Third line forcing and commercial contracts

Third line forcing is a form of exclusive dealing that is prohibited under the Competition and Consumer Act 2010 (Cth) (CCA).  It occurs where one corporation (Forcer) enters into a contract to supply goods or services to another (Forced Party), which includes an obligation to buy goods or services from an unrelated third party (Third Line Party).

It’s common in various commercial contracts including franchise and license agreements, for the issuer of the contract to attempt to limit or restrict who a party buys goods or services from. The reason for this is obvious in terms of the need to ensure that a uniform product is delivered to customers. The often cited example being the uniformity of the width of fries served at every McDonald’s throughout Australia and for that matter the world.

Third line forcing example

For example, Company A is a supplier of cleaning services that enters into an agreement to provide these services to Company B, on the condition that Company B purchase all its cleaning supplies from Company C. Here, Company A is the Forcer, Company B is the Forced Party and Company C is the Third Line Party and the situation involves ‘Third Line Forcing’.

Cases law on third line forcing and the element of compulsion

The case law on third line forcing requires that an element of compulsion be included, in other words the acts required must be compulsory and not elective.

It was said by Drummond J in Australian Competition and Consumer Commission v IMB Group Pty Ltd (in liq) [2002] FCA at 23 that: 

“In order to establish third line forcing, there must be two discrete products or services, with the supply of the first being conditional on the purchaser acquiring another product or service directly or indirectly from a third person.”

In Australian Competition and Consumer Commission v Bill Express Limited (ACN 090 059 564) (In Liq) [2009] FCA 1022 Gordon J said that:

“Third line forcing requires two discrete products or services with the supply of the first being conditional on the purchaser acquiring another product or service directly or indirectly from a third person”.

In Pampered Paws Connection Pty Ltd v Pets Paradise Franchising (Qld) Pty Ltd (No 10) [2012] FCA 25 (27 January 2012) Mansfield J affirmed the requirement of compulsion, where it was held that an arrangement for a franchisee to purchase stock from a third party, and to acquire a point of sale system from another third party amounted to third line forcing.

Third line forcing is strictly prohibited

Unlike other forms of exclusive dealings described in section 47 of (CCA) where it can be demonstrated that they have an adverse effect on competition in the relevant market, third line forcing is strictly prohibited under sections 47(6) & 47(7).

When is the Third Line Party not related to the Forcer?

The prohibition on third line forcing applies only to third parties that are not “…a body corporate related to the corporation.” The Act does not provide a definition of when a body corporate will be related to another, however, section 50 of the Corporations Act 2001(Cth) (Corps Act) provides that one body corporate is related to another where it is:

• the holding company of the other
• a subsidiary of the other; or
• a subsidiary of a holding company of the other

Giving notice of third line forcing

A corporation that intends to engage in an act that they believe may constitute third line forcing may, by virtue of section 47(10A) of the CCA, notify the Australian Competition and Consumer Commission (ACCC), which if approved will render the actions the subject of the notice beyond the reach of section 47(6) and (7).   The notice must be in the form prescribed by section 93 of the CCA.

Penalties for third line forcing

Pursuant to section 76(1)(a)(i) of the CCA, where a Court is satisfied that a corporation has contravened section 47 of the CCA, it may impose an order that the corporation pay a pecuniary penalty to the Commonwealth. Under section 76(1A)(a) of the Act, the Court may impose a pecuniary penalty of an amount up to the greater of:

• $10,000,000.00;
• the amount equal to the benefit obtained by the company by the act(s) of third line forcing; or
• 10% of the turnover of the company in the 12 months preceding the act of third line forcing.

Given the penalties that may apply to third line forcing, careful consideration needs to be given when drafting contracts which force a party to deal with another.

Links and further references

Legislation

Competition and Consumer Act 2010 (Cth)

Case law

Australian Competition and Consumer Commission v IMB Group Pty Ltd (in liq) [2002] FCA 402

Australian Competition and Consumer Commission v Link Solutions Pty Limited (No 3) [2012] FCA 348 (5 April 2012)

Australian Competition and Consumer Commission v Bill Express Ltd (in liq) and Ors [2009] FCA 1022

Pampered Paws Connection Pty Ltd (on its own behalf and in a Representative Capacity) v Pets Paradise Franchising (Qld) Pty Ltd (No 11) [2013] FCA 241 (19 March 2013)

Guides by the ACCC

Guide to exclusive dealing notifications, by the Australian Competition and Consumer Commission (ACCC)

Further information about competition law

If you require further information on issues relating to third line forcing or exclusive dealings, contact us for a confidential and obligation-free discussion:

Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.

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