Nullity for lack of know-how: know-how or not, that is the question (Chambéry Court of Appeal, October 3, 2023, 21/00142)

Avocats, Conseils en réseaux

In a well-reasoned ruling handed down on October 3, 2023, the Chambéry Court of Appeal declared a real estate development franchise contract null and void, notably for lack of know-how. This is an opportunity to examine what does or does not constitute this crucial element of a franchise agreement in the property development sector.

In 2015, a franchisee with no knowledge of property development signed two franchise agreements with a property developer covering two different territories.

Two years later, as the franchisee had still not succeeded in setting up a real estate program, he decided to stop paying royalties and notified the franchisor of his intention to terminate the contracts.

On January 11, 2021, the Annecy Commercial Court ruled that the franchise agreements were null and void on the grounds of error, fraud and lack of cause.

The franchisor appeals.

In addition to the question of the pre-contractual information provided to the franchisee before committing himself, and the profitability of franchises, the judges of the Chambéry Court of Appeal had to consider the transmission of know-how specific to the franchisor, and recalled on this occasion that “the know-how must enable [the franchisee] to acquire a competitive advantage: this is the whole purpose of the franchise contract and the reason why the franchisee accepts to bear a certain number of financial obligations”.

Before assessing the know-how transmitted in this case, the Judges recall that the Cour de cassation defines know-how “as a body of unpatented practical information, resulting from the franchisor’s experience and tested by him, a body which is secret, substantial and identified” (Com June 8, 2015, n°15-22.318), which cannot “be summed up in the rules of the art, the instructions for using a machine or software, or an aggregate of easily accessible and widely known information”.

Under the terms of the franchise agreements, the franchisor claimed to have “developed an original, specific and substantial, identified and secret concept and know-how for supporting people wishing to become property developers”.

However, the judges considered that the franchisor had not demonstrated that he had communicated to the franchisee the necessary tools to enable him to carry out development operations, considering that the franchisor had “not developed specific know-how such that it could be reproduced in other French regions”.

 Above all, the Court of Appeal noted that the franchisee had “failed in its obligation to provide its franchisee with a method other than that followed by any normally well-informed developer, even if the advice given was relevant and common sense”.

Giving advice is not enough: it must be established that the advice constitutes a genuine know-how.

This ruling is therefore an opportunity to reiterate that know-how does not consist of a set of general information and/or recommendations required to operate a business in a given sector, but must contain advice, techniques and methods enabling the franchisee to gain a decisive competitive advantage.

What about the franchisor’s know-how in the real estate development business?

In the real estate development sector, for example, a reminder of the regulations and the steps involved in compiling a land file, while essential, does not constitute know-how.

More specifically, the Court of Appeal noted :

– while the need to “define a territory according to social housing needs” is emphasized, no method is proposed other than to “find one or three preferred towns in order to repeat one real estate program per year”;

– the recommendations given for knowing the territory are far too vague to enable a future developer to be operational, and in particular “no real estate agent or business contributor coordinates in the given franchise sector with whom the franchisor has had fruitful contacts are given”;

– the eight-day training course on “development program design, construction, financial management and knowledge of the main players involved in the building process” was very general and not likely to give the franchisee a decisive competitive advantage;

– the testimony of an ex-franchisee quoted in the judgment reveals that “the resale of housing units in bulk to lessors is not an invention, nor a concept, nor a know-how, but a common practice of developers from which [the franchisor] drew inspiration from his competitors”.

In short, a know-how that is not groundbreaking …

As a result, the Court of Appeal upheld the nullity of the franchise contracts “for lack of transmission of specific know-how and a method enabling the construction of housing at a price lower than the existing market in the [local territory]”.

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