In the previous issue of Franchise New Zealand, specialist competition law barrister Anna Ryan of Canterbury Chambers explained how the Commerce Act applies in a franchise setting. In this issue, Anna answers questions from franchisors, franchisees, and advisors about price fixing.

Question 1

In smaller industries (whether franchising is prevalent or not), the usual price for certain services can become quite well known. Everyone knows the “standard rate”. In such cases, how does the Commerce Commission distinguish between price fixing and ordinary market knowledge?

Competitors often have a good sense of each other’s pricing. Prices may be publicly advertised, such as petrol prices, or listed on websites, brochures, or social media. Customers who shop around may also share what others are charging. All of this is legitimate market intelligence. The Commerce Commission has no issue with businesses knowing information that is publicly available or obtained independently.
 
When a business becomes aware of competitors’ pricing through legitimate means, it can, and can reasonably be expected to, take that information into account when setting its own prices. It is entirely lawful for a business to decide to match a competitor’s price, provided that decision is made independently and not as part of any agreement or understanding with others. Each business must make its own pricing decisions, whether that means matching, undercutting, or charging more than its competitors.

Where the Commission draws the line

The Commission is focused on ensuring that pricing is not the result of anticompetitive collusion.
 
Under the Commerce Act, price fixing occurs when competitors enter into an arrangement or understanding, whether formal or informal, that has the purpose, effect, or likely effect of fixing, controlling, or maintaining prices. This can include:

• agreeing not to discount
• agreeing to use the same pricing formula or structure
• agreeing to increase prices by the same amount or at the same time
• coordinating minimum prices or setting a common floor price

The arrangement does not need to be written down or formally documented. A loose or unspoken understanding can still breach the Act if it reduces uncertainty about how each competitor will price.

Why information sharing is so risky

Businesses should avoid sharing current or future pricing information with competitors and should only share historic pricing information after obtaining competition law advice. Exchanging sensitive information can:

• reduce uncertainty about how competitors will behave
• make it easier for competitors to align prices or avoid discounting
• contribute to an arrangement or understanding about future pricing behaviour

Even without a formal agreement, repeated or structured exchanges of sensitive pricing information can support a finding that competitors have reached an arrangement or understanding that has the purpose, effect, or likely effect of fixing, controlling, or maintaining prices. This is prohibited under the Commerce Act.

Question 2

What should a franchisor do if they suspect price fixing is occurring between franchisees?  Can the franchisor be held liable?  

If a franchisor suspects that franchisees may be engaging in price fixing, the first step is to seek advice from an experienced competition lawyer. Price fixing is one of the most serious breaches of the Commerce Act, and specialist advice helps ensure the franchisor responds appropriately and protects its own position.

Is the franchisor legally implicated?

A lawyer will begin by confirming that the suspected conduct is limited to the franchisees and that the franchisor has not, even inadvertently, become involved. This usually involves meeting with the franchisor to understand the concerns, reviewing the franchise agreement and manuals, and examining any relevant communications between the franchisor and franchisees.

Determining the right course of action

If the franchisor is not implicated, the next step is to agree on the franchisor’s objectives and the most effective way to achieve them. A key priority will be getting to a point, as quickly as is reasonably possible, where the franchisor can be confident that franchisees are making their pricing decisions independently and that no price‑fixing is occurring. 
Depending on the circumstances, this may involve a more detailed investigation into franchisee behaviour or a lighter‑touch approach focused on education and resetting expectations.
 
The right approach will depend on the seriousness of the concerns, the level of cooperation from franchisees, and the franchisor’s broader commercial relationships.

Key legal considerations

Two considerations must remain front of mind:

1. Price fixing is extremely serious. It carries significant civil penalties and, since 2021, criminal liability for individuals involved in cartel conduct.
2. A franchisor can be liable if it aids, abets, or is knowingly concerned in price fixing. It is therefore essential that the franchisor takes all practicable steps to ensure its network is complying with the law and that it is not seen to be tolerating or facilitating unlawful conduct.

No obligation to report

A franchisor may choose to report its concerns to the Commerce Commission, but it is not legally required to do so. There are legitimate reasons why a franchisor might prefer to address the issue internally, including the potential for reputational harm and the impact on relationships with franchisees across the network.

Engaging with the franchisees

A constructive starting point may be for the franchisor and its lawyer to meet separately with each franchisee involved. This allows the franchisor to outline its concerns, hear the franchisee’s perspective, and ensure the franchisee understands the seriousness of the allegations. A competition lawyer can also explain what a Commerce Commission investigation would involve and the potential consequences if price fixing is found.

What happens next

The next steps will depend on the nature of the allegations, the strength of the evidence, and the attitude of the franchisees concerned. A franchisee who acknowledges that they may have crossed a line and is prepared to take corrective steps presents a very different situation from one who denies wrongdoing despite clear evidence. The franchisor and its lawyer will need to assess the level of risk and decide what action is necessary to protect the network and ensure compliance.

Network-wide competition law training

Regardless of how the franchisor addresses the specific allegations, it should also provide cartel law training to all franchisees. This reinforces the franchisor’s expectations, demonstrates that the franchisor is taking reasonable steps to promote compliance, and reduces the risk of similar issues arising in the future.

Question 3

Can franchisors recommend prices to their franchisees?

Franchisees must be free to independently set the minimum price of the products and services they sell unless a specific exemption in the Commerce Act applies. The law is clear that franchisees cannot be required to charge a particular minimum price.
 
A franchisor may, however, recommend retail prices. Recommended prices are common in many franchise systems and can support brand consistency, marketing, and customer expectations. The key requirement is that the recommendation must genuinely be a recommendation. Franchisees must remain free to set their own prices.
 
A franchisor may also set maximum prices. Maximum prices do not raise the same competition concerns because they do not restrict a franchisee’s ability to offer lower prices. They can be useful where the franchisor wants to ensure the brand remains competitive or that customers receive consistent value across the network.

How to stay on the right side of the law

To ensure recommended or maximum prices do not drift into unlawful price control, franchisors should:

• make it clear in writing that recommended prices are optional
• avoid any language that suggests franchisees are expected to follow the recommendation
• avoid monitoring or criticising franchisees based on whether they adopt the recommended price
• ensure franchisees understand they are free to set their own pricing strategy
• reinforce that franchisees must set their prices independently and should not discuss their pricing intentions with each other

These steps help demonstrate that franchisees are genuinely making independent pricing decisions, which is the central requirement under the Commerce Act.  

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