Is a pharmacy franchise already a capital group?
The open catalog of prerequisites evidencing the acquisition of control over another entrepreneur results in the possibility of considering that the franchise agreement is one of them. The resulting consequences are of significant importance for many entrepreneurs intending to open a pharmacy, whose business has been put in question.
Franchising – how does it work?
By franchise, we mean a contract linking two independent entrepreneurs (franchisor and franchisee), which creates rights and obligations for each party. The primary obligations of the franchisor include providing the franchisee with the necessary support in the operation of the business (including the sharing of its know-how) and allowing the franchisee to use the trademarks to which the franchisor has rights. In exchange for the above benefits, the franchisee is obliged to pay the franchisor an agreed-upon remuneration, which often depends on the amount of revenue generated by the franchisee. At the same time, there is no single template for a franchise agreement operating on the market, as it is an unnamed contract (not regulated by law, unlike, for example, a lease or sales contract) and based on the principle of freedom of contract. However, it cannot be ruled out that in the future this contract will be regulated at the statutory level, as evidenced by the establishment of a team on franchising by the Minister of Justice in April 2022, whose task is, among other things, to develop legislative proposals in this regard.
It follows from the essence of the franchise agreement that the franchisor is an entrepreneur with an established and already recognized brand in the market, while the franchisee is an entity (usually an individual entrepreneur) intending to start a business in a given industry using solutions successfully applied so far by the franchisor. The franchisee’s actions affect consumers’ perception of a given brand, since the franchisee operates under a banner that is often recognized nationwide. After all, franchisees are used by millions of Poles every day in the course of, among other things, filling up the car, daily grocery shopping or purchasing medicines. For this reason, franchisors ensure in their franchise agreements that they have the authority to control whether the franchisee performs its business in the manner accepted within the franchise network.
In practice, the franchise agreement is often accompanied by other agreements linking the franchisee and the franchisor. This is because the start of a franchisee’s business within a franchise network often involves the need to properly equip the service premises and acquire a range of products. For this reason, franchisees sometimes benefit from loans taken out by franchisors for this purpose. By means of separate agreements, franchisees may also benefit from additional services of franchisors, which relate to support in the area of bookkeeping or broad legal issues.
Capital group in Polish law
Unlike franchising, the concept of an equity group finds its definition in Polish law. According to the Law on Competition and Consumer Protection, a capital group is all entrepreneurs that are controlled directly or indirectly by a single entrepreneur. The concept of control, which is key in the above context, is also defined in the same law as any form of direct or indirect acquisition of powers by an entrepreneur that, either separately or in combination, taking into account all legal or factual circumstances, makes it possible to exercise decisive influence over another entrepreneur or entrepreneurs.
The Law on Competition and Consumer Protection also contains an exemplary catalog of situations that are supposed to prove that one entrepreneur has acquired control over another (e.g., the power to appoint a majority of the members of its board of directors or the existence of a right to all or part of the other entrepreneur’s property). The situations listed therein concern, for the most part (with one exception concerning contracts for the management of another entrepreneur or the transfer of profits), ties of a capital/personal nature existing between the two entrepreneurs. It follows that the legislature itself considered the case in which an agreement would lead to the acquisition of control over another entrepreneur to be exceptional.
The statutory definition of “acquisition of control” poses many difficulties in practice and makes it impossible to determine “in advance” all cases that will result in the formation of a capital group. Whether the ability to exercise decisive influence over another entrepreneur should be understood broadly as influence over all relevant aspects of its internal and external functioning or narrowly as influence over strategic decisions only remains disputed.
The catalog of prerequisites that can create a capital group looks in vain for the conclusion of a franchise agreement between two entrepreneurs. However, its open nature has opened a “gateway” to the possibility of recognizing that the franchisee and the franchisor are members of a single capital group. This is most clearly seen in the Pharmaceutical Law, where it leads to far-reaching consequences for many entrepreneurs.
Impact on the Pharmaceutical Law
No provision of the Pharmaceutical Law refers directly to the franchise agreement as well as does not independently define the concept of an equity group. However, a number of provisions of the Pharmaceutical Law, which are crucial from the perspective of the possibility of running a pharmacy, use the concept of a capital group, which should be understood in the same way as under the Law on Competition and Consumer Protection. For example, it is prohibited to grant a license to operate a pharmacy to an entity that is a member of a capital group whose members operate at least 4 pharmacies or operate more than 1% of the pharmacies located there in a given province. The above restrictions apply to both the procedure for obtaining a new permit and the procedure for transferring an existing permit from one entity to another.
On the basis of the above regulations, some pharmaceutical inspection authorities refuse to issue or transfer a pharmacy license to a franchisee. Pharmaceutical inspection authorities argue such decisions with the belief that as a result of the franchise agreement concluded, as well as often accompanying agreements (e.g., a loan agreement), the franchisor has taken control of the franchisee, and as a consequence both entities are members of one capital group. For example, even standard provisions of agreements of this type, i.e. concerning the obligation to report the franchisee’s sales data to the franchisor or the franchisor’s support of the franchisee in maintaining its accounts or providing legal services, have been considered by the pharmaceutical inspection authorities as allegedly creating a relationship of dependence.
As a result, the pharmacy business of many entrepreneurs has come to a standstill, since they cannot start it without obtaining a license, which the pharmaceutical inspection authorities refuse to grant them. A chance for a quick end to this impasse was seen in the communication published by the Chief Pharmaceutical Inspector on franchise agreements in the retail market for medicinal products (September 2021). This is because it indicated that the mere operation of franchises in the pharmacy market is not prohibited. At the same time, however, it was emphasized that in certain cases (e.g., when the franchise agreement results in the franchisee’s inability to continue pharmacy operations after its termination) it is possible to consider the franchisee a subsidiary of the franchisor. Beneficially for franchisees, it has also been noted that general obligations for the franchisee to submit to control by the franchisor (e.g., with respect to business and accounting records) are inherent in the essence of the franchise agreement and do not constitute a violation of the Pharmaceutical Law per se.
After almost a year from the date of publication of the above announcement, practice shows that the issue of franchising in the pharmacy market continues to be a contentious issue, and some pharmaceutical inspection authorities still refuse to grant licenses to operate pharmacies for this reason. Some provincial pharmaceutical inspectors even apriori classify a given entity as a member of a group of companies due to the existing franchise agreement, while in the justifications of their decisions one can search in vain for arguments referring to the communication of the Chief Pharmaceutical Inspector. From the perspective of a franchisee in the pharmacy market, it becomes crucial to consider modifying the agreements concluded with the franchisor in order to maximize its chances of obtaining a license to operate a pharmacy.
Article published on September 9, 2022 on Infor (URL: https://mojafirma.infor.pl/umowy-w- company/abc-umow/5572745,Franchise-aptek-group-kapital.html)
