- 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 recognises 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.
The application of certain provisions of the Competition Act 89 of 1998, as amended, to franchise agreements
- This notice is prepared and issued by the Competition Commission (hereinafter “the Commission”) in order to inform franchisors and franchisees about the impact of the Competition Act 89 of 1998 (hereinafter “the Act”) on their activities and arrangements to enable them to comply with the Act.
- This notice is purely a guide aimed at clarifying the areas of the application of the Act to various aspects of franchising agreements and is not binding on the Commission, the Competition Tribunal (hereinafter “the Tribunal”) or the Competition Appeal Court (hereinafter “the Appeal Court”) in the exercise of their respective judgement (ruling on cases), or their interpretation of the Act.
Objectives of Franchise Agreements
- 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.
- 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.
- 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.
- 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.