in principle is acting on a stand-alone basis in relation to most relevant laws. Hence, the franchisor should either ensure that disclosure is made in relation to all SPVs.
6. What actions can a franchisee take in the event of mis-selling by the franchisor? Would these still be available if there was a disclaimer in the franchise agreement, disclosure document or sales material?
To the extent that the mis-selling claim is based on misrepresentation or omission of key information, e.g. by giving inaccurate financial projections, the franchisee may use remedies for breach of contract available under statutory or non-statutory law. A disclaimer in the franchise agreement would not be valid if the mis-representation or omission is intentional and most likely not if constitutes gross negligence. If the mis-selling claim is based on lack of suitability of the contractual object (the franchising right), then as a professional party, the franchisee will not be able to invoke statutory consumer law protection.
7. Would it be legal to issue a franchise agreement on a non-negotiable, “take it or leave it” basis?
Yes, this would be lawful. As long as the franchisee is free to decline the offer of the franchise agreement, such an offer would be lawful.
8. How are trademarks, know-how, trade secrets and copyright protected in your country?
Trademarks (registered trademarks and on certain terms trademarks established by use) are protected under the Trademarks Act 2010. Copyright is protected under the Intellectual Property Rights Act 2018. Trade secrets are protected under the Trade Secrets Act 2020. To the extent that know-how is not a trade secret within the meaning of the Trade Secrets Act, it must first and foremost be protected in the franchise agreement, either by a non-compete clause and/or by a professional secrecy clause. However, some protection could be offered to business undertakings under the Marketing Act 2009 against abuse of know-how by a competitor under the principle of good business practice between business undertakings.
9. Are there any franchise specific laws governing the ongoing relationship between franchisor and franchisee? If so, please describe them, including any terms that are required to be included within the franchise agreement.
The are no franchise specific laws governing the ongoing relationship between franchisor and franchisee in Norway.
10. Are there any aspects of competition law that apply to the franchise transaction (i.e. is it permissible to prohibit online sales, insist on exclusive supply or fix retail prices)? If applicable, provide an overview of the relevant competition laws.
All undertakings are prohibited from cooperating in ways that restrict competition. Section 10 of the Norwegian Competition Act corresponds with Article 101 of the Treaty on the Functioning of the European Union (TFEU), which prohibits cooperation that prevents, restricts or distorts competition. The prohibition includes both horizontal and vertical cooperation. A franchise agreement will be considered as a vertical cooperation and will be regulated by the European Commission Vertical Block Exemption Regulation Restraints (VBER). VBER is implemented into Norwegian law. Prohibition of online sales are not allowed. Exclusive supply is allowed as a main rule. The franchisor may also give a guiding price and set a maximum price so long as each of the parties do not have market share of more than 30%.
11. Are in-term and post-term non-compete and non-solicitation clauses enforceable?
Most aspects of a franchise agreements are subject to the principle of contractual freedom. Non-compete and non-solicitation clauses will therefore as a main rule be enforceable. If such clauses are part of employment contracts, they will be regulated by the Working Environment Act and may only be entered into and enforced on certain terms for a maximum of up to one year after termination of the employment relationship.
12. Are there any consumer protection laws that are relevant to franchising? Are there any circumstances in which franchisees would be treated as consumers?
Consumer protection laws are applicable to the franchisee’s consumer customers in the same way as for consumer customers of other trade undertakings. Franchisees would not under any circumstances be treated as consumers.
13. Is there an obligation (express or implied) to deal in good faith in franchise relationships?
There is a general, non-statutory obligation of contractual loyalty between contractual parties under Norwegian general law of contracts, both in connection with entering into the franchise agreement and during performance of the agreement.
14. Are there any employment or labour law considerations that are relevant to the franchise relationship? Is there a risk that the staff of the franchisee could be deemed to be the employees of the franchisor? What steps can be taken to mitigate this risk?
Assuming that the franchisee acts on a stand-alone basis in relation to the franchisor, i.e. as employer for the employees at the franchise outlet through a separate legal entity or a sole proprietorship, there are no labour law considerations that are particularly relevant for the franchise relationship as such. Provided that the franchisor does not exercise any employer rights or obligations over the employees of the franchisee (payment of salary or day-to-day management etc.), then the employees will not be considered to be employees of the franchisor. Furthermore, large franchisors and franchisees are subject to the recently adopted Transparency Act are required to identify and assess actual and potential adverse impacts on fundamental human rights and decent working conditions that the enterprise has either caused or contributed toward, or that are directly linked with the enterprise’s operations, products or services via the supply chain or business partners. Undertakings are large if they covered by section 1-5 of the Accounting Act or if they meet two of the following three criteria: a turnover of at least NOK 70 million, a balance sheet total of at least NOK 30 million or an average number of employees of 50 full-time equivalent employees during the financial year.
15. Is there a risk that a franchisee could be deemed to be the commercial agent of the franchisor? What steps can be taken to mitigate this risk?
