Comparative Study

  1. In most jurisdictions no particular law that is dedicated to franchising exists and thus franchising agreements are subjected to the same competition law and policy, as it is applicable to all economic activities.
  2. In Australia Part IV of their Trade Practices Act of 1974 as amended, applies and prohibits any anti-competitive agreements and practices that could substantially lessen competition in vertical relationships and the rule of reason is applied in such cases. Price fixing, RPM, collective boycott and in certain instances exclusive dealing are regarded as per se prohibitions. Recommended prices are, however, allowed and do not constitute a contravention of the Act. The ACCC 11 also makes use of the Franchising Code of Conduct 12 to deal with franchising problems through mediation. However, in a case where a franchisor abuses its power to the disadvantage of the franchisee or does not abide by the rules of the code, the ACCC may intervene and take action on behalf on the franchisee.
  3. In Canada the provisions of their Competition Act of 1985 as amended, also govern franchising agreements. An agreement or conduct is assessed on a case-by-case basis to determine whether competition is or is likely to be lessened substantially. Exclusive dealing and tied selling are judged under the rule of reason. Their Tribunal may make an order prohibiting a supplier from continuing to engage in an exclusive dealing or tied selling. It may also stipulate any other requirements that, in its opinion, are necessary to overcome the effects thereof in the market or to restore or stimulate competition in the market. Cases of abuse of dominance are also dealt with under the rule of reason or on the substantial lessening of competition test. RPM is treated as an outright prohibition by the authority but price recommendation is allowed.
  4. In Japan the Anti-monopoly Act, 1947 as amended, applies to franchising agreements and most practices are judged under the rule of reason. Business activities by parties through contracts, agreements or any other concerted actions are prohibited if they would be contrary to the public interest and result in substantial restraint of competition in any particular field of trade. RPM applies only in circumstances where the conduct would have an adverse effect on consumers and was imposed on the reseller. However, it does not apply in legitimate acts performed by an entrepreneur who produces or sells a commodity. The Japanese franchising guideline document cautions franchisees and franchisors to abide by the law and to take heed of the Anti-monopoly Act when contracting.
  5. In the United Kingdom (“UK”) the Fair Trading Act, Restrictive Trade Practices Act, Resale Prices Act and the Competition Act of 1998 are all relevant in the investigation of anti-competitive and restrictive practices agreements as they relate to franchising. They also follow the principles of Article 81(1) of EC Competition Law, which prohibits agreements that will have an appreciable anti-competitive effect on competition. Chapter 1 of their Competition Act prohibits agreements whose object or effect is to prevent, restrict or distort competition within the UK. Vertical agreements are considered not to raise competition issues except when imposed by a firm with market power. RPM is, however, considered as a ‘hardcore’ restriction and seen as capable of having an appreciable effect on competition. Maximum pricing and recommended pricing are allowed provided they do not result in price fixing and reduction of price competition.
  6. In the United States the Anti-trust laws subject all competition concerns to the same legal standards and analytical process with no distinction between franchising and other distribution systems. Agreements and practices relating to IPRs are dealt with on a case-by-case basis under the rule of reason.
  7. In the European Commission the legislation shows a move towards a more economic approach in the assessment of vertical agreements under the EU competition rules. In the absence of market power, vertical agreements that contain restrictions to competition may be considered to improve the production and distribution of goods and services. However, notwithstanding the efficiencies generated, the accepted view is that vertical agreements can also have anti-competitive effects, particularly if they result in market foreclosure, restrict price competition or result in the partitioning of markets. Whether or not the franchise agreement might raise competition concerns, depends on its nature or formulation, or on the structure, market size or market power. Article 81(1) of the EC Competition Law, prohibits agreements that will have an appreciable effect on competition, and would apply in franchise agreements if it is shown that harm is caused to third parties, especially where there are no alternatives. RPM would apply if parties have market power. In the E.U the court found in the Pronuptia de Paris GMbh v Pronuptia de Paris Irsmgard Schillgalis 13 case that price fixing was per se illegal in respect of franchising. Individual or group exemptions can be granted if there are overriding countervailing benefits such as an improvement in efficiency or the promotion of research and development.
  8. It appears therefore that there is a lot of similarities in the way franchise agreements are dealt with in the different jurisdictions. For example, it is accepted that although vertical agreements are efficiency enhancing they can also have anti-competitive effects. It is also evident that in most of these jurisdictions, the use of the rule of reason is more prominent when dealing with franchise agreements. A developing country like South Africa is likely to continue to treat RPM as a per se offence whereas in developed countries the trend seems to indicate that RPM may be authorized when there are demonstrable public benefits. Recommended prices are acceptable to most competition authorities in that they communicate information (e.g. quality, brand image, etc.) to consumers and franchisees. Furthermore, on the issue of vertical restraints linked to IPRs, most jurisdictions tend to accept that these not only enhance efficiency but are imposed to protect the know-how or the investment incurred by the franchisor
  1. This refers to the Australian Competition and Consumer Commission which is the competition authority in Australia
  2. The Code ensures that franchisees are informed of all relevant facts when starting their businesses, and that they can access a fast and relatively inexpensive way to resolve any disputes. The Authority adopted this code (which is not theirs) and made it a mandatory code under the Trade Practices Act.
  3. Pronuptia v Schillgali (1996) ER 353)


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