As a franchisee, you have certain duties and obligations specified in the franchise agreement. One includes buying any goods and services needed for operating the franchise either from the franchisor or a nominated supplier. This concept is referred to in legal terms as “exclusive dealing”.
What constitutes exclusive dealing?
In broad terms, exclusive dealing involves the franchisor restricting the franchisee’s choice of supplier for the goods or services it requires to operate the franchise business. This restriction extends to encompass the type of goods and services that are purchased and where they are sold. In general, some types of exclusive dealing will be against the law if it adversely affects, or decreases, the level of competition.
What is third line forcing?
Third line forcing involves a franchisor forcing its franchisees to purchase from a particular supplier (or third party). This arrangement usually requires written permission from the franchisor for requests to buy goods or services from other parties.
For instance, Kebabs Pty Ltd may include conditions in their franchise agreement that require its franchisees to buy their kebab wraps from Wraps Pty Ltd even if they are not the most affordable or best quality wraps.
Typically, third line forcing is prohibited conduct under the Competition and Consumer Act 2010 (the Act). This being said, the Australian Competition and Consumer Commission (ACCC) can make certain exemptions if the public benefit outweighs the potential for negative impacts on the level of competition.
Public benefits recognised by the ACCC
The ACCC has acknowledged that, in certain circumstances, third line forcing will benefit the public. Some of the recognized benefits include:
- Promoting business productivity;
- Improving the quality of products; and
- Enhancing levels of competition in the market
A good example would be when purchasing from the same supplier is more cost effective, than choosing to purchase from a third party. This scenario actually promotes competition and enhances the welfare of consumers (the price of the product is lower because costs are also lower, and there is good quality control).
What is full line forcing?
Full line forcing is not so different from third line forcing. It still restricts the franchisee from choosing their own supplier without first seeking the permission of the franchisor. The only difference is that full line forcing requires the franchisee purchase their products and services directly from the franchisor.
For instance, Printers-R-Us Pty Ltd may include conditions in franchise agreement that require its franchisees to only buy their printers from Printers-R-Us Pty Ltd.
This type of exclusive dealing will breach the Act if the franchisor is trying to lessen competition, or competition will most likely lessen in the relevant market as a result. Otherwise, full line forcing will not be against the law.
Stay tuned for part two on exclusive dealings. In the meantime, if you believe your franchisor has imposed unfair exclusive dealing obligations on you as franchisee, contact LegalVision on 1300 544 755. Our franchise solicitors will happily advise you on the best course of action for dealing with this kind of franchisor misconduct.