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A franchise is a business model where a business owner allows another party to operate copies of their original business. Within this structure, a franchisee will manage their replica of the business and will pay the franchisor various royalties or fees. 

This collaboration is beneficial to all parties, although it can raise some issues regarding anti-cartel law in New Zealand. This article will provide some background and explain whether anti-cartel law will affect your New Zealand franchise.

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Franchising in New Zealand

Franchising allows business owners to grow their established business premises. Additionally, this business model allows franchisees to take advantage of an already successful business. A franchisor may grant their franchisees various rights and support them in running a successful replica of the business. Doing this might include assisting with:

  • coordinated product purchases;
  • marketing and branding strategies;
  • intellectual-property licences;
  • supply contracts;
  • educational resources;
  • location scouting; or
  • anything else the franchisor deems necessary for their relationship.

Nonetheless, all parties within a franchising relationship must cooperate and communicate effectively. It is important to note that the franchisor and franchisees own separate businesses. However, franchisees usually own a local installation of the original franchise. While they own the business, they are granted rights from the franchisor through the franchise agreement. For example, franchisees may have obligations to run the business in a specific way. 

Naturally, the control a franchisee has over their business will vary according to the structure of the franchise itself. Their role is to handle the day to day matters of the local business itself, while the franchisor manages the whole system.

This cooperative nature of a franchise is mainly positive and benefits all parties. However, there is a risk of a franchise attracting cartel behaviour without careful wording in the franchise agreement.

What is a Cartel?

Competing with other businesses to be the best choice for consumers is central to commercial activity. Businesses that sell the same products or services compete with one another. Naturally, customers will decide to purchase whichever is the more attractive choice. Therefore, you must keep your products and services to a high standard as a business. Additionally, keeping your prices low is a great way to keep customers and attract new ones.

When businesses work together to undermine the competition, they may gain an unfair advantage over their competitors. A cartel involves businesses that agree not to compete with each other. For instance, powerful businesses may take advantage of their market power and work together to drive out smaller ones.

In New Zealand, the law severely penalises any behaviour that qualifies as cartel conduct. Some examples of this include:

  • price-fixing;
  • bid-rigging;
  • market allocating;
  • restricting output; or
  • cover pricing.

Additionally, cartel provisions within a contract are also illegal. This may include any provision within a contract that outlines the above behaviours. For example, market allocation qualifies as cartel conduct. Therefore, if a clause within your franchise agreement outlines specific territory allocations for different franchisees, you may be breaking the law. 

How Does Anti-Cartel Law Affect My Franchise?

Franchises require a franchisor and their franchisee to cooperate. However, as franchisees own a replica of the business, these parties may fall into competition with each other. Therefore, specific clauses with a franchise agreement may qualify as cartel provisions depending on their nature. These may include clauses that:

  • require franchisees only to purchase stock from specifically approved suppliers;
  • allocate the market territories of franchisees;
  • mandate that franchisees sell goods at a specific or minimum price; or
  • restrict franchisees from certain business activities, such as a restraint of trade clause.

However, these clauses may be fundamental to running your franchise successfully. Therefore, you need to take steps to ensure that:

  • the clauses do not engage anti-cartel law; or
  • you structure your franchise so that there is no competition between its members.

You may consider including alternative clauses in your franchise agreement that achieve the same commercial outcome. This area of law is quite complex, so you may need to ask an experienced commercial lawyer to review your franchising agreement. This will help ensure that you do not engage in anti-cartel prohibitions. Consequences for engaging in such behaviour include heavy fines and possible jail time.

Exceptions

There are a few exceptions to anti-cartel rules within New Zealand. In particular, these include:

  • collaborative activities;
  • vertical supply contracts;
  • joint buying and promotion; or
  • having a reasonable belief that an exception under the Commerce Act applies.

These exceptions may apply to you. Although, this depends on the structure of your franchise and the nature of the provisions themselves. Therefore, it is important to seek advice from an experienced lawyer to help you with this assessment.

Key Takeaways

A cartel refers to when two competing businesses work together in a way that undermines market competition. Given the collaborative nature of your franchise, you may qualify under this umbrella. Therefore, you should seek advice from an experienced lawyer to ensure your franchise agreement does not engage anti-cartel law.

If you need help with protecting your franchise, our experienced franchising 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 0800 005 570 or visit our membership page.

Frequently Asked Questions

What is a franchise?

A franchise is a business model that you may use to grow your business. As the franchisor, you may allow other parties to replicate your business operations to create their own success. A franchising agreement refers to these parties as franchisees. As a franchisor, you can grow your business and receive various fees or royalties.

What is cartel conduct?

Cartel conduct is anti-competitive behaviour involving businesses that collaborate to control the price or quantity of goods or services. It may also involve carving out areas of the market for each other. Types of cartel conduct include price fixing, bid rigging, market sharing, and restricting output.

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