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As a franchisor, ensuring your franchisees are legally compliant is crucial to avoid disputes and protect your franchise network’s reputation. In particular, the Commerce Act and cartel conduct provisions promote fair competition throughout the New Zealand market. There are high consequences for breaching the Act. This article will guide you on how your franchise can comply with the cartel provisions and anti-competitive laws.
This publication provides you with the fundamentals for franchising your New Zealand business, including set up, branding and management.
What Are Cartel Provisions?
Anti-competitive conduct includes contracts or agreements between competitors that seek to substantially lessen competition in the market. Cartel provisions are one type of anti-competitive behaviour and can include:
- restricting output; or
- allocating markets.
Price fixing occurs when competitors agree to set or control prices for goods and services, such as setting discounts and rebates. Accordingly, agreements that create standardised pricing among your franchisees could breach the price-fixing laws. Therefore, you must ensure prices are not fixed among your franchises and vary as appropriate.
Restricting output means competitors work together to restrict production or a supply of goods and services to create scarcity in the market. In a franchise context, the following may fall under the restricted output prohibition:
- restricting trading hours;
- restricting a franchisee from running other businesses; or
- preventing a franchisee from starting a business after leaving your franchise.
Lastly, allocating markets involves dividing the market based on geography, demography, or lifestyle choices. This provision may apply to your franchise agreement if it divides and allocates geographical territories between franchisees.
If you cannot amend your agreements, you may be able to seek an exemption from the Commerce Commission.
Getting an Exemption
There are three exceptions to the cartel provision prohibitions, including:
- contracts for vertical supply;
- joint buying arrangements; and
- collaborative activities.
Collaborative activities often apply to franchise systems. The exception states that when cartel provisions exist between parties to an activity, those provisions will not be prohibited as long as the arrangement does not lessen competition between competitors. Moreover, competitors must establish that the cartel provisions are necessary for the arrangement.
You can seek an exemption or clearance from the Commerce Commission, who will review your application within 30 days. Afterwards, they will decide whether the:
- competing parties are involved in a collaborative arrangement;
- cartel provisions for the collaborative arrangement are reasonably necessary; and
- collaborative activity does not substantially lessen competition in the market.
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Is Your Franchise in Competition?
As a franchisor, you are most likely competing with your franchisees if you operate a business within your franchise. For example, if you own a cafe franchise and run one of the cafes, you will compete with your franchisees.
A competitive relationship may still exist even if you do not run a store within your franchise business. This is due to you dealing and contracting with your franchisees, who compete with each other.
Penalties for Breaching Anti-Competitive Laws
Conducting cartel and anti-competitive behaviour without an exemption is a civil and criminal offence. In civil law, your franchise can receive a fine:
- up to NZD 10 million;
- three times the commercial gain from the illegal arrangement; or
- 10% of your turnover per year per breach.
From a criminal law perspective, your franchise business will face criminal fines. Accordingly, it is vital to ensure all your franchises comply with competition laws to avoid a hefty fine and a damaged brand reputation. It is best to inform your franchisees of competition laws to ensure they can avoid breaching them. You can conduct regular check-ins throughout your franchise business to guarantee no franchisee engages in anti-competitive practices.
Cartel provisions include price fixing, restricting output, and market allocation. Your franchise agreement may consist of such prohibitions depending on the terms. Therefore, you can ask your lawyer to amend the agreement or seek an exemption from the Commerce Commission. Complying with anti-competitive laws is vital, otherwise your franchise may face a large fine or criminal sanctions.
If you need help complying with anti-competitive laws, our experienced franchise lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers who can answer your questions and draft and review your documents for a low monthly fee. Call us today at 0800 005 570 or visit our membership page.
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