Franchising is a distribution model where the franchisor grants a bundle of rights to an independent business (the franchisee), allowing the franchisee to trade in the name of the franchisor and adopt the franchisor’s business model.
The franchisor achieves scalability for a successful business model and offloads investment and operational risk to the franchisee.
The franchisee gains quick market entry through acquiring the right to adopt a proven business model and operate under an established brand name, and the benefit of transfer of intellectual property rights and know-how.
WHAT ARE THE POTENTIAL EFFECTS ON COMPETITION?
To protect the common identity and reputation of the franchised network of businesses, a franchisor will usually:
- Exercise quality control over the franchisee’s business and trading methods, such as, the décor and layout of sales outlets, production process etc.
- Impose an obligation to use the franchisor’s know-how, trade marks, trade names and other industrial property rights, but only to do so as agreed.
- Impose an obligation to sell only to end-users or other franchisees.
- Impose a non-compete obligation for the duration of the franchise agreement.
Whilst it is permissible for a franchisor to exercise control over the franchisee business, it is important to bear in mind that restrictions imposed on the franchisee should not go beyond what is necessary and proportionate to the aims of protecting brand unity, know-how and licensed intellectual property rights.
The following restrictions, for example, may have anti-competitive effects not justifiable by the franchise network:
- Fixing minimum resale prices (as opposed to recommending them).
- Imposing a post-agreement non-compete that is excessive in duration or scope.
- Prohibiting franchisees from selling to, or buying from, other franchisees.