The Norwegian Agency Act includes and implements EU Council Directive 86/653/EEC relating to self-employed commercial agents. If there is sufficient similarity between the contractual position of the franchisee and the position of a commercial agent, then there is a possibility that provisions of the Agency Act may be applied analogically to the franchise contract. To avoid such a situation, the franchisor should not limit the franchisee’s freedom to act as an independent contractor by issuing too many instructions from the franchisor and should e.g. ensure that the franchisee is able to set his own prices.
16. Are there any laws and regulations that affect the nature and payment of royalties to a foreign franchisor and/or how much interest can be charged?
This is subject to contractual freedom between the parties. It is however forbidden to take, demand or agree on prices that are unreasonable. Nor must business terms be demanded, agreed or maintained that are unreasonable to the other party or that are obviously in conflict with public interests. If payments are delayed and no penalty interest rate is agreed in advance, penalty interest may be claimed according to Act relating to Interest on Overdue Payments and the rate is at present 9.5 %.
17. Is it possible to impose contractual penalties on franchisees for breaches of restrictive covenants etc.? If so, what requirements must be met in order for such penalties to be enforceable?
The parties may agree upon contractual penalties on franchisees for breaches of restrictive covenants etc. Such penalties would be enforceable in the same way as other obligatory claims, i.e. through the courts if the franchisee rejects the penalty claim. To the extent that such penalties are unreasonably high within the meaning of the Agreements Act section 36, the penalties may be censored by the courts.
18. What tax considerations are relevant to franchisors and franchisees? Are franchise royalties subject to withholding tax?
Franchisors and franchisees who are tax resident in Norway are subject to ordinary net income tax, currently at 22 % (2022 rate). Franchise royalties may be subject to withholding tax, but only if the franchisor and franchisee are closely related companies and the franchisor is tax resident in a low tax jurisdiction and only for the part of the franchise royalties which are payment for the use of intellectual property.
19. How is e-commerce regulated and does this have any specific implications on the relationship between franchisor and franchisee? For example, can franchisees be prohibited or restricted in any way from using e-commerce in their franchise businesses?
E-commerce is regulated by the Electronic Commerce Act. The purpose of this law is to facilitate sustainable competition, as well as stimulate business development and innovation. The relationship must take into account that storing information in the user’s communication equipment, or gaining access to such, is not permitted without the user having been informed of what information is being processed, the purpose of the processing, who is processing the information and having consented to this. The law itself does not contain any restrictions which prohibits the franchisor and franchisee from using e-commerce in their businesses.
20. What are the applicable data protection laws and do they have any specific implications for the franchisor/franchisee relationship? Does this have any specific implications in the franchising context?
GDPR is implemented into Norwegian law pursuant to the EEA Agreement, cf. the Personal Data Act. Within a franchising context, this means that parties will have to comply with all GDPR regulations when performing their rights and duties within their relationship. This will also apply to data stored after termination of the franchise relationship.
21. Is the franchisor permitted to restrict the transfer of (a) the franchisee’s rights and obligations under the franchise agreement or (b) the ownership interests in the franchisee?
Under the principle of contractual freedom, the franchisor and franchisee are permitted to agree that the franchisor may restrict the transfer of the franchisee’s rights and obligations under the franchise agreement and/or the ownership interests in the franchisee.
22. Does a franchisee have a right to request a renewal on expiration of the initial term? In what circumstances can a franchisor refuse to renew a franchise agreement? If the franchise agreement is not renewed or it if it terminates or expires, is the franchisee entitled to compensation? If so, under what circumstances and how is the compensation payment calculated?
The franchisee will only have a right to renew upon expiration of the initial term if this is agreed in the franchise agreement. The franchisee will not be entitled to any compensation upon lawful expiry or termination of the franchise agreement if this is agreed in the franchise agreement.
23. Are there any mandatory termination rights which may override any contractual termination rights? Is there a minimum notice period that the parties must adhere to?
There are no mandatory termination rights which may override contractual termination rights. In the (unlikely) event that the franchise agreement should not contain a notice period or an expiry of term provision, then it would follow from non-statutory general law of contract that termination must be made with reasonable notice.
24. Are there any intangible assets in the franchisee’s business which the franchisee can claim ownership of on expiry or termination, e.g. customer data, local goodwill, etc.
This would be up to the agreement between franchisor and franchisee.
25. What due diligence should both the franchisor and the franchisee undertake before entering into a franchise relationship?
Both franchisor and franchisee should look into the business record of the other party and consider whether the other party is the right candidate for a long-term business relationship. The franchisee should consider whether the terms of the franchisor’s standard franchise contract meet the needs of the business he intends to run. To the extent either party takes over an existing legal entity in connection with entering into to the franchise agreement, a thorough due diligence should be made of that entity’s assets and obligations.
26. How widespread is franchising and what are the most active sectors? Are there any specific economic, cultural or regulatory issues that make franchising particularly attractive?
Franchising has become considerably more widespread over the last 20 years or so. According to a 2022 report from The Federation of Norwegian Enterprise (Virke) out of a total of approximately 25,500 outlets in the five sectors supermarkets – specialised trade, petrol stations/convenience stores, catering/fastfood and service trade – 26 per cent use franchising as a business model. On average the chains own around half of the outlets. The franchisee outlets’ share of the total number of outlets is biggest within petrol stations/convenience stores and supermarkets, followed by catering. Franchise outlets within the five sectors had a turnover of close to NOK 150 billion in 2020. There are no specific economic, cultural or regulatory issues that make franchising particularly attractive or unattractive. There is no cultural disapproval of franchising outlets or franchising as a business model in the general public.
