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Cartel Amendments to Commerce Act: Overview for Franchisors

Written by Darryl King, PARTNER; on January 25th, 2016.    


The Commerce (Cartels and Other Matters) Amendment Bill is currently in its final stages in Parliament.  This Bill will impact most franchise businesses – including franchisees - as most franchise agreements will contain clauses that are considered to be ‘cartel’ provisions under the Bill. 
This article provides a brief overview for franchisors on the Bill, its potential impact on their franchise businesses and what franchisors need to do to prepare for the passing of the Bill.

What does the Bill do?

The Bill amends the Commerce Act 1993 to make a business arrangement containing a cartel provision unlawful. 
A cartel provision is a provision or arrangement between competitors that allows for: 

  • fixing prices;

  • restricting output;  or

  • allocating markets. 

The Bill does contain exemptions which allow cartel provisions in certain circumstances.  The most likely exemption to apply in franchise arrangements is the exemption for ‘collaborative activities’.  A collaborative activity is defined as an activity carried out in cooperation between two or more parties that does not have the dominant purpose of lessening competition.  The cartel arrangement must also be reasonably necessary for the purpose of the collaborative activity.
While the Bill will not significantly change the scope of the prohibitions on the Commerce Act for most businesses, the cartel changes will affect most franchise businesses for the reasons set out below.

How does this affect my franchise business?

While you may not think of your franchise business as involving a ‘cartel’, or that you as franchisor are in competition with your franchisees, most franchise agreements will contain a cartel provision of some sort.  We believe it is safest to assume that a competitive relationship exists, either between franchisor and franchisee, or between the franchisees. 
Typical franchise clauses that might be caught by the cartel restrictions include clauses which:

  • allocate geographical territories to franchisees;

  • require a franchisee to only purchase stock from an approved supplier; 

  • require a franchisee to sell at a specified price, for example, as part of a promotion; or

  • restrict a franchisee from carrying on other business activities (restraint of trade).

In many cases, these clauses will be essential to the successful operation of your franchise business.  It will, therefore, be important to consider whether an exemption under the cartel restrictions will apply, or whether the clauses can be amended so that they no longer fall foul of the legislation.  Assessment of whether an exemption applies will require an assessment of the markets you and your franchisees operate in, and may change over time.  

Criminal penalties removed from Bill

One of the controversial elements of the Bill was the proposal to introduce criminal sanctions.  Individuals involved in cartel conduct could be imprisoned for up to 7 years. However in December 2015 the government abandoned this proposal (see this statement from the Minister of Commerce and Consumer Affairs Paul Goldsmith). Under the Bill, civil penalties are in the tens of millions for corporations or up to $500,000 for individuals.    

What steps do I need to take to comply?

How the Bill applies to your franchise business will depend on your franchise arrangements, and the competitive market you operate in.  We recommend that you:

1. Review and amend your franchise agreement:  We recommend that your current franchise agreement be reviewed, to:

  • identify any potential ‘cartel’ clauses;

  • consider whether an exemption under the Bill could be applied; 

  • carefully document how any applicable exemption applies;

  • prepare for discussions with current and potential franchisees who will be looking to you for assurance that the franchise system complies with the new cartel arrangements; and

  • amend your template franchise agreement where necessary.

There will be a short transition period for you to amend your existing franchise agreements.

2. Become familiar with the Bill:  This will enable you to respond to potential competition issues as they arise in your day to day business.  For example, if a franchisee complains to you about the behaviour of another franchisee.  

3. Schedule regular compliance checks:  As your business changes over time, so too will the assessment of whether your business complies with the Bill.  We recommend that you schedule in regular compliance assessments as part of your compliance programme – this will be important to protect you from a cartel investigation. 

As a member of the legal and regulatory subcommittee of the Franchise Association of New Zealand, we have been liaising with the Commerce Commission to obtain a fact sheet to assist franchisors to understand their obligations under the cartel provisions. Unfortunately the Commission is yet to be able to provide us with a draft of the fact sheet. 

When do I need to comply?

The Bill was introduced into Parliament in 2011 and has been making slow progress through Parliament. However, with the criminalisation aspects having been removed from the Bill, it seems likely that the Bill will be passed early in 2016. As the Bill does not give any lead time for existing agreements (meaning that from the commencement date of the Bill any new franchise agreements and any renewal agreement would need to comply), we recommend that you start taking steps now to ensure your franchise arrangements comply with the Bill.  

How we can help

We are happy to discuss the Bill with you in further detail, answer your questions, and assist you to comply with your obligations under the cartel provisions. We can provide you with a fixed fee package to provide you with cost certainty.

The information contained in this publication is of a general nature and is not intended as legal advice.  It is important that you seek legal advice that is specific to your circumstances.
All rights reserved © Jackson Russell 2016

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