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Will your franchise agreement survive scrutiny by our Competition Authorities?
By Webber Wentzel Bowens
The Competition Tribunal ("the Tribunal") considered an application for interim relief by a group of Seven-Eleven franchisees who alleged, inter alia, that the franchisor had breached certain provisions of the Competition Act by setting minimum prices (conduct per se prohibited by our Act).
Cancun Trading No.24 & Others v Seven-Eleven Corporation SA (Pty) Ltd
Case No 18/IR/Dec99 � Discussed
The Competition Tribunal ("the Tribunal") considered an application for interim relief by a group of Seven-Eleven franchisees who alleged, inter alia, that the franchisor had breached certain provisions of the Competition Act by setting minimum prices (conduct per se prohibited by our Act).
The franchisees founded their cause of complaint principally on the following extract from a clause in the Franchise Agreement:
The clause was challenged on the basis that it constituted minimum resale price maintenance and was accordingly per se prohibited under our Act. The franchisor conceded that the clause would ordinarily be the subject of a per se prohibition but raised the following two defences in support of its contention that it was not appropriate in the context of a franchisor/franchisee relationship to apply the prohibition:
The Tribunal could find no authority for the acceptance of the single economic entity argument and the condonation of vertical price fixing arrangements in the context of a franchisee/franchisor relationship. It accordingly rejected this line of argument and noted that it was generally accepted all over the world that franchising should be analyzed simply as a contractual means of vertical integration. It found the nature of franchising to be inconsistent with traditional concepts of agency which are based on a relationship of consent. It noted that, whereas a franchisee invested its own capital in its own business and was liable for its operating expenses and worked for its own benefit, an agent on the other hand worked for the benefit of and in the place of its principal and was therefore clearly distinguishable from a franchisee. In the circumstances, it was compelled to find that franchise distribution operations could not be treated as intra-firm transactions with the entities analogous to supermarket chain stores.
The Tribunal did note that most jurisdictions seemed to accept that a franchisor can suggest prices, provided that in the process it neither coerces nor colludes with others to ensure adherence to the suggested prices. It also appeared to accept that it was permissible to send price lists and menus (with prices) to franchisees provided adherence to the prices was not mandatory and provided there was no consensual price arrangement.
Insofar as its second argument is concerned to the effect that it was not applying minimum resale price maintenance but merely fixing the price, the Tribunal had regard to the fact that the franchisor acknowledged that the franchisees may not sell at a lower or, for that matter, higher price than that prescribed by the franchisor. It could find no basis for distinguishing the fixing of a price and resale price maintenance and it therefore rejected this defence. The Tribunal, in arriving at this finding, made the important distinction between minimum resale price maintenance which is per se prohibited under our Act and maximum resale price maintenance which it confirmed was not per se unlawful. Practically speaking therefore, your business can set maximum resale prices without fear that it will be prohibited outright, however before setting a maximum resale price, we suggest that you satisfy yourself that the anti-competitive effects of doing so are outweighed by the pro-competitive benefits.
The following practical points can be extracted from the judgment:
Disclaimer: The material contained in this article is provided for general information purposes only and does not constitute legal or other professional advice. We accept no responsibility for any loss or damage which may arise from reliance on information contained in this article.
Case No 18/IR/Dec99 � Discussed
The Competition Tribunal ("the Tribunal") considered an application for interim relief by a group of Seven-Eleven franchisees who alleged, inter alia, that the franchisor had breached certain provisions of the Competition Act by setting minimum prices (conduct per se prohibited by our Act).
The franchisees founded their cause of complaint principally on the following extract from a clause in the Franchise Agreement:
"The Licensee shall sell all its products only at prices approved by the Licensor from time to time". (our emphasis added)
The clause was challenged on the basis that it constituted minimum resale price maintenance and was accordingly per se prohibited under our Act. The franchisor conceded that the clause would ordinarily be the subject of a per se prohibition but raised the following two defences in support of its contention that it was not appropriate in the context of a franchisor/franchisee relationship to apply the prohibition:
- a franchise operation must be viewed as a single business entity or association (i.e. not a customer/supplier relationship) which operates as a chain of stores with uniform products and prices. Viewed as such (i.e. as a single proprietor chain store), a ruling price for any business within the chain of stores could never constitute minimum resale price maintenance;
- it was not applying minimum resale price maintenance but merely fixing the price.
The Tribunal could find no authority for the acceptance of the single economic entity argument and the condonation of vertical price fixing arrangements in the context of a franchisee/franchisor relationship. It accordingly rejected this line of argument and noted that it was generally accepted all over the world that franchising should be analyzed simply as a contractual means of vertical integration. It found the nature of franchising to be inconsistent with traditional concepts of agency which are based on a relationship of consent. It noted that, whereas a franchisee invested its own capital in its own business and was liable for its operating expenses and worked for its own benefit, an agent on the other hand worked for the benefit of and in the place of its principal and was therefore clearly distinguishable from a franchisee. In the circumstances, it was compelled to find that franchise distribution operations could not be treated as intra-firm transactions with the entities analogous to supermarket chain stores.
The Tribunal did note that most jurisdictions seemed to accept that a franchisor can suggest prices, provided that in the process it neither coerces nor colludes with others to ensure adherence to the suggested prices. It also appeared to accept that it was permissible to send price lists and menus (with prices) to franchisees provided adherence to the prices was not mandatory and provided there was no consensual price arrangement.
Insofar as its second argument is concerned to the effect that it was not applying minimum resale price maintenance but merely fixing the price, the Tribunal had regard to the fact that the franchisor acknowledged that the franchisees may not sell at a lower or, for that matter, higher price than that prescribed by the franchisor. It could find no basis for distinguishing the fixing of a price and resale price maintenance and it therefore rejected this defence. The Tribunal, in arriving at this finding, made the important distinction between minimum resale price maintenance which is per se prohibited under our Act and maximum resale price maintenance which it confirmed was not per se unlawful. Practically speaking therefore, your business can set maximum resale prices without fear that it will be prohibited outright, however before setting a maximum resale price, we suggest that you satisfy yourself that the anti-competitive effects of doing so are outweighed by the pro-competitive benefits.
The following practical points can be extracted from the judgment:
- as a franchisor, whilst one can recommend prices and even distribute menus to one's franchisees which include a price list, one cannot prescribe minimum resale prices;
- if you want to set a maximum resale price, it would be preferable to simply recommend the maximum resale price. If it is necessary for the purposes of your business to make a maximum resale price mandatory (a practice we do not recommend), we suggest that before you do so, you consider whether you will be able to justify your conduct on the basis that the pro-competitive benefits of your doing so outweigh the anti-competitive effects;
- the setting of a minimum resale price, even in the context of a franchisee / franchisor relationship is per se prohibited and therefore not capable of justification. Should you persist with setting minimum resale prices, this could lead to the prosecution of your business and a very real exposure to an administrative penalty which could amount to as much as 10% of your business' gross annual income for the previous financial year.
Disclaimer: The material contained in this article is provided for general information purposes only and does not constitute legal or other professional advice. We accept no responsibility for any loss or damage which may arise from reliance on information contained in this article.