The effect of application of the Competition Act
to franchising agreements is crucial, as it may
in future have a penalising outcome for those
businesses which are found to be substantially
preventing or reducing competition in a given
market.
Section 5 (1) of the Competition Act states that
“An agreement between parties in a vertical
relationship is prohibited if it has the effect
of substantially preventing or lessening competition
in a market, unless a party to the agreement can
prove that any technological, efficiency or other
pro-competitive gain resulting from that agreement
outweighs that effect.”
1 In
essence, Section 5 (1) can be broken down into
four different elements:
- There must be an existing agreement between
the parties;
- The parties must be in a vertical relationship
with one another;
- The agreement between them must substantially
prevent or lessen competition in the relevant
market; and
- The agreement can be excused if any technological
or efficiency gains arise from the agreement,
gains which outweigh any anti-competitive
effect.
When does the agreement substantially
prevent or lessen competition in the relevant
markets?
An agreement will be “condemned by reason
of the effects that it has. No prohibition attaches
to an agreement simply by reason of its contents.”
2
The relevant market has been described as “the
narrowest market at a given stage of the supply
chain in which a hypothetical monopolist operating
at that level could exert a significant degree
of market power”.
3
In practical terms a “relevant market”
is established when a defined category of products
is marketed in a defined territory.
In order to determine whether or not a franchise
agreement has the effect of preventing or lessening
competition in the relevant market are we need
to ask:
- What are the effects of the exclusivity
clauses (territory / products)?
- Does the agreement have a “locking
in” effect?
- Does the agreement have repercussions on
consumers? and
- What is the duration of the agreement? The
standard franchise agreement lasts for a period
of five to ten years which is long enough
to have a serious impact the issues which
have been discussed above.
Voluntary compliance
The Act requires all businesses in the Republic,
and outside the Republic where applicable, to
comply with all its provisions, which includes
ensuring that the conduct of businesses does not
negatively affect the competition in a particular
market. Failure to comply with the Act will result
in the imposition of the relevant penalty provisions,
which may include a fine of up to 10% of the firm’s
annual turnover.
Conclusion
There are escalating pronouncements from the Competition
Commission against exclusivity in franchises,
including the imminent promulgation of the “Franchise
Act”. There is no South African case law
nor are there guidelines or regulations which
could assist in the interpretation of Section
5 (1) of the Competition Act. Accordingly, even
if there were merely a suspicion of a contravention
of the Competition Act and even if there were
no legislative or other developments, which could
adversely affect the validity of the existing
franchise agreements - it is not only prudent
but in fact an economic necessity for franchisees
to ensure compliance with the Competition Act.
Amendments to franchise agreements
In order to ensure compliance with the Competition
Act we recommend the following changes can
be made to franchise agreements:
- Whilst franchisees may retain their
exclusivity with respect to other existing
franchisees, their territories will
be opened up for new franchises and
the existing franchisees will be encouraged
and rewarded for their recruitment of
new franchisees in their territory as
well as the territory of other franchisees;
- Franchisees will be encouraged to
open more outlets and to trade more
actively in their territory;
- No minimum prices or maximum discounts
will be set;
- Franchisees may purchase products
from alternative suppliers as long as
these are of similar quality as the
franchise products.
|
Footnotes
[1] Competition Tribunal’s decision in the
Seven Eleven case [2] Unterhalter Restrictive
Vertical Practices at 166
[3] South African Raisins case (Case No. 04/IR/Oct99)
