Question
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24 July 2015

Exclusive dealing?

Business / Franchise Sale & Purchase, Trade Marks
Federal

Asked

Dear Sir, this query relates to franchising.

Franchisors want to have a measure of control over the way in which a franchisee operates to business. Our client, a franchisor, wishes to require franchisees to only purchase stock from its related company, on the basis that it can offer low prices and is satisfied with the quality.

We query how such a requirement would operate in light of the prohibition against third-line forcing under s 47 of the Competition and Consumer Act 2010 (Cth). Are there any ways to draft the clauses to not offend the provisions (e.g. approval process whereby other suppliers can be used if their quality is acceptable)? 

We note that there is a way for the franchisor to lodge a notification with the ACCC which protects it from legal action in relation to this but we understand the lodgement fee to be $7,500 which is more than our client is willing to bear.

We look forward to receiving your comments on the above. Thanks.

Answered

The proposed terms of the franchise agreement and the conduct is exclusive dealing. The franchise agreement should provide that the franchisee shall buy products only from the franchisor or from suppliers approved by the franchisor (see, for example, clause 16 of the By Lawyers precedent franchise agreement).

The related company should supply the products to the franchisees as agent for the franchisor to remove any suggestion it is third line forcing.

The conduct should be notified to the ACCC using Form G. The notification fee is $100 only. All notifications are on the public register maintained by the ACCC and we suggest you look at how some other franchisors have dealt with the notification.

If there are commercially sensitive aspects to the franchise arrangement, there is provision in the notification process to provide this information separately to the ACCC and for it not to be included in the public register.

Regards Mentor