Franchisees commonly ask whether their franchisor can force them to buy their goods. For example, a cleaning company franchisee may have been using cheaper home brand cleaning products. The franchisor may then request that the franchisee uses cleaning products developed by the franchisor. This can be concerning because the franchisee can no longer maintain their profit margin. This article will explore the situations where it may be permissible for a franchisor to force a franchisee to purchase the franchisor’s products in some circumstances.
The Basic Rule – Exclusive Dealing is Not Allowed
Broadly speaking, exclusive dealing occurs when an individual 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. Exclusive dealing can apply to a situation where a franchisee is being forced to buy the goods of a franchisor.
Section 47 of the Competition and Consumer Act 2010 (Cth) deals with a situation where one person forces another to buy their goods. Under section 47(3), a corporation engages in exclusive dealing if it refuses to supply an individual with goods or services because he or she hasn’t agreed to stop acquiring goods from a competitor. Effectively, this behaviour must substantially lessen competition.
A franchisor refusing to supply goods and services to the franchisee who wishes to continue using a competitor’s product could amount to, under the Act, prohibited exclusive dealing.
When May it be Permissible for a Franchisor to have a Franchisee Purchase Their Goods?
There are two situations where it may be permissible to force a franchise 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.
A franchise’s success is largely dependent on the franchisor’s ability to control the quality of the goods or services provided by limiting franchisees dealings with competitors. One of the all-time greatest franchises, McDonalds, is an obvious example. McDonalds operates in 118 different countries, serves over 68 million customers each day and has over 35,000 different restaurants. Irrespective of whether you visit a McDonalds in Maroubra or Maroochydore, you know you can rely on consistently great tasting food (depending, of course, on your palate’s initial tolerance for McDonalds). This is because how ‘Maccas’ cooks its Big Macs or fries doesn’t differ one oil-drop from franchise to franchise.
Franchises can ‘notify’ the ACCC when they wish to engage in exclusive dealing. A notification provides the franchise with protection from legal action under the Act, allowing a franchisor to make it a condition that franchisees purchase their goods.
The ACCC has an exclusive dealings notification register to check which entities have notified the ACCC of conduct.
Not a Substantial Lessening of Competition
An entity will not engage in exclusive dealing if its effect does not substantially lessen competition. To determine whether there has been a substantial lessening of competition, the effect of exclusive dealing on the overall market for the particular product and its substitutes must be assessed.
The assessment’s focus is not on a particular franchisee’s ability to compete with other market players, but on the impact on the market as a whole.
Summary and Quick Tips for Franchisors
The Act prohibits exclusive dealing that substantially lessens competition. A franchisor or person wanting to engage in exclusive dealing can lodge a notification with the ACCC, which will protect it from legal action. Alternatively, if the exclusive dealing conduct does not ‘substantially lessen competition’, then exclusive dealing is permissible.
If you are a franchisor, and you want to make changes to the franchise system, you should consult with franchisees when putting in place measures restricting their ability to deal with other suppliers. By creating an open and transparent system of communication about changes, you’re likely to avoid or at least mitigate some disputes.
Questions? Please get in touch in 1300 544 755.