Franchisors will be familiar with the prohibition on "third line forcing" contained in s47 of the Trade Practices Act 1974 (Cth) (TPA). Third line forcing, where in simplified terms A supplies goods or services to B on the condition that B acquires goods or services from C, is prohibited irrespective of its impact on competition.
In the franchising context, the franchise agreement would clearly be a contract for the supply of services from A to B. Supply of goods or services by A to B is permitted, even if the goods or services come to A from C, but a requirement for the franchisee B to acquire goods or services from third party supplier C (unless C is a related company of A) creates a problem. Typical situations where problems can arise include the supply of stock, and requirements in relation to point of sale technology and hardware, food/beverage service equipment and advertising/marketing services and material.
Many franchise systems have successfully implemented these arrangements using the Notification process contained in the Trade Practices Act. In considering the proposed conduct the ACCC will have regard to the potential impact on competition. The ability to tie supply in a franchise network can be very pro-competitive in assisting franchisees and franchisors to compete with larger corporations, so the ACCC will often allow the proposed conduct to take place. However the ACCC will look at each case on its merits, and it should never be assumed that all third line forcing arrangements will be accepted by the ACCC. The ACCC's successful prosecution of Bill Express Pty Limited (BXP) and Technology Business International Pty Ltd (TBI) in September last year shows that the ACCC does not always regard third line forcing as being appropriate.
BXP and TBI supplied to merchants an online payment system known as the "Bill Express Payment System" and the hardware necessary to operate the system. The Bill Express Payment System enabled merchants to receive bills and other payments owed by their customers to various third parties. In order to obtain the supply of the Bill Express Payment System, merchants were required to enter into two contracts – the Merchant Contract with BXP for the supply of the online payment system and the Rental Contract with TBI for the supply of the hardware platform which hosted the online payment system. Entry by merchants into both of these contracts was required by BXP and TBI as part of the merchants' application for the supply of the Bill Express Payment System.
The Court was satisfied that the supply of the Bill Express Payment System did involve the imposition of a condition by BXP that merchants enter into the Rental Contract (and, conversely, the imposition of a condition by TBI that merchants enter into the Merchant Contract), thereby falling foul of the per se prohibition against third line forcing under the TPA. No Notification or application for Authorisation had been lodged with the ACCC, so once the ACCC initiated the prosecution the conduct of BXP and TBI was simply assessed against the third line forcing prohibition. There was no scope for the court to consider the conduct in the context of its effect on competition, as third line forcing is absolutely prohibited irrespective of the effect on competition.
This case reinforces the importance of obtaining legal advice from experienced competition and trade practices lawyers when any form of tied supply or exclusive arrangement is proposed, particularly if 3 or more 2 parties are involved.
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