July 18, 2014

Implementing Pricing Strategies in a Franchise?

Pizza Hut recently implemented a sales strategy that placed a cap on the price its franchisees could charge for a pizza. The sales strategy was launched by Pizza Hut to remain competitive in the market, particularly in relation to its rival Dominos, as well as in response to a downward trend in financial performance and a loss of customers over the past decade.

The strategy essentially involved restricting the maximum price for pizzas sold by franchisees, and reducing the number of pizza products on the menu (the Strategy).

80 disgruntled Pizza Hut franchisees sought an interlocutory injunction restraining the franchisor’s parent company, YUM! Restaurants Australia Pty Ltd (Yum), from implementing the Strategy (the Injunction).1

The Injunction was sought by the franchisees on two primary grounds:

  1. the implementation of  the Strategy breached implied terms of the franchise agreement, including a duty to act in good faith, reasonably and/or honestly; and
  2. implementing the Strategy involved unconscionable conduct in contravention of section 21 of the Australian Consumer Law (the ACL). 2

Section 21 of the ACL prohibits unconscionable conduct in connection with the supply of goods and services.

On 24 June 2014, the Federal Court declined to grant the Injunction. The Court expressed the view that due to the deterioration of profits and brand recognition, the Injunction would prevent Yum from competing effectively on price and that it would be rational for Yum to implement a sales strategy. There was no evidence that Yum was acting in its own interests at the expense of its franchisees, and the Court accepted evidence presented by Yum that it would act rationally in response to the practical application of the Strategy.

Additionally, it was necessary to take into account the adverse impact the injunction would have on the other 130 or so franchisees not a party to the proceedings.

The Court considered that damages would be an adequate remedy for any franchisee that suffered loss as a result of the Strategy, and placed particular weight on this when deciding not to grant the Injunction.

This decision is significant for both franchisors and franchisees, as it demonstrates the Court’s approach to assessing whether a franchisor has acted in good faith and not unconscionably by implementing profitability strategies for a franchise network as a whole.

 


1.  A & A (Sydney) Pty Ltd v YUM! Restaurants Australia Pty Ltd [2014] FCA 678.

2.  Schedule 2, Competition and Consumer Act 2010.