Bill to give 'no undue preference' to franchising

The recent Departmental Report to the Economic Development, Science and Innovation Committee on the Commerce (Criminalisation of Cartels) Amendment Bill is disappointing for the franchise sector.

Despite concerns raised in submissions by the Franchise Association and some franchise lawyers, it seems as if the Bill will not be further changed in any substantive way to clarify certain areas. The Bill, which criminalises cartel behaviour, could make features of franchising as price agreements, trade restraints or the allocation of territories an offence unless the parties can prove that one of the three legislated exemptions applies. The failure to clarify could lead to further costs for franchisors and potentially, as in Australia, the taking of ‘test cases’ against franchisors to determine how certain provisions of the Bill might be interpreted.

An entire section of the Report deals with how the Commerce Act and the Bill apply to franchises. It notes:

‘The Act recognises the benefits of franchise agreements by setting out three exceptions from the cartel prohibition (collaborative activity; vertical supply contract; joint buying exception – Ed.). These exceptions focus on the substance of the arrangements rather than being specific to any particular business model or form.’

‘While we consider that most franchises will be collaborative activities, deeming franchises to be a collaborative activity would:

a) give undue preference to a particular business model, when franchising is only one form of distribution arrangement. The collaborative activity exception is designed to focus on the substance of the arrangements and not its form.

b) raise complex issues in terms of how to define a franchise for the purpose of this provision.’

The Report also finds, '…Suggested amendments to clarify the application of the exceptions to franchises would unduly favour this business model over similar models and be technically difficult to do well. We also think that the exceptions better provide for franchises and distribution arrangements than the equivalent Australian provisions.’

Instead of making the amendments, the Report’s authors suggest, ‘The Commerce Commission should be invited to include franchises as a target group for its education and advocacy activities following the passage of the Bill. This may include the Commerce Commission preparing a fact sheet setting out their approach to applying the Act and the new provisions to franchise agreements.’

Dr Callum Floyd, Chairman of the Franchise Association of New Zealand, expressed the concern of the franchise sector in saying, 'The potential for criminal prosecutions in what is a complex and untested area could have an unintended negative impact on franchising in New Zealand – where franchising is predominantly small business (not large business) and a major contributor to output and employment in the New Zealand economy.'

There are 631 franchise brands operating in New Zealand, with 37,000 franchise units having a total turnover of $27.6 billion (equivalent to 11 percent of the country's GDP). Source: Franchising New Zealand survey 2017