What Is a Block Exemption?

15 September 2023

441 5 mins read

Want to start a new franchise business? Before getting into the nitty gritties, understand how franchise agreements & block exemptions work to learn more.

Relationships between franchisors and franchisees do not begin randomly or spontaneously. A handshake, trust, good intentions, and underlying knowledge of what both parties expect from their partnership aren’t enough to start a franchise.

To get things started, you’ll need a written record of clear, legally defined measures and requirements. This document is known as a franchise agreement. Let’s look at what that term means and what you may expect to find on one.

Table of Contents

What is a Franchise Agreement?

A Franchise Agreement is a legal contract between two parties – the franchisor and the franchisee. As a result, in a franchise agreement, the franchisor would provide the franchisee the exclusive right to use all services, products, and proprietary marks for a set amount of time. In return , the franchisee would be required to pay the franchisor a portion of his or her earnings or income.

The franchise agreement must include the brand name to be used, the length of the franchise agreement, and sections dealing with penalties, such as fines, reimbursement, and franchise termination.

Over the last ten years, the Indian franchising market has grown rapidly. Despite the financial downturn, the annual growth rate of the franchising industry in India has remained positive and is now estimated to be between 30 and 35 percent.

To conduct business legally and profitably, you must have a franchise agreement if you wish to license your firm for use as a franchise, or if you are a franchisee looking for profit. Otherwise, your franchise agreements could lead to problems that you will have to deal with later. Make sure you have the right franchise agreement for your needs and that you understand how it works. You can also know more about the MSA Agreement Online for Business Related Requirements.

How Franchise Agreements Works?

A franchisee essentially buys the right to run its operations under the franchisor’s structure, strategy, and brand. Franchises have an established business model, and investors, particularly those with prior experience, want to profit from it. Expectations and guidelines must be agreed upon by both the franchisor and the franchisee.

Here’s how a standard franchise agreement process goes:

Attend a meeting with a potential franchisor.
Determine the franchisee’s planned territory rights for his or her location.
Set minimum performance requirements and related penalties for unmet goals.
Calculate how much you’re willing to pay in exchange for the use of your product or service.
Establish the advertising rules and intellectual property rights that will govern the transaction.
Consult with a franchising attorney to help you turn your notes and interactions into a unified document.
Review the terms and conditions with the franchisor once again.
Arrange a date for both sides to sign the franchise agreement.
Make copies and present them to the franchisor and franchisee.
Keep your franchise agreement safe, preferably with your other important paperwork.

Putting together the Agreement for franchise operations is a rather simple process. However, there are some Legal Notice and financial considerations to be made. The goal of a franchise is to help you make a lot of money and establish a name for yourself. Make sure your documents represent the level of service you provide.

What is a Block Exemption?

The Block Exemption Regulation is a business line or industry exemption that prohibits organizations in the industry from engaging in certain commercial activities in order to foster competition. The block exemption regulations are revised on a regular basis to encourage competition among European Union member states.

The block exemption regulations established according to Article 101(3) TFEU explain the circumstances under which certain forms of agreements are exempted from the Article 101(1) TFEU prohibition on restrictive agreements.

Purpose of Block Exemption

So, what exactly does “block exempted” mean? Essentially, it’s a term used to describe certain agreements or practices that are granted an automatic exemption from certain competition rules. This is done to foster competition while still allowing cooperation in specific areas. The purpose of block exemptions is to streamline processes, promote fair play, and encourage innovation.

Benefits of Block Exemption

The benefits of block exemption are significant. Firstly, they save businesses time and effort. Instead of having to seek individual approval for agreements that fall under the exemption, they can focus on their operations and growth. This speeds up processes and reduces administrative burdens.

Secondly, consumers gain from block exemptions. When businesses can collaborate within certain boundaries, it often leads to better products and services. For instance, think about two companies joining forces to develop new technologies that benefit everyone. Block exemptions make such collaborations smoother.

Types Of Block Exemption

In the franchise industry, there are two types of block exemptions. You can learn more about each of them by reading the following:

Block Exemption-Vertical Agreements

Vertical agreements include non-competitive distribution (exclusive and selective), franchising, supply, and agency partnerships (i.e. those who do not compete in the product market which is the subject of the agreement). Only in highly limited cases does the VABE allow for agreements between competitors to profit from the block exemption.

A vertical agreement is one that is made between two or more parties, each of whom works at a different level of the production chain for the purposes of the agreement, and the primary aim of the agreement is to buy, sell, or resell products or services.

Vertical agreements that meet the criteria of the Vertical Agreements Block Exemption (VABE) are excluded from Article 101 of the Treaty on the Functioning of the European Union’s prohibition on anti-competitive agreements (the Prohibition). However, the laws that apply to dominating corporations remain in effect.

In order for the VABE to be effective, the following requirements must be met:

Both parties should be bound into a vertical agreement together;
Each party’s market share must not surpass 30%;
The agreement must not contain any hardline limits.

Block Exemption – Horizontal Agreements

The Horizontal Block Exemption Regulations describe certain research and development and specialization agreements that are more useful than detrimental and hence allowable under antitrust laws.

Horizontal agreements can limit competition, especially when they involve price fixing or market sharing, or when they define market power as a result of horizontal cooperation that has negative market impacts on pricing, output, innovation, or product diversity and quality.

Key Takeaways

A franchise agreement is a legally enforceable document that establishes the conditions of a franchisor-franchisee relationship.
Before signing a franchise agreement, franchisors must give a franchisee 14 days to evaluate all disclosures.
Before signing a franchise agreement, all parties should properly analyze it with the assistance of a lawyer.

Conclusion

A franchise agreement must specify the various business decisions that go into developing a franchise system because franchising is about consistent, long-term replication of a company’s brand commitment. It’s complicated, and in most cases, it’s a contract of adhesion, which means an agreement that can’t be easily changed.

Duplicating another document system’s and agreement is perhaps the single biggest error a new franchisor can make, because a franchise agreement is expected to reflect the originality of each franchise offering and explain the intricacies of the intended franchise relationship. If you have any queries reach out to Vakilsearch!

In developing a proper set of franchise agreements, each of the elements of the franchise need to be evaluated. Prior to having the lawyers begin to draft the agreements, it is essential for the franchisor to first develop its business plan: https://www.mca.gov.in/MinistryV2/incorporation_company.html and decide on all of these important issues. For most franchisors, it is important that, in addition to working with qualified franchise lawyers, they first work with experienced and qualified franchise consultants to craft their franchise offering.

FAQs

What does block exempted mean?

Block exemption refers to certain agreements or practices that are automatically granted an exemption from specific competition rules. This allows for cooperation while maintaining competition.

What is the purpose of block exemptions?

The purpose of block exemptions is to facilitate cooperation among businesses within defined limits, promoting fair competition and innovation without the need for individual approvals.

What is block exemption regulation?

Block exemption regulation outlines the conditions under which certain agreements are automatically exempted from competition rules, aiming to balance collaboration and competition.

What is technology transfer block exemption?

Technology transfer block exemption specifically pertains to agreements involving the transfer of technology. It allows businesses to share technological knowledge without violating competition rules.