27. Is there a national franchising association? Is membership required? If not, is membership commercially advisable? What are the additional obligations of the national franchising association?
A previous national franchise association existed from 1973 onwards but was dissolved. Other attempts to form a national association were viable. In February 2022 a new franchise association – Norges Franchiseforening – was formed, with the purpose of acting as an interest association for both franchisors and franchisees. As of yet, the new association is little known in the general public
28. Are foreign franchisors treated differently to domestic franchisors? Does national law/regulation impose any debt/equity restrictions? Are there any restrictions on the capital structure of a company incorporated in your country with a foreign parent (thin capitalisation rules)?
Generally speaking, foreign franchisors are not treated differently to domestic franchisors. National law/regulation does not impose debt/equity restrictions on foreign franchisors different from those applicable to Norwegian franchisors. The Private Limited Companies Act stipulates a minimum share capital of NOK 30,000 (appr. EUR 3,000). The company must at all times have an equity and liquidity which is justifiable in view of the risk and scope of the business of the company. If it must be assumed that the equity is less than justifiable in view of the risk and scope of the business of the company, the board must forthwith consider the matter and convene the general meeting and give it an account of the company’s financial position. If the company does not have a justifiable equity as described above, the board must propose in the general meeting measures to rectify this. For tax purposes there is legislation which limits deductibility of interest costs. Also, Norway imposes withholding tax on interests paid to certain closely related entities, provided that the recipient is resident in a low tax jurisdiction.
29. Are there any requirements for payments in connection with the franchise agreement to be made in the local currency?
The currency of payments under the franchise agreement is up to the parties to decide under mutual agreement, either in the franchise agreement or in subsequent agreements.
30. Must the franchise agreement be governed by local law?
Franchisor and franchisee are as professional parties free to agree on choice of law.
31. What dispute resolution procedures are available to franchisors and franchisees? Are there any advantages to out of court procedures such as arbitration, in particular if the franchise agreement is subject to a foreign governing law?
In addition to the ordinary courts, franchisors and franchisees may of course agree on arbitration, either in the franchise agreement or when a dispute has arisen. In the event of a lawsuit, the district courts will also offer court mediation, which may be a good alternative but both parties must agree to attempt court mediation. Also, out of court mediation may be an alternative, e.g. using a mediator certified by the Bar Association. Arbitration could be less expensive than an ordinary court, particularly if a judgment by the district court is appealed. It could also be a swifter process and the parties get to appoint arbitrators with special knowledge of franchising. Furthermore, an arbitration award would also be confidential if the parties have agreed on confidentiality and the award would be enforceable mostly in the same way as a final judgment by the courts. Out of court mediation would typically be presided over by one mediator and would as such be the least expensive dispute resolution procedure.
32. Does local law allow class actions by multiple franchisees?
Class actions are allowed under the Disputes Act 2005 on certain terms. The claims must be based on the same or essentially the same factual and legal basis, the same court must be competent to adjudicate all the claims under essentially the same procedural rules, class action must be the best procedure and there must be a basis for appointing a class representative.
33. Must the franchise agreement and disclosure documents be in the local language?
Franchisee and franchisor are free to agree upon the language to be used in the franchise agreement and appurtenant documents.
34. Is it possible to sign the franchise agreement using an electronic signature (rather than a wet ink signature)?
The franchise agreement may be signed using an electronic signature. As the principal rule, there are no formal requirements for entering into agreements under Norwegian law. Even an oral agreement would be binding but it goes without saying that franchise agreements should be documented in writing for purposes of evidence of the agreement and clarity.
35. Can franchise agreements be stored electronically and the paper version be destroyed?
The franchise agreement and appurtenant documents may be stored electronically and the paper version destroyed. Pursuant to the Book Keeping Act and the Book Keeping Regulation, the franchise agreement must be stored for at least 3.5 years as so-called secondary accounting material. There must be a back-up of the stored franchise agreement.
36. Please provide a brief overview of current legal developments in your country that are likely to have an impact on franchising in your country.
There is no franchise legislation under way likely to have an impact on franchising in Norway. Nor is there to our knowledge any other initiatives or pending lawsuits which may have a significant impact on franchising in Norway.
37. In your opinion, what are the key lessons to be learned by franchisors as a consequence of the COVID-19 crisis?
The franchisees may easily go bankrupt in similar situations because of temporary closedowns ordered by the authorities and/or because of the general public’s fear of being infected in public venues. Franchisors should prepare for possible future pandemics by seeking to negotiate, right of reduced rent from landlords and credit facilities from banks for its franchisees in case of a pandemic. Franchisors should also have a plan for assisting its franchisees with how to reduce labour costs, typically by temporary lay-offs, but also assistance with applications for any government grants available.
Contributors
Per Forsberg – Partner – pf@forsberglaw.no
Dag Thorstensen – Partner – dt@forsberglaw.no
