Legal Matters

by Simon Lord

last updated 26/09/2012

Proposed anti-cartel bill could increase compliance costs for NZ franchises

by Simon Lord

last updated 26/09/2012

A draft bill before the Commerce Select Committee could see franchisors having to apply for exemption from laws designed to prevent collaborative activity among competitors, says FANZ

The Franchise Association of New Zealand (FANZ) has made a submission to Parliament regarding the draft Commerce (Cartels & Other Matters) Amendment Bill. The submission criticises the lack of clarity of the Bill's definitions which it says potentially exposes franchise systems to criminal liability.

The main aim of the Bill is to amend the Commerce Act 1986, introducing criminal sanctions for hard-core cartel behaviour and making a number of other amendments including to the provisions that govern jurisdiction and other penalties. This would bring New Zealand into line with some of our major trading partners.

What is a cartel?

A cartel is defined as “an agreement or association between two or more business houses for regulating output, fixing prices etc” and “also the businesses thus combined.”

According to the Parliamentary Information Service, ‘By raising prices above the competitive level and decreasing output, cartels have the effect of making consumers either pay a higher price for the product, or forgo the product entirely. The consumer is therefore an unknowing participant in the illegitimate transfer of wealth to the cartelists.’

Why does this affect franchises?

From a franchising point of view, the problem with the Bill comes in the definitions of ‘collaborative activity’ and ‘joint purchasing’ included in the bill. By their very nature, franchises require franchisees to collaborate routinely on issues such as products, promotions, pricing and marketing territories as well as other matters. Because they are independent businesses (even though they are part of a franchise and trading under the same name) such actions could fall foul of badly-worded legislation – and that is precisely what the Franchise Association is concerned about.

‘The draft bill is inadequate in its clarity,’ FANZ chief executive Graham Billings told a recent meeting in Auckland. ‘Although we have had meetings with senior policy advisors at the Ministry, and they have advised that they recognise that franchising is a special case and said that the Bill should not be too onerous, there are a number of problems with the Bill as drafted. The definitions of ‘collaborative activity’ and ‘joint buying’ are not clear, and it seems that franchises would have to apply for individual exemption from the Bill’s provisions. That would result in an increase in compliance costs for franchise businesses.’

Proposed exemption for FANZ members

In its submission, FANZ suggests that franchise agreements should all be exempt from the provisions of price fixing and market sharing. One of the problems is that franchising is not defined in New Zealand law and that ‘there is therefore a potential difficulty in establishing what is a ‘genuine’ franchise as opposed to a business arrangement of convenience that might benefit from any blanket provision.’

The submission goes on to suggest that the voluntary self-regulation process of FANZ would provide confirmation of the genuine nature of any franchise, and that accordingly membership would automatically provide exemption from the provisions. Although this may be a slightly tongue-in-cheek suggestion, if adopted it would undoubtedly have an impact on membership numbers. Currently, it is estimated that under a third of all franchises in New Zealand are members of FANZ.

More information

Read a digest of the Bill’s contents

Read the full FANZ submission.

This short film from the Australian ACCC demonstrates the sort of behaviour that cartels engage in which governments are keen to criminalise. It’s fairly clear from this that business-format franchises, which are pro-competition rather than anti-competitive, are not the real targets of such legislation. 

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