11 March 2013
The force will be with you, always: third line forcing
The force I speak of is not an energy field created by all living things, but a form of exclusive dealing called ‘third line forcing’ created by law makers in 1974, when the then Trade Practices Act was enacted - now called the Competition and Consumer Act 2010 (Cth) (CCA).
What is third line forcing?
Third line forcing is prohibited under section 47(6) and section 47(7) of the CCA. Put simply, classic third line forcing occurs where a corporation either:
supplies goods or services to a buyer on condition that the buyer buys other goods or services from another person (not related to the corporation); or
refuses to supply goods or services to a buyer for the reason that the buyer has not bought, or has not agreed to buy, other goods or services from another person (not related to the corporation).
For example, if GalaxyCo offers to sell film reels to Mr Lucas on the condition that Mr Lucas buys a camera from CameraCo, GalaxyCo would be engaging in third line forcing conduct.
Importantly, and a reason why the force is so strong in our competition galaxy, third line forcing is prohibited outright – unlike some other forms of exclusive dealing, it does not matter what effect it has on competition.
Third line forcing surrounds us
Many businesses don’t stop to think about whether their business arrangements might involve third line forcing. Third line forcing arrangements arise, and surround us, more often than you may think – across a wide variety of industries and often in business arrangements that are common place.
Third line forcing issues arise not only in contractual arrangements like supplier, distribution and franchise agreements - they also arise in trade promotions, competitions and loyalty programs.
Real life examples of conduct that constitutes third line forcing include:
a building company that offers contracts to builders on condition that the builders use nominated suppliers;
a tea retailer that offers franchise services on condition that its franchises purchase goods and services from third party suppliers nominated by the tea retailer;
a proprietor of leisure assets that offers discounts to customers of a nominated health insurance fund;
an online digital market place that offers a discount on selected services on condition that customers use Paypal to pay for the service;
an airline rewards program that offers its members reward points on condition they completed third party opinion surveys;
a supplier of confectionery products that offers consumers a chance to win a prize in a trade promotion on condition that consumers must buy its products from specified participating third party retailers in order to be eligible to participate in the promotion and win a prize; and
a media company that offers consumers a chance to win a prize in a trade promotion on condition that entrants must use the services of a third party provider of free web or app based goods or services in order to enter the promotion.
What are the penalties?
Penalties for third line forcing by corporations include fines up to the greater of:
three times the gain from the breach; and
if the gain cannot be assessed, 10% of the annual turnover of the company in breach.
An individual who has helped someone else breach or who is knowingly involved in the breach (eg. an employee of a corporation) can also be liable for a fine of up to $500,000.
Immunity from the force
To avoid possible enforcement action by the Australian Competition and Consumer Commission (ACCC), those involved in third line forcing conduct can obtain immunity by notifying the ACCC of the intended conduct. Immunity is granted where the public benefit of the conduct outweighs any anti-competitive detriment. The ACCC can revoke immunity at any time (after giving notice) but this is rare. The current filing fee for a notification is only $100.
Filing a notification is quite common. A notification was filed, and the ACCC granted immunity, in each of the ‘real life’ examples noted above.
The alternative is to re-structure the particular arrangement so that it does not constitute third line forcing conduct. For example, GalaxyCo could restructure its arrangement described above so that it buys the camera from CameraCo, and then sells the camera and the film reels (as a package) to Mr Lucas.
What this means for you
If you are a corporation, and you are considering setting up, or being part of, an arrangement where you supply goods or services, and there are three persons involved in the arrangement (including your company), then you may be in third line forcing territory.
We can assist you with the analysis of your arrangement, recommend alternative ways to structure your arrangement if the arrangement does constitute third line forcing conduct, and prepare a notification if required.