Five things you need to know…about third-line forcing

Published On 02/01/2011 | By Kim de Kock | Notifications, Uncategorized

Third-line forcing occurs when a supplier agrees to supply its goods/services to a customer on condition that the customer acquires goods/services of a particular type from an unrelated third person specified by the supplier.  This constitutes a form of exclusive dealing that is prohibited outright by section 47 of the Competition & Consumer Act (CCA). This means that it will be illegal regardless of the supplier’s purpose or its effect on competition.

In its review of the CCA, the Dawson Committee recommended that third-line forcing be made subject to a “substantial lessening of competition” test in line with other forms of exclusive dealing.  This recommendation was initially incorporated in the Dawson Bill, however the Federal Government withdrew the proposed amendment and indicated that third-line forcing will remain prohibited outright.

Outlined below are common types of third-line forcing conduct and possible ways to avoid contravening the prohibition.

1. Typical third-line forcing scenarios

The classic third-line forcing scenario occurs where a supplier forces the purchase of a second product or service from a specified supplier. For example, where a financial institution provides a mortgage on condition that a borrower takes out mortgage insurance from a particular insurance company or where a car dealer selling a car requires the buyer to finance the car through a nominated finance company.  Third-line forcing also commonly arises where several suppliers of products or services participate in a co-promotion (for example, supermarket discounted petrol promotions) or a membership or loyalty program (for example, a credit card rewards program that offers reward points when members make purchases from nominated suppliers).

2. The element of compulsion and/or futurity

The courts have generally accepted that third-line forcing conduct requires some element of compulsion and/or futurity.  This means that it will not be third-line forcing where a customer chooses (rather than undertakes) to acquire goods/services from another supplier, or where a supplier supplies goods/services to a customer as a benefit or reward for having already acquired goods/services from the third party supplier.  In this way, it may be possible to restructure offers or supply arrangements to fall outside the third-line forcing provisions.

3. Single supply of packaged product/service

The courts have also accepted that it will not be third-line forcing where there is the supply of a single packaged product/service, rather than the supply of two distinct products/services. The most notable example of this approach is the High Court’s decision in Castlemaine Tooheys Ltd v Williams & Hodgson Transport Pty Ltd (1986) 162 CLR 395. This case involved a brewery that was only prepared to sell beer to publicans on condition that the beer was delivered by a carrier engaged by the brewery. The High Court held that this was not third-line forcing as the publicans were not obtaining two separate products from two separate suppliers. Rather, the brewery’s arrangements for delivery of beer to the publicans amounted to the sale of one single composite product, namely “delivered beer”.

4. Utilising an agency relationship

Another way to avoid third-line forcing is to use an agency relationship in supply arrangements.  By entering into an agency agreement with the third party, a supplier can bundle together the products/services it supplies with those of the third party, as its agent.  As the one supplier is providing both the first and second product/service, the third party is removed from the supply arrangements.  This changes the conduct from “third line forcing” to another form of exclusive dealing known as full line forcing.  The benefit of this structure is that full line forcing only breaches the CCA where it has the purpose, effect or likely effect of substantially lessening competition in a relevant market.

5. Notification of third-line forcing conduct

If it is not possible to restructure the supply arrangements for practical or commercial reasons, it may be possible to gain statutory exemption from prosecution through the ACCC’s notification procedure. Under this procedure, notifications are required to be in a prescribed form detailing the proposed conduct and the relevant participants. The cost of lodging a notification is $1000 for public companies and $100 for proprietary companies. The ACCC applies a “net public benefit” test to determine whether to allow immunity from prosecution. Immunity from prosecution is automatically granted 14 days from the date of lodgment unless, within the 14 day period, the ACCC notifies the parties otherwise. While the ACCC may remove the immunity at any time, it must provide notice to the parties and have a pre-decision conference before removing that immunity.

 

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About The Author

is a Senior Associate in the Sydney office of King & Wood Mallesons where she specialises in anti-trust law, with a focus on mergers and acquisitions, access matters as well as general competition issues. Outside of the office, Kim has recently taken up surfing... but is probably not going to be appearing on the ASP tour any time soon.

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