Welcome to part two of Franchisee Obligations and Exclusive Dealing. We have already touched on the types of exclusive dealing arrangements that franchisors will try to impose on their franchisees, and the legal limitations of these arrangements. An important takeaway from part one is that these kinds of arrangements should never reduce competition, and should be mutually beneficial to both franchisor and franchisee.

Volume Margins

It is common practice for franchisors to require their franchisees to buy their products and services from a nominated supplier. Although this appears to be a restrictive, perhaps even unfair condition, the truth is that by having the franchisees purchase from the same supplier, both parties can benefit. In fact, this is the arrangement in most of the very successful franchise systems.

As with most businesses, the ability to buy goods and services at reduced rates depends to a large extent on the volume you are able to buy. The volume of products, however, depends on both demand and what is required to operate the franchise business. In a large franchise system where there are hundreds of franchisees, it is obviously much cheaper to buy from the same supplier. At the end of the day, this will give the franchisees a competitive edge due to these higher volume margins.

Quality Control

Franchised outlets within a franchise are characteristically alike, meaning they share the same products and marketing for the most part. To have franchisees purchase from a nominated supplier is to ensure that the quality of the products is identical throughout the franchise network. This is important as customers are looking for consistency when they buy from a franchise. A Big Mac in Western Australia is probably expected to taste the same as a Big Mac in New South Wales.

Brand Protection

Much time and effort will have been invested into the franchise to develop a recognisable and reputable brand throughout its network of franchisees. The franchisor will understandably want to maintain the good reputation it has built over time and one effective way of ensuring this happens is to make sure that franchisees buy from the same supplier.

The Australian Competition and Consumer Commission

The ACCC act as the watchdog over the franchising industry. The commission ensures that franchisors and franchisees are compliant with the Franchising Code of Conduct (the Code), as well as the Australian Consumer Law. If franchisors/franchisees breach the Code or the ACL, the ACCC can take enforcement measures to ensure compliance or punish for non-compliance.

In addition, the ACCC has powers to audit different franchisors to check they are being compliant, and also has powers to require franchisors hand over any documents they are required to keep records of under the Code.

To carry out an audit on a franchisor, the ACCC must serve a notice, however, need not have any basis for suspecting the franchisor has in any way breached the ACL or the Code.

Based on recent amendments to the Code, the ACCC has been given stronger enforcement powers with the ability to issue infringement notices of up to $8,500 to companies without a court order.

Conclusion

Franchisors usually require the franchisees within their network to purchase their products from the same supplier. This is for a variety of reasons, including volume margins, quality control and brand protection. In some cases, however, the franchisors will impose unfair conditions that actually reduce competition. These practices are known as exclusive dealing and include third line forcing and full line forcing.

If you’re at all concerned about the conduct of your franchisor, and wish to speak with a franchise lawyer about your concerns, contact LegalVision on 1300 544 755.

Next Steps

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