The Australian Government recently published guidelines around the proposed ACCC amendments to the Competition and Consumer Act 2010 (the Act). This article will set out the changes particularly as they apply to section 47 of the Act (exclusive dealing clause) and the potential implications of franchisors. Although the changes are yet to come into force, franchisors, franchisees and other businesses should be aware of the proposal and its potential impact.
Before detailing the proposed amendment, it is important to discuss the term third line forcing in the franchising context. Third line forcing refers to the requirement that the supply of goods or services will be restricted to a condition that requires a business to purchase the good or service from a particular supplier.
This is common in many franchise systems to ensure consistency and quality control of the products that the business will offer customers. For example, a fast food franchisor may require a franchisee to purchase a particular seasoning from an “approved supplier”. The franchisee is then restricted from sourcing their own supplier. This may also occur if the franchisor refuses to supply products on the basis that the franchisee did not agree to purchase from an approved supplier.
The Act currently requires that businesses receive a notification from the ACCC allowing them to enforce such “third line forcing” arrangements. This means that third line forcing is automatically prohibited unless a business receives approval in the form of a “notification” from the ACCC. In approving the arrangement, the ACCC will need to consider whether the anti-competitive effects will outweigh the public benefit of the arrangement. Section 47 of the Act further sets this out.
The proposed amendments will remove the automatic illegality of third line forcing. Such arrangements will only be prohibited when the “the purpose, effect or likely effect of the conduct is a substantial lessening of competition”. This means that section 47(10) of the Act will be amended so that third line forcing will only be prohibited if the above test is satisfied. One of the reasons for the amendment is ensuring the same test is applied to each scenario, which differs from the ACCC deciding on the situation upon receiving an application for a notification.
Effects on Competition
According to the Act, the supply arrangement must have an impact in “substantially lessening competition”. The common test is that a court will need to be satisfied that the action has the purpose, effect or likely effect of substantially lessening competition. Australian competition law precedents provide examples of how the courts commonly interpret this. For example, the term “lessening” will require that competition be compromised or impacted. Further, the term “substantially” will require the conduct to be relevant to the competition process.
What Does this Mean for Franchisors and Franchisees?
If this proposal is accepted, the changes to the Act will allow it to be more flexible for franchisors to enforce specific supply arrangements if they are of the belief that this will not substantially lessen competition. Of course, the conduct should be assessed to determine whether your conduct would substantially lessen competition. For franchisees, this will mean they will have to be extra diligent in reviewing the franchisor’s supply arrangements to determine whether the franchisor may be conducting third line forcing practices that would lessen competition in the market of suppliers. If franchisees are concerned about the franchisor’s practice, they will need to prove that the franchisor’s conduct has substantially lessened competition as third line forcing will not be automatically prohibited according to these proposed changes.
If you are a franchisor or franchisee, you should keep a look out for any upcoming changes to the legislation and be aware of the potential impacts this may have on the conduct of your business. If you have questions or need assistance reviewing your supplier agreements, get in touch with our franchise team on 1300 544 755.