Exclusive dealing can take the form of full line forcing or third line forcing.
Read on to learn more about the regulations and implications of exclusive dealing and third line forcing.
Exclusive Dealing
Full Line Forcing
Third Line Forcing
Substantial Lessening of Competition
Franchising and Exclusive Dealing
Exclusive Dealing
Exclusive dealing involves one business imposing restrictions on another’s freedom to choose:
- who they deal with;
- what product or service they deal with; or
- the location in which they deal with another person.
Exclusive dealing can involve either full line forcing or third line forcing.
Full Line Forcing
Full line forcing involves a supplier refusing to supply goods or services unless the intending purchaser agrees not to:
- buy goods of a particular kind or description from a competitor.
- resupply goods of a particular kind or description acquired from a competitor.
- resupply goods of a particular kind acquired from the company to a particular place or classes of places.
For a full line forcing arrangement to contravene the Competition and Consumer Act 2010 (the CCA) it must have the effect of substantially lessening competition in the relevant market.
Third line forcing
Third line forcing involves the supply of goods or services on the condition that the purchaser buys goods or services from a particular third party, or a refusal to supply because the purchaser will not agree to that condition.
Third line forcing is a common practice in most franchise systems, where the franchisor chooses suppliers who it knows will meet quality standards for the provision of goods and services such as stock, group insurance policies, merchandising and packaging and technology.
Since November 2017 for a third line forcing arrangement to contravene the CCA it must have the effect of substantially lessening competition in the relevant market.
Before its amendment, the terms of section 47 of the CCA meant that third line forcing was prohibited outright, consequently franchisors who required their franchisees to buy goods or services from a specified third party supplier were likely to be engaging in anti-competitive behaviour.
What is the substantial lessening of competition test?
Under the substantial lessening of competition test, it is not enough to show that an individual business has been damaged.
To determine whether a substantial lessening of competition occurs you must look at the following factors –
- the overall market for the particular product;
- any substitutes of the product; and
- whether or not the refusal would substantially restrict availability of that type of product to consumers.
“Substantial” has been defined as large, weighty, big, real or of substance.
An effect is considered to be substantial if it has a significant impact or carries significant weight within the context of the market's size and dynamics. This means that the effect must be of considerable importance and influence, taking into account the scale and scope of the market in question. It is crucial to assess the effect's magnitude and its potential implications on competition, consumer choice, and market dynamics.
When territorial restrictions have been imposed as a condition of supply, the Court will carefully evaluate the extent to which consumers are limited in their ability to purchase a specific product or its alternatives within the designated territory. This assessment is essential in determining whether the imposed territorial restrictions have a significant impact on consumer access and choice. By considering factors such as market dynamics, consumer preferences, and the availability of substitutes, the Court aims to ascertain whether the territorial restrictions excessively hinder competition and potentially harm consumer interests. Hence, it becomes crucial to thoroughly analyse the magnitude and implications of these restrictions, ensuring a fair and balanced evaluation of their impact on the market as a whole.
Franchising and Exclusive Dealing
While third line forcing is no longer prohibited outright under the CCA, franchisors must still carefully evaluate the potential implications of third line forcing on competition within the market.
Despite the relaxation of the prohibition, it remains crucial for franchisors to consider whether their actions may result in a substantial lessening of competition. By doing so, franchisors can ensure that they comply with the regulations and avoid engaging in anti-competitive behavior.
To enable an assessment of whether actions may result in a substantial lessening of competition a franchisor can thoroughly assess the market dynamics, consumer preferences, and availability of substitutes when implementing third line forcing arrangements.
This comprehensive analysis will enable them to determine whether their actions excessively hinder competition and potentially harm consumer interests.
Disclaimer
The information in this article is general in nature and is not intended to address the circumstances of any person or other entity. Although we do our best to provide timely and accurate information, we do not guarantee that the information in this article is accurate or that it will continue to be accurate in the future.
