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A crucial but often overlooked aspect of franchising is competition law and its potential impact on franchise operations. Competition regulations significantly influence franchisors’ strategies, agreements, and practices. You must ensure your franchise complies with competition law to avoid legal issues related to anti-competitive practices. This article will explain what competition law is and its relevance to franchising.
What is Competition Law?
In the business sense, competition refers to rivalry between two or more businesses operating within the same market. Competition is how these businesses vie for customers, market share, and profits. Companies compete based on:
- pricing;
- product differentiation;
- marketing strategies; and
- customer service.
Competition is a vital and protected aspect of a free-market economy. Healthy market competition benefits consumers by leading to lower prices, improved product quality, innovation, and choice. However, keeping up with market competition can be tiring for business owners, as they must frequently adapt to remain competitive.
At its core, competition law is designed to ensure a fair and competitive marketplace. It prevents anti-competitive practices such as monopolies, price fixing, and other unfair business practices that could harm consumer choice and economic competition. The UK legal framework aims to safeguard consumer interests and maintain consumer choice while encouraging businesses to innovate. Breaching competition law can result in hefty fines for your business.
Franchising and Competition
In the franchising context, competition law becomes relevant because it governs the rules and regulations surrounding fair competition. Competition law prevents anti-competitive agreements between businesses. In franchising, anti-competitive practices include:
- having too high a market share;
- restricting franchisees’ sale prices on their goods and services; and
- restricting franchisees’ online sales.
| Anti-Competitive Practice | Explanation |
| Market dominance | Any business with too high a market share can restrict competition. Suppose you are a franchisor with a significant market share. In that case, you need to be particularly cautious about anti-competitive behaviour, as the actions of your business can have a more pronounced impact on competition within your industry. |
| Exclusive territory | Franchisors often grant franchisees exclusive rights to operate within their territory. If you do this, consider the effect of this on the market within that area. You should not give excessive exclusive territory to one franchisee. Prohibiting franchisees from operating outside designated territory may also be considered anti-competitive. |
| Restrictions on franchisees | Particular restrictions on franchisees, such as setting minimum prices and restricting passive sales, are anti-competitive practices. You may set guidelines, but you should not impose restrictions on these areas. |
If you make an agreement that breaches competition law, it will likely be void, and you may be liable to pay significant fines.
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The Franchise Agreement
A franchise agreement is a legal document establishing the contractual relationship between you and a franchisee. Within the agreement, franchisors tend to stipulate particular terms that, if unreasonable in scope, can be considered anti-competitive.
Franchisors typically include non-compete clauses and territorial restraints within franchise agreements. These clauses prevent franchisees from starting a new business in the same market. For example, a non-compete clause may stipulate that Franchisee X, who joined a cafe franchise, cannot create a cafe business while the franchise agreement is in place or up to six months after its termination. Through restrictive clauses such as these, franchisors protect their business interests.
Recent reviews of non-compete clauses and competition law show the potential for this area of law to change. By their nature, non-compete clauses are anti-competitive. They prevent former franchisees from entering the same market as your brand and innovating a similar product or service. To ensure that your non-compete clause complies with current law, ensure that it does not extend further than is reasonably necessary. You should:
- keep any non-compete obligation limited to a year or less following the end of the franchise agreement;
- consider the market scope of the clause is not overly restrictive; and
- seek legal advice where necessary to ensure compliance.
Key Takeaways
Competition law influences your operations as a franchisor. This legal framework upholds fair competition by preventing anti-competitive practices. Maintaining an equitable and competitive market within your franchise network and the broader market is essential. Within franchising, anti-competitive practices can include market dominance, price restrictions, and constraints on sales. Additionally, the non-compete clauses in your franchise agreements must be reasonable in scope.
Franchisors should be aware of what business practices can be anti-competitive. You must maintain a fair and competitive environment within your franchise network and relevant market. Violations can result in legal consequences, fines, and damage to the reputation of your franchise system. The resulting benefits of a solid understanding of competition law are essential for franchising success.
If you encounter competition law-related issues with your franchise, our experienced franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
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