Competition law changes – Opportunities for franchise systems

05 December 2017

On 6 November 2017, the most significant changes to Australia’s competition laws in over 20 years came into force. Press reporting has focused on changes in the law on misuse of market power. However, other changes have greater significance for franchising systems. These include the following:

  • An end to the prohibition on third line forcing and the need to file notifications with the ACCC;
  • A new, easier to satisfy test for ACCC authorisation. This means that many franchise systems could now obtain competition law immunities to allow franchisors and franchisees to discuss and specifically agree prices, suppliers, promotional activities and supply terms in ways that are currently not possible; and
  • A new process has been introduced to allow resale price maintenance to be ‘notified’ to the ACCC in much the same way as third line forcing used to be. This holds out the prospect that franchisors and product distributors may be able to introduce and enforce minimum resale prices and/or minimum advertised price policies.
    More detail on these changes is set out below.
Third line forcing – An end to ACCC notifications!

Third line forcing occurs where you offer to supply goods or services on condition that the recipient acquire something else from a third party. A requirement that franchisees must use approved suppliers (e.g., for fit out or IT systems) or carry particular stock creates a third line force because it amounts to supplying franchise rights on condition that the franchisee must acquire something from a third party or class of third parties.

It used to be that exemption from this prohibition was commonly obtained by filing a ‘notification’ in a specified from with the ACCC. Filing third line forcing notifications has therefore been a part of establishing franchise systems in Australia for many years. But no more – since 6 November, third line forcing is only illegal if it has a purpose, effect or likely effect of substantially lessening competition in an overall ‘market’. Very few franchise systems are so powerful as to be able to substantially restrict competition in a whole economic market. As a result, it will be rare for third line forcing conduct in franchise systems to be prohibited. That means it is now easier for franchise systems to require franchisees to use nominated suppliers, and it will now be rare for a franchising system that does this to need to file third line forcing notification with the ACCC.

Third line forcing notifications that have been filed in the past remain in force, but are generally no longer required unless you believe the force is likely to substantially lessen competition.

New test for ACCC authorisation

It is common in franchise systems for franchisors to sell through company owned websites or to operate company owned stores. This will usually make the franchisor a ‘competitor’ with some or all of its franchisees for the purposes of cartel laws. This, in turn, makes it illegal for the franchisor to control retail prices in the franchise system without contravening cartel laws. Cartel laws also make it difficult to agree on promotions with franchisees or negotiate standard supply terms with suppliers. For example, sitting down with franchisees and agreeing the products and prices that should be included an upcoming catalogue technically constitutes price fixing. The same laws make it illegal for franchisees to agree not to poach each other’s customers.

These restrictions are often poorly understood in franchise systems. However, breaches of cartel laws could, in theory at least, expose franchisors to penalties of up to $10 million per contravention and expose individuals involved to penalties of up to 10 years jail.

These problems can be overcome by seeking ‘authorisation’ from the ACCC. In the past, to obtain authorisation it has been necessary to show that coordinating prices within a franchise system will create public benefit. This was not always clear. Now, however, authorisation is also available if an applicant can show that their conduct is not likely to substantially lessen competition. Since most franchise systems account for only a small share of the markets in which they operate, this is a test that many franchise systems will be able to satisfy. This opens up the possibility that many franchise systems may now obtain authorisation to allow franchisors and franchisees to explicitly discuss and agree promotions and pricing, enabling those systems to operate in a truly integrated way that has often previously not been possible due to competition law constraints.

Resale Price Maintenance

Resale Price Maintenance (RPM) occurs where a supplier attempts to set minimum prices for its products or otherwise restrict or deter discounting. In Australia, RPM is prohibited ‘per se’ (i.e., it is illegal even if it causes no harm) and the ACCC has a history of prosecuting offenders.

RPM can now be ‘notified’ to the ACCC in the same way as third line forcing used to be. If the ACCC does not object within 60 days, you then have immunity to impose minimum resale prices or minimum advertised price policies. This may be a tantalising prospect for distributors and franchise systems that wish to set a floor on pricing of their products.

A couple of factors, however, may limit the circumstances in which the new ability to notify RPM may be used:

  1. ACCC can object to (and therefore block) an RPM notification if it is satisfied that the likely benefit to the public from the conduct will not outweigh the likely detriment to the public. Alternatively, if the ACCC is not satisfied that benefit from the conduct will outweigh detriments, it can impose conditions on the notification. It remains to be seen whether the ACCC will allow many RPM notifications to stand or whether it will use these powers to block them;
  2. If a franchisor or distributor competes with its franchisees or resellers, then setting minimum resale prices or minimum advertised price policies will constitute price fixing, not just RPM. An RPM notification will not solve this problem. Notification of RPM may therefore only be of assistance to franchisors or distributor that do not have their own retail stores, sell through company websites or otherwise compete with their franchisees or resellers; and
  3. Introducing minimum resale prices or a minimum advertised price policy is likely to require amendments to distribution agreements or to the terms of a franchise system’s franchise agreements.

A resale price maintenance notification therefore may not assist every franchise or distribution system, and there may be other strategic issues to consider before seeking such an immunity from the ACCC. For some systems, however, the possibilities presented by this change may be profound.

To discuss any of these or other recent changes to competition laws, contact a member of our Franchising or Competition and Consumer Protection teams.

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