Franchisors, just like any other business operator, need to comply with competition laws and not participate in anti-competitive behaviours. Competition laws are particularly relevant for franchisors due to the significant control that the franchisor has over how the franchisee's business is operated. This control includes the image of the business, and the goods and services used or supplied in the business.
Recently there has been a change which brings competition laws back into focus for franchisors.
A franchise system is based on the intellectual property which the franchisor has developed. The franchisor then licences certain parts of this intellectual property to the franchisee under the franchise agreement to use in the franchisee's business.
Although this licence controls how the franchisee conducts its business, it has always been understood that intellectual property licences were exempt from competition laws relating to cartel conduct or market sharing due to section 51(3) of the Competition and Consumer Act 2010 (Cth) ('the CCA').
Last year, the Federal government repealed section 51(3) of the CCA. There was a safe harbour period which has now ended.
There is some technical suggestion that the repeal of section 51(3) will mean that franchisors may now breach the cartel conduct provisions by stipulating provisions in franchise agreements such as:
quality assurance in relation to products purchased or supplied;
market sharing (for example, providing the franchisee with an exclusive territory); or
the allocation of customers through a centralised collection point, such as a call centre.
A breach of competition laws may occur in particular if the franchisor operates company stores which may compete with a franchisee.
While the change in law is new and yet to be tested in the Courts, there is now clearly a risk that did not previously exist.
There is no grandfathering of section 51(3) and so the changes apply to all franchise agreements, whether they were entered into before the repeal date or not.
There are significant penalties for breaching the cartel conduct provisions of the CCA. The maximum penalty on a franchisor company would be the greater of:
$10 million;
three times the value of the benefit reasonably attributable to the act or omission; or
if the value of the benefit cannot be determined, 10% of the franchisor’s annual turnover in the preceding 12 months, per breach.
Individuals, including directors, can also incur penalties up to a maximum of $500,000 per breach. Individuals and corporations can also face criminal penalties if found guilty of cartel conduct.
Franchisors are already bound by various prohibitions in the CCA relating to resale price maintenance, third line forcing and unfair contract terms.
It is important, now more than ever, for franchisors to be wary of the terms of their franchise agreements to ensure they do not breach the CCA.
CCK Lawyers can assist with a review of your franchise agreement and the operation of your franchise system to ensure it is compliant with the CCA. Please contact us if you have any concerns regarding the possible application of competition laws.
This article provides general comments only and does not constitute legal advice. You should always seek specific advice on your particular circumstances
CCK Lawyers has extensive experience with franchising, competition laws and intellectual property. If you need advice contact us on (08) 8211 7955.