Competition Commission

  • Various industry players in the franchising sector have argued that the Act should not be made applicable to franchise agreements because of the nature of franchising as a business model.
  • Some of the arguments are that franchising should be seen as a specialist field with different elements and should be distinguished from ‘normal’ business entities. It is also argued that since franchising has generally a low rate of failure, it should be left alone unregulated so that it can continue to grow.
  • The Commission recognizes the contribution of franchising to job creation and the fact that it is one of the best vehicles and an effective way to opening up markets for small and medium-sized enterprises (hereinafter “SMEs”) and the historically disadvantaged persons to participate in the mainstream economy of the country.
  • Whilst franchising is a successful, common and often efficient method of distribution or manufacture of goods and services in the country, it is important to realize that at the same time it may be problematic from a competition law perspective.
  • This notice thus highlights the various aspects of franchising that may be affected by the Act. However, this should not be interpreted to exhaust all instances or activities in franchising arrangements that could be affected by the Act. For easy understanding and clarity, decided cases and approaches adopted in other international jurisdictions have been considered.

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Objectives of Franchise Agreements

  1. Franchising is described as a method of structuring a productive relationship between two parties in which both contribute to the production or distribution of the product and service. It is a contractual relationship between a franchisor and a franchisee whereby a franchisor would permit a franchisee to make use of his/her trademark or patent, distribution network and commercial know-how in return for a royalty fee attached to a license.
  2. The franchisor may also provide the marketing image as well as technical assistance for the duration of the agreement. Franchising does offer the perfect opportunity for expanding a franchisor’s business while retaining his/her competitive edge.
  3. In order to ensure uniformity in the presentation and selling of goods/ services, the franchisor may insist on certain requirements amongst its franchisees, such as requiring them to obtain stock from him/her or from selected suppliers or to produce the stock in accordance with the franchisor’s specifications. In addition to the need to protect intellectual property rights such as trademark, the franchisor also supervises the location, the décor, and may arrange premises in accordance with the distinctive layout/format associated with the franchise. Despite all of these, it is important to realize that the franchisee’s business is an independent business to that of the franchisor.
  4. Inasmuch as this industry is described as a specialized sector with all the good intentions, it is also a business concept or model whereby the franchisors and the franchisees are engaged in an economic activity. Therefore, in terms of section 3(1), the competition legislation does apply to franchising agreements, as they constitute an economic activity within or having an effect within the Republic.

Problematic clauses in Franchise Agreements 1

  1. The Commission was established to investigate, control and evaluate restrictive practices and abuse of dominance. Chapter 2 of the Act stipulates specifically the types of agreements and conduct that could be deemed to be anti-competitive.
  2. Section of 4(1) of the Act prohibits a conduct by parties in a horizontal relationship that would have the effect of substantially lessening competition in a market or relate to price fixing, market division or collusive tendering.
  3. Section 5(1) of the Act prohibits agreements between firms in a vertical relationship that would have the effect of substantially preventing or lessening competition in a market or that relate to minimum resale price maintenance. The Act further prohibits the abuse of dominance.
  4. Chapter 2 makes provision for rule of reason prohibitions and per se prohibitions. The former allows for justification of prohibited conduct whereas the latter does not. Price fixing, collusive tendering and market division as well as minimum retail price maintenance are thus per se prohibitions in the Act.
  5. Typical restraint provisions applicable to franchising, which may have possible competition implications, are discussed below. It must be noted though that the extent to which competition concerns may arise would depend largely on market definition, which the Commission will do on a case-by case basis, taking into account both geographic and product dimensions.