Third Line Forcing and Franchising
A recent Federal Court decision in Pampered Paws Connection Pty Ltd (on its own behalf and in a representative capacity) v Pets Paradise Franchising (Qld) Pty Ltd (No.10) (“Pets Paradise Case) highlighted two issues:
- that a franchisor’s supply arrangements can constitute third line forcing, which is a prohibited conduct under Competition and Consumer Act 2010 (Cth) (Äct”) (the Act replacing Trade Practices Act 1974 (Cth) (“TPA”); and
- that a failure to provide full disclosure to a franchisee of its obligations to accept and pay for stock under those supply arrangements can breach the Franchising Code of Conduct.
Third line forcing occurs where a company supplies goods or services (or gives a discount or offers a particular price) to a buyer on condition that the buyer purchases other goods or services from a third party who are not related to the supplier. This practice is a form of exclusive dealing that is prohibited outright by the Act (and its predecessor, the TPA).
Often, franchisors are able to obtain better prices for products for franchisees due the economies of scale and the large quantities ordered by the franchise network as a whole. In the Pets Paradise Case, the franchise agreement required the franchisees to stock only approved products and there was an approval process for other products, which is standard in many franchise systems. However, in practice, the franchisees stocked mainly the products supplied by Global Pet Products Pty Ltd (“Global) (which formed part of the Pets Paradise group).
One of the franchisees, Pampered Paws Connection Pty Ltd (“Pampered Paws”), did not want to be required to stock products supplied by Global and did not seek approvals for the other products which it stocked. This franchisee commenced an action against the franchisor, alleging numerous counts of misrepresentation, but was only successful in Court on two counts:
- the arrangements enforced by the franchisor in regards to the supply of products by Global were a form of third line forcing under the TPA; and
- the franchise disclosure document required to be provided to all current and potential franchisees by the Franchising Code of Conduct did not specify that the franchisees would be obliged to enter into a supply agreement with Global and accept and pay for stock from Global. In this particular case, a copy of the Global supply agreement was not included in Pampered Paws’ initial franchise document pack, although it had been provided to other franchisees.
This case is still on-going in relation to damages to be awarded to Pampered Paws.
Franchisors should review their supply arrangements within the network to ensure there is no third line forcing actions are taking place within their system. Further, franchisors must be diligent with their disclosure document to ensure all relevant documentation
MST is able to advise the affected parties on solutions to third line forcing issues.
Author: Jane Garber