Stewart Germann, Partner at Stewart Germann Law Office discusses the impact of cartels legislation on franchising in New Zealand, by sharing an example and delving into the criminalisation of cartels. For more on franchising, read his previous article here.
The Commerce Act 1986 provides the regulatory framework relating to anticompetitive conduct and the Commerce Commission is charged with policing that framework. The Commerce (Cartels and Other Matters) Amendment Act 2017 made significant changes and replaced the previous prohibition on price-fixing between competitors with an expanded prohibition on cartel provisions, which extends to market allocations and output restrictions, as well as to price-fixing, by competitors. The New Zealand cartel prohibition is very wide and will have quite an impact on franchise networks. Some additional clauses must be inserted into franchise agreements and there should be explanations as to why certain clauses are necessary. Consideration must be given to cartel clauses in franchise agreements; for example, clauses that set or influence prices, restrict output or allocate markets will be caught. The possibility that alternative arrangements might achieve the same or a similar commercial outcome as a cartel clause should also be considered. Another consideration is whether the collaborative activity exemption or the vertical activity exemption would apply. Expert legal advice should be obtained in relation to this Act.
There will not be a cartel arrangement in place where parties are not in competition with each other. In most franchise systems the franchisor will not be in competition with its own franchisees but that is not always the case. For example, a franchisor that owns its own outlet might be found to be in competition with franchisees. Similarly, where a franchisor sells online direct to the end consumer, yet at the same time has franchisees who sell to those consumers, it may also be in competition with its franchisees. There may also be instances where the franchisees are in competition with each other. Where a franchisor is in competition with a franchisee or where franchisees are found to be in competition with each other, there will be a competitive relationship, so the franchisor needs to be cognisant that there may be provisions in its franchise agreements that amount to cartel provisions.
Criminalisation of Cartels
Consideration must also be given to the Commerce (Criminalisation of Cartels) Amendment Act 2019 which comes into force on 8 April 2021. The Act introduces a new criminal offence for cartel conduct and the proposed new criminal sanctions reflect the covert nature of cartels and the harm they cause to consumers and the economy. The Commerce Act 1986 provides a number of statutory exceptions that would not constitute a cartel arrangement and may be pro-competitive. These exceptions relate to collaborative activities (for example, joint ventures or franchise arrangements), joint buying, vertical supply contracts and specified liner shipping arrangements as stated earlier in this paper. There are no defences for mistakes of fact relating to the elements of joint buying and promotion and vertical supply contracts. Therefore, it would be possible in the future for a director of a franchisor company to be criminally liable under the Act for a cartel offence. For an individual who commits an offence the penalty on conviction could be imprisonment for a term not exceeding 7 years or a fine not exceeding $500,000, or both. For a company which commits an offence the penalty could be up to $10 million.
In conclusion, great care must be taken in drafting franchise agreements and with due consideration for any cartel implications. In my opinion, it is very important for all franchisors to maintain a manual or register recording the reasons why some clauses with a potential cartel impact are included in their franchise agreements.
Stewart Germann is a Barrister and Solicitor of the High Court of New Zealand and he attended the University of Auckland. He has the qualifications of B.Com, LLB, FCIS, CFInstD and Notary Public and he specialises in franchising, licensing, sale and purchase of businesses and commercial law. Stewart has over 35 years’ experience in franchising law and has acted for many franchisors in New Zealand and overseas. He also acts for franchisees advising them about a particular franchise and commenting on the form of franchise documents. From 1997 to 1999 Stewart was the Chairman of the Franchise Association of New Zealand. He has spoken at franchising conferences in New Zealand, Australia and USA and is very interested in international franchising. He has also written numerous articles on franchising for New Zealand and international publications. Stewart is a member of the International Franchise Association (IFA) based at Washington DC and of the International Bar Association (IBA). Stewart is a qualified mediator and is a member of AMINZ. He is also on the Panel of Mediators of the Franchise Association of New Zealand. Connect with Stewart via email: [email protected] or via LinkedIn