A short while ago in a galaxy very, very close…
- Franchise A insists you must buy products from Supplier X;
- Car Dealer B will only sell you a car if the car is serviced at Mechanic Y;
- Bank C will only offer you a discount on your mortgage if you take out insurance with Insurance Company Z.
We see numerous examples of third line forcing in our everyday lives; however this conduct is prohibited outright by the Consumer and Competition Act 2010 (Cth) (“the Act”).
Section 47 of the Act prohibits exclusive dealing which occurs when one person trading with another imposes some restrictions on the other’s freedom to choose with whom, in what, or where they deal.
There are two categories of exclusive dealing:
- third line forcing; and
- other types of exclusive dealing.
The main difference between third line forcing and other types of exclusive dealing is that third line forcing is prohibited “per se” which means that it is not necessary to show that it substantially lessens competition.
According to s 47(6) and 47(7) of the Act, third line forcing occurs when:
- a supplier agrees to supply its goods or services to a purchaser on the condition that the purchaser buys goods or services from an unrelated third party supplier; or
- if the purchaser refuses to comply with the scenario (a) above, the business will refuse to supply the purchaser with goods or services;
- the supplier offers a discount on goods or services to a purchaser on the condition that the purchaser buys goods or services from a unrelated third party supplier; or
- the purchaser refuses to offer a discount to the purchaser on the basis that the purchaser has not acquired (or agreed to acquire) a good or service from an unrelated third party supplier.
A key element is that there must be some element of compulsion or conditionality.
Consider the following ‘science fiction’ scenario:
Corn Pty Ltd (“CPL”) develops a corn seed which is completely resistant against Corn Pesticide which is developed by Pesticide Pty Ltd (“PPL”). CPL and PPL are unrelated entities. There are other pesticides in the market but the Corn Pesticide developed by PPL is the most effective.
- CPL sells its corn seed to farmers on the condition that they buy and use PPL’s Corn Pesticide. This would constitute third line forcing.
- CPL sells its corn seed to farmers on the condition that they buy PPL’s Corn Pesticide or other pesticides that are above 60% effective and lists these other brands. This would also constitute third line forcing as CPL is specifying brands of pesticide that the farmer must purchase.
- CPL sells corn seed to farmers and states that testing reveals that CPL’s product is completely resistant to PPL’s Corn Pesticide and there are some risks in using other brands of pesticides. This would not constitute third party forcing. The purchase of the seed is not conditional on the purchase of the pesticide. The farmer maintains the choice of which pesticide brand they choose to purchase, if at all.
Companies that commit third line forcing conduct liable to pay fines up to the greater of:
- $10 million;
- if the gain can be measured, three times the gain from the breach of the Act; and
- if the gain cannot be measured, 10% of the annual turnover of the company in breach.
In order to avoid contravening the Act, it is possible to restructure offers so they do not fall within the ambit of third line forcing conduct. Where this is not possible, it is suggested that companies seek to gain a statutory exemption from prosecution through the ACCC’s notification procedure. Companies should stop and consider, “May the force be with you?”