Franchises and Anti-Competitive Practices

Competition authorities tend to allow franchises to engage in certain behaviors that would usually be prohibited.

Monday, July 30, 2012

From Issue No. 151 of the Bulletin of Competition from the Commission to Promote Competition (COPROCOM) in Costa Rica:

FRANCHISE AGREEMENTS AND THEIR ASSESSMENT BY LAW No. 7472. RECORD OP-06-12.
Franchises are based on an ongoing cooperative relationship in which one party (called the franchisor, or grantor), the proprietor of a trade name, trademark, designs or logos that identify a company or business, gives the other party (called franchised taker or franchisee) a set of rights enabling then to sell, distribute or commercially exploit at their own risk, in a pre-established place or territory, one or more products and services, relying not only on the brand under which the grantor identifies their products, but also on the brand image and operational methods used.

In this way, franchise agreements include a license of intellectual property rights relating to trademarks or logos or know-how for use and distribution of goods and services. In addition to licensing intellectual property rights, the franchisor usually provides the franchisee during the period of the agreement, with commercial or technical assistance. The license and this assistance are an integral part of the business method franchisee. Generally, the franchisor of the franchisee receives a fee for the use of the business method in question. Franchising may enable the franchisor to establish, with limited investments, a uniform network for the distribution of products.

...

From a competition point of view, some aspects of the franchising model contain a combination of vertical restrictions, specially in terms of selective distribution, brand or distribution exclusivity or some form of those, that in certain scenarios could be considered relative monopolistic practices.

These practices are described in article 12 of law 7472, and are defined as any contracts, arrangements or agreements that push out other participants in an inappropriate way.

The article specifies as inappropriate behaviors price imposition or resale conditions, exclusive distribution, tied sales, price depredation, or any other act that forces other participants out of the market or prevents their entry.

In general terms, competition authorities tend to analyze franchising contracts with greater flexibility than other commercial models, acknowledging the efficiencies that these contracts generally produce.

In doing so, they allow certain conducts that would otherwise be prohibited. It must be noted, however, that this higher flexibility does not imply an absolute authorization to engage in monopolistic practices. Additionally, they need to be real and not apparent franchises, to prevent monopolistic practices disguised as franchising models.



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Many of the typical requirements established in franchise agreements involve apparent restrictions on free market competition.

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The Law on Promotion of Competition and Effective Consumer Protection recently approved typifies monopolistic practices and changes the rules on economic groups.

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