Third Line Forcing

Changes to legislation usually tighten existing regulations. Recent changes to the provisions of the Competition and Consumer Act 2010 (Act) covering third line forcing are a pleasant departure from this norm.

Third line forcing is a form of exclusive dealing, where a business will only supply goods or services, or give a particular price or discount, on the condition that a person buys the goods or services from a nominated third party. If the person does not comply with the condition, then the business will refuse to supply the goods or services.

Franchisors often engage in third line forcing to ensure uniformity in the quality of the product or service offered to consumers by their franchise system. There are many benefits to this:

  1. Consistency across a franchise system can benefit customers and increase the value of the franchise system.
  1. Franchisees operating compatible equipment and purchasing the same goods creates a more efficient operation and management of the franchise system through, for example, increasing efficiency in training.
  1. Cost and time savings for franchisees creates improved contractual relations and more efficient and effective bargaining between franchisors and suppliers.

Until 6 November 2017, third line forcing was a breach of the Act and a business was required to lodge a notification with the ACCC if they intended on engaging in this conduct without facing prosecution from the ACCC. The ACCC would allow a notification to stand where they were satisfied that competition in the marketplace had not been substantially lessened, and where the public benefit outweighed the detriment.

The recent changes to the Act essentially mean that third line forcing is no longer prohibited per se. Third line forcing will now only breach the Act if the conduct has the purpose, effect or likely effect of substantially lessening competition, in which case a notification must then be lodged with the ACCC.

This is a welcome change for the franchising industry and does away with burdensome administrative red tape for franchisors who place supply restrictions on their franchisees. Many arrangements which were previously notified to the ACCC no longer need to be notified.

Despite these changes, you should always carefully consider whether your conduct will affect competition in the market place or if it risks breaching other provisions of the Act and the Australian Consumer Law. At Rouse Lawyers we can assist with lodging notifications with the ACCC where appropriate, and advise on alternative ways to structure arrangements which will not breach anti-competition laws.

Need advice  Talk to the Franchising team at Rouse Lawyers. Contact us today!