As a franchisor, it is typical to want to replicate your processes and product at each franchise location. In 2017, the Australian Competition and Consumer Commission (ACCC) also recognised the importance of replicating these processes and creating contractual relations with suppliers and ultimately abolished the absolute prohibition on third-line forcing. This article will explain third-line forcing, its benefits and when it is prohibited.
What is Third-Line Forcing?
Third-line forcing is a type of exclusive dealing. Exclusive dealing is when a company trading with another imposes restrictions on that other person’s freedom to choose who they can deal with or wrongfully discourages that person from trading with competitors of the business.
There are two common examples of third-line forcing, including where a business:
- refuses to supply products unless the purchaser buys products from a third-party business; and
- offers discounts if the customer purchases products from a third-party business.
Companies that practice third-line forcing face penalties of more than $10 million or three times the amount they gained from the breach.
In the franchising industry, prescribing specific suppliers for your franchisees was historically considered illegal third-line forcing and required permission from the ACCC. However, in 2017, the ACCC changed the legislation not to absolutely prohibit third-line forcing but only prohibit it in specific circumstances.
What Are The Benefits Of Third-Line Forcing For Franchisors?
1. Consistency Across Franchises
A franchise’s success depends on the reputation of its brand. Therefore, having the same suppliers for each franchise will keep the quality of goods or services consistent and allow that positive reputation to spread.
In addition, having the same suppliers creates a better experience for customers since it will enable them to expect the same products from each of your franchises. For example, using the same pepperoni supplier in your pizza franchise allows each pepperoni pizza to maintain consistent quality in every location.
2. Creates Effective Operations and Systems
One of the critical considerations in franchising your business is ensuring that the business model is replicable. Prescribing the same equipment or products allows franchisees to replicate those systems and easily source the required materials and ingredients. In addition, by choosing particular suppliers with sufficient reliability and availability, you can improve the efficiency of franchise operations and streamline the supply chain process since the ordering and operating processes will be the same for all franchisees.
For example, having the same deep frying machine in each location means being more thorough in your training systems and operations manual. In addition, you can provide a resource that helps troubleshoot any equipment problems or explain the procedures when using the equipment.
3. Wholesale Cost Savings
Using third-line forcing to restrict your franchisees to a limited number of suppliers of products and services allows you to negotiate wholesale discounts, rebates and special offers from those suppliers. These strong contractual relationships improve your bargaining power as a franchisor, benefiting the entire franchise network.
Franchisees can also save on delivery and freight costs from suppliers who service multiple franchisees through joint orders. Additionally, the new equipment or services training process is more streamlined when franchisees share costs.
This factsheet sets out the three key financial disclosure obligations every franchisor needs to comply with.
When is Third-Line Forcing Prohibited?
Before 2017, businesses needed to notify the ACCC if they wanted to engage in third-line forcing. At that point, the ACCC would assess whether the conduct would likely result in substantially lessening competition to approve or disallow that conduct. Breaching these provisions and not notifying the ACCC could result in a $10 million fine.
In 2017 the laws changed so that now third-line forcing is only prohibited when it has the purpose or is likely to have the effect of substantially lessening the competition in the relevant market. If that is the case, you will need to notify the ACCC. With these changes to the law, franchisors have saved time and money by avoiding having to make these applications where not necessary.
Seeking an Exemption
Third-line forcing has benefits, but it might not be ideal for franchisees. For example, they might be able to find other suppliers with better quality or better prices out there, but third-line forcing locks them in with a specific supplier. Therefore, you must inform them of any supplier agreements you have before you draft any franchise agreements or make any offers.
Unfairly or unreasonably restricting the choice of suppliers, particularly in a niche or specialised industry, may substantially lessen competition. However, suppose you think the third-line forcing arrangements may substantially lessen competition. In that case, you can notify the ACCC to seek protection from legal action and gain a legal exemption from the prohibition.
Key Takeaways
Third-line forcing is an effective way for you, as a franchisor, to create good relationships with suppliers and arrange discounts on some of the necessary goods and services. This exclusive dealing allows consistency, efficiency and cost-savings across your franchise network. However, it is important to note that if the arrangements could substantially lessen competition in the market, the ACCC will require you to lodge a notification. Moreover, it is vital to inform franchisees of these dealings to let them decide whether that works for them and their business ideas.
If you need assistance in lodging a notification or drafting supplier agreements, our 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
Third-line forcing is when a third party only supplies the purchaser if they have bought a product from a specific party. Alternatively, that third party might only provide a discount if the purchaser has purchased from a specific party.
As of 2017, third-line forcing is not prohibited. However, if your dealing is likely to lessen the market competition substantially, you must lodge an application with the ACCC seeking exemption from the prohibition.
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