FRANCHISING: Competition Issues and Reforms. Harper and beyond

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1 FRANCHISING: Competition Issues and Reforms Harper and beyond

2 Key competition issues in a post-harper world The competition law landscape is continuing to shift There are several recent issues that the franchise sector must be aware of: 1. There are a suite of changes as part of the Harper reform package Page heading goes here a. Third line forcing b. Resale price maintenance c. The new concept of concerted practices 2. After much debate, misuse of market power is changing 3. Recent case law has clarified where parties may be competitors 4. The penalties discussion means that the risks can be significant We will work through these key issues in the next 45 minutes

3 Harper snippets THIRD LINE FORCING RESALE PRICE MAINTENANCE CONCERTED PRACTICES The topic Third line forcing involves the supply of goods or services on condition that the customer acquires goods or services from a third party (or refusal to supply because the customer has failed to do so) In general terms, resale price maintenance (RPM) involves a supplier supplying goods on condition that they are not supplied below a price specified by the supplier The Bill that is currently before the Senate proposes a new concept of concerted practices that have the purpose or likely effect of substantially lessening competition The issue Under the Bill currently before the Senate, third line forcing will no longer be prohibited per se (outright). Instead, it will be subject to the competition test Under the Bill: RPM will remain a per se prohibition Corporations will be able to notify RPM (rather than seeking authorisation) There will be a related bodies exception The proposed prohibition is designed to fill a gap or shortfall that has been identified in the concept of a contract, arrangement or understanding Implications for franchising Rather than notifying third line forcing as a matter of course, franchise operators will instead need to consider whether the arrangement has the purpose or likely effect of substantially lessening competition RPM will still be prohibited outright under the CCA. However, notification will allow RPM to be more efficiently assessed by the ACCC (based on a net public benefit test) Businesses should be aware that the threshold for contravening the CCA will be lowered. Information exchange between competitors will be increasingly risky

4 Misuse of market power Page heading goes here CURRENT TEST A person with a substantial degree of power in a market NEW EFFECTS TEST A person with a substantial degree of power in a market shall not take advantage of that power in that or any other market for the purpose of: (a) eliminating or substantially damaging a competitor (b) preventing the entry of a person into that or any other market; or (c) deterring or preventing a person from engaging in competitive conduct must not engage in conduct which has the purpose, effect, or likely effect of substantially lessening competition in that market, or in any market in which the corporation or a related body supplies or acquires goods or services or is likely to do so

5 There is no doubt that franchising relationships are open to abuse because franchisors occupy a coordinating position within the franchising system and this provides them with a significant level of market power in relation to any single franchisee. Such market power is open to abuse in a way that normal competition cannot effectively control. Finding a Balance (1997) House of Representatives Committee on Industry, Science and Technology

6 Misuse of market power Key questions When might a franchisor have market power? When might a franchisee have market power? What are the implications if a firm has market power? Aggressive discounting? Vertically integrating? Launching a product with which competitors cannot complete? Refusing to supply a competitor? How does this interact with other obligations in a franchising context?

7 Competitors Flight Centre and beyond Page Why heading are we talking goes about here competitors? PART IV (as at October 2017) Cartel conduct Exclusionary provisions Misuse of market power Resale price maintenance Third line forcing Substantial lessening of competition Exclusive dealing Mergers Provisions s44zzrd ss45 & 4D s46 ss48 & 96 s47(6)&(7) s45 s47 s50 Summary Contract, arrangement or understanding between likely competitors with: purpose or effect of fixing or influencing prices purpose of restricting production, capacity or supply / allocating customers, rigging bids Contract, arrangement or understanding between likely competitors with the purpose of restricting supply to or acquisition from particular persons

8 Competitors Flight Centre and beyond Page heading goes here Why are we talking about competitors? PART IV (as at October 2017) Cartel conduct Exclusionary provisions Misuse of market power Resale price maintenance Third line forcing Substantial lessening of competition Exclusive dealing Mergers Provisions s44zzrd ss45 & 4D s46 ss48 & 96 s47(6)&(7) s45 s47 s50 Summary Contract, arrangement or understanding between likely competitors with: purpose or effect of fixing or influencing prices purpose of restricting production, capacity or supply / allocating customers, rigging bids Contract, arrangement or understanding between likely competitors with the purpose of restricting supply to or acquisition from particular persons

9 Competitors Flight Centre and beyond Flight Centre: Principals and agents as competitors Agency Service Agency Service Pricing discretion No duty to prefer airline interests to own Air travel service Selling ticket valid against airline Booking Selling ticket service valid on behalf against of airline

10 Competitors Flight Centre and beyond ANZ: Distribution arrangements and competition DISTRIBUTION SERVICE Mortgage Refunds Pty Ltd Lending service Loan arrangement service Loan arrangement service

11 Competitors Flight Centre and beyond Harper proposals regarding anti-overlap Currently, only vertical restraints between competitors which fit the technical description of exclusive dealing are removed by anti-overlap from per se treatment Harper recommended broadening anti-overlap so it made more types of vertical restraint subject to a competition test rather than a per se offence (i.e., trading restrictions imposed by one firm on another in connection with the supply or acquisition of goods or services ) That approach would address the problem that is created by Flight Centre Unfortunately, without explanation, that proposal was quietly dropped between the Exposure Draft (2016) and the Bill which is currently before the Senate

12 Competitors Flight Centre and beyond What does this mean for franchise operators and distribution channels? Dual distribution arrangements through self and through agents got riskier Care needs to be taken when setting up the structure of franchising arrangements Where, for one reason or another, there has been a reliance on agency arrangements, proper limits need to be set at the outset so it is clear there is no competition with an agent Existing agency relationships need to be looked at on a case by case basis Where it is possible that a distributor competes with their agent, arrangements for customer / territory allocation or pricing controls / MFNs are high risk. This also applies to other distribution arrangements such as online vs bricks and mortar

13 The penalties discussion the agreed penalties are at the very bottom of the range of appropriate penalties I almost certainly would have imposed higher penalties, being penalties towards the higher end of the range Certainly in future we won't settle unless the penalties are in accord with what we think they should be To the contrary, we consider that the penalty would reinforce a view that the price to be paid for the contraventions was an acceptable business strategy, and was no more than a cost of doing business

14 THANK YOU Haydn Flack Josh Simons