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.
What does the Bill do?
The Bill amends the Commerce Act 1993 to make a business arrangement containing a cartel provision unlawful.
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.
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.
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:
There will be a short transition period for you to amend your existing franchise agreements.
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.
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David Alizade, PARTNER