By Warren Scott, Partner
The absolute prohibition on third line forcing has been abolished. On the 6 November it was replaced with a test to judge whether it is likely to result in a substantial lessening of competition.
What is third line forcing?
Third line forcing is where a franchisor requires a franchisee to acquire goods or services from a third party. One example is where a franchisor might require a franchisee in a burger chain to buy all the requirements for meat patties from a specified supplier.
What does the change mean for franchisors?
As a result of this change it will now be straight forward and inexpensive for franchisors to put in place tied supply arrangements to require franchisees to buy products and services from third parties.
This will be attractive to franchisors as they can ensure franchisees purchase from suppliers and franchisors can often negotiate to receive rebates from those suppliers. In the past some franchisors elected to purchase and on-supply products to the franchisee to circumvent the third line forcing provisions.
There will no longer be a cost or inconvenience in notifying the ACCC of these arrangements where the conduct is not likely result in a substantial lessening of competition (which will nearly always be the case in competitive industries).
What does it mean for franchisees?
There is no legal requirement for franchisors to justify that there is a quality or cost benefit to franchisees before requiring them to purchase particular goods or services from third parties.
With the removal of the need for franchisors to notify the ACCC of such arrangements, it is likely that franchisors will increase their use of third line forcing in the supply chain.
This will enable the franchisor to cease being part of the supply chain itself and shift liability away from itself to the third party suppliers.
Franchisees will need to ensure that they understand the supply chain that comes with the franchise they are involved with, both in terms of the cost and quality of the third parties as well as the financial standing of the suppliers to stand behind the products and services they supply.
Aussie law more competitive
The change to the law in respect of third line forcing brings Australia into line with how competition law deals with this issue in other countries. It is universally accepted by competition experts that this change to the law is in fact pro-competition and an appropriate change.
However, franchisees need to understand that they can be required to purchase from third parties regardless of quality, price advantage or other benefits and therefore need to ensure they consider this in their assessment of the franchisor and the franchise offer.
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