Competition law clearer for franchisors after changes

Recent legislation is set to bring new clarity on the application of competition rules to franchising agreements.

On 1 June 2022, new legislation came into force, the Vertical Agreements Block Exemption Order (UK Block Exemption), replacing the previous European rules. Helpfully, detailed guidance explaining the new law has also been published by the Competition & Markets Authority (CMA).

While the framework of the UK Block Exemption broadly reflects the old EU law, it is widely regarded as a positive development for both franchisors and franchisees as there is now greater clarity on important issues such as on-line sales and the use of internet marketing.

What is the UK Block Exemption?

The UK Block Exemption applies to agreements between parties who are at different levels in the supply chain, and this includes franchise agreements.

Why is it relevant to franchisors?

Anti-competitive agreements between businesses are outlawed under the Competition Act 1998 – known as a Chapter 1 prohibition. Any franchise agreement which breaches the requirements of Chapter 1 is invalid and may incur substantial fines.

To prevent every individual franchise agreement having to be assessed by the CMA, the UK Block Exemption sets out conditions which, if met, mean the franchise agreement is not caught by the Chapter 1 prohibition. In short, the UK Block Exemption provides peace of mind for franchisors!

What conditions must be met for the UK Block Exemption to apply?

There are three conditions:

1. Market share threshold: the market share held by either the franchisor or the franchisee must not exceed 30%.
2. Hardcore restrictions: the franchise agreement must not contain any hardcore restrictions. These include restricting passive sales into a territory (although prohibiting active sales is ok), setting a minimum price (although maximum price levels are allowed) and various restrictions on the use of the internet and on-line sales and marketing.
3. Excluded restrictions: the benefit of the UK Block Exemption will not apply to any excluded restrictions in a franchise agreement. Perhaps the most relevant for franchise agreements are non-compete obligations which last more than five years. However, this five-year limit does not apply where a franchisee operates from premises, land or vehicles owned or leased by the franchisor. However, the bfa (British Franchise Association) are yet to see the final version of the Guidance to see what interpretation the CMA gives to this change.

What should franchisors do now?

Franchisors need to review their existing franchise agreements to ensure they continue to benefit from the UK Block Exemption and do not fall foul of any of its provisions.

It is now much easier for franchisors to specify what franchisees can and can’t do when it comes to on-line sales and marketing. Agreements may need to be amended to provide greater clarity.

How can we help you?

If you need help understanding the impact of the UK Block Exemption on your existing documentation or are looking to update your agreements to ensure the benefit of the UK Block Exemption please get in touch with any of our friendly team for a confidential, no obligation chat to find out how we can help you.

Goldstein Legal is part of Nexa law. They are franchising solicitors who offer a range of legal services for franchisors and franchisees, regularly advising both businesses and individuals.