It is common for franchisees to question whether their franchisor can force them to buy their goods. As a franchisee, there are many reasons why you may not wish to buy your franchisor’s goods. For instance, you might not be comfortable with the quality of their products. Alternatively, the franchisor’s products may be so expensive that you will no longer maintain their profit margin. Undoubtedly, this situation can cause many concerns for franchisees. Therefore, this article explores situations where it may be permissible for a franchisor to force a franchisee to purchase their products.
Is Exclusive Dealing Allowed?
Exclusive dealing occurs when an individual’s trading with another imposes restrictions on the other’s freedom to choose with whom they deal. Exclusive dealing is not permitted when it substantially lessens competition. Although, exclusive dealing can apply when a franchisor forces their franchisee to buy their goods. Furthermore, a franchisor who refuses to supply goods and services to a franchisee who wishes to continue using a competitor’s product could be exclusive.
When is it Permissible for a Franchisor to Have a Franchisee Purchase Their Goods?
There are two situations where it may be permissible to force a franchisee to purchase a franchisor’s goods:
- where the franchisor ‘notifies’ the Australian Competition and Consumer Commission (ACCC); or
- where the conduct does not ‘substantially lessen competition within the meaning of the Act.
Notifying the ACCC
A franchise’s success is mainly dependent on the franchisor’s ability to control the quality of the goods or services. For instance, consider the highly successful franchise, Mcdonald’s.
Irrespective of which Mcdonald’s location you visit, you will likely receive the same food quality. This is because their goods and services rarely differ between each franchise.
Moreover, franchises can ‘notify’ the ACCC when they wish to engage in exclusive dealing. Doing this provides the franchise with protection from legal action under the Competition and Consumer Act. Additionally, this Act allows a franchisor to make it a condition within their agreement that franchisees purchase their goods.
The ACCC has an exclusive dealings notification register to check which entities have notified the ACCC of conduct.
What is a Substantial Lessening of Competition?
An entity will not engage in exclusive dealing if it does not substantially lessen competition. To determine whether there has been a substantial lessening of competition, you must look at the effect of exclusive dealing on the overall market. This assessment occurs with consideration for a particular product and its substitutes.
The assessment’s focus is not on a particular franchisee’s ability to compete with other market players but on the impact as a whole. In most circumstances, an individual brand requiring that franchisees source certain supplies from particular suppliers is not seen as substantially lessening competition.
Clauses of the Franchise Agreement
If a franchisor’s requirement to nominate suppliers does not fall under substantial lessening of competition, you must next assess whether it falls under a clause of the franchise agreement. Usually, such a clause requires franchisees to only purchase supplies from supplier lists that the franchisor will approve. Furthermore, you can often find these lists in an operations manual.
If there is no similar provision in the franchise agreement, the franchisor has no contractual right to dictate where you may obtain supplies.
Key Takeaways
In summary, franchisors can force franchisees to buy their goods. However, exclusive dealing that substantially lessens competition is typically not good practice. However, a franchisor or person wanting to engage in exclusive dealing can lodge a notification with the ACCC. This will protect them from legal action. Alternatively, if the exclusive dealing conduct does not ‘substantially lessen competition’, then exclusive dealing is permissible, provided the Franchise Agreement permits a Franchisor to nominate suppliers.
If you are a franchisor, you should consult your franchisees when enforcing measures restricting their ability to deal with other suppliers. In doing so, you are likely to avoid or mitigate some disputes.
If you need help determining whether your franchisor can dictate which goods you buy, LegalVision’s experienced franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
Exclusive dealing occurs when an individual’s trading with another imposes restrictions on the other’s freedom to choose with whom they deal. For example, a franchisor stops you from buying goods from brands other than theirs.
The ACCC is a regulatory commission of the Australian Government. They are part of the Treasury that promotes fair trading and competition.
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