After it eased restrictions on retailing to fulfill its WTO commitments, Vietnam experienced an explosion in franchising, and this has changed the face of the retail market. Franchisees seek to protect a uniform image of the franchise formula, its intellectual property, accumulated knowledge, and to ensure the efficiency of the operation of its franchise. To pursue these objectives, franchise agreements may contain provisions which limit the franchisee's freedom regarding price, ingredients, variety and customer grouping. Some restrictions may be considered to be anti-competitive. We discuss whether a resale price formula could violate laws that protect competition.
Basic regulations on franchising are provided in the Commercial Law and some other legal documents.1 However, there is no specific body of regulations on competition that relates to franchising. Applying the Competition Law adopted by the National Assembly on June 12, 2018 ("Competition Law"), which does not speak specifically of franchising, is the only way to know whether a resale price restraint contained in a franchise agreement is prohibited on the grounds that it restricts competition.
Resale Price Restraints in Franchise Agreements
So, what is a resale price restraint in a franchise agreement? A resale price restraint--or resale price maintenance (RPM)--is a vertical agreement or a concerted practice between an upstream supplier and a downstream reseller (such as a retailer or distributor) that constrains or actually sets the downstream resale price. In a franchise agreement, a resale price restraint is defined as a price-related consensus-based practice between franchisors and franchisees that relates to pricing. Let's consider a franchise agreement that contains price restrictions established by the franchisor and franchisee. That is, let's say there is an agreed uniform, fixed, maximum or minimum resale price for the product. In addition, other restrictions may be placed on a franchisee in terms of pricing its goods and services. For example, there may be clauses that forbid a franchisee from operating in competition with the franchise system or other members of the system, or say, franchisees are not allowed to increase the number of products sold for the same price. These are forms of resale price restraint.
When prohibited?
Whether a resale price restraint is prohibited because it is anti-competitive under the Competition Law is based on three criteria all of which must be present: (i) an agreed resale price, (ii) a vertical or horizontal agreement, (iii) the franchisor holds a dominant market position or has significant market power.
(i) An agreed resale price
Whether a resale price restraint is anti-competitive depends partly on the price level actually agreed by the franchisor and franchisee. We consider three types: fixed price, minimum resale price, or maximum resale price. An agreed fixed price is clear. A minimum resale price is the minimum price at which the reseller must on-sell goods. Fixing a maximum resale price occurs when a supplier and a retailer agree on the retailer's maximum resale price. The Competition Law prohibits the parties directly or indirectly from imposing a specific, fixed price or setting a minimum resale price. However, the Competition Law does not prohibit fixing a maximum resale price. In agreeing to a maximum resale price, franchisors should ensure that fixing a maximum price has no direct or indirect impact on achieving a fixed or minimum resale price. For instance, the parties may fix a maximum resale price, but at the same time, the agreement may prohibit the franchisee from competing with co-franchisees in the franchise system. Such an agreement can be seen as a prohibited fixed-price agreement.
(ii) A vertical or horizontal agreement?
The existence of a resale price restraint is the main factor when determining whether a violation of the Competition Law has occurred. Generally, a vertical agreement which restricts competition is treated less strictly than a horizontal arrangement with the same objective. The rule of reason or an effects-based approach is applied to vertical agreements. A horizontal agreement, however, is, per se illegal.
A horizontal price-fixing arrangement between a franchisor and a franchisee is prohibited under the per se principle. It is seen as a form of price fixing involving dual distribution. It occurs when a franchisor sells goods or services directly and through independent distributors, competing with them in the downstream market. The franchisor imposes a fixed resale price which means that the franchisee is unable to compete on the basis of price with the franchisor. Given that the franchisor's operation is at the retail level, such horizontal price fixing is banned, and the effects are not relevant. That is, the act itself is prohibited irrespective of its actual impact on the market.
Vertical price restraints between a franchisor and a franchisee are different. They operate at a different point in the supply chain. Franchisors are wholesalers, and a price restraint imposed by a franchisor will be prohibited but only when (i) the market share of the franchisor and the franchisee is at least 15% each and (ii) the agreement causes or has the ability to cause a significant competitive impediment in the market.
Franchisees which offer similar products and similar services can easily be considered competitors in a relevant market. Similar vertical price restraints between one franchisor and each of many franchisees may create a binding indirect consensus among direct competitors. As a result, while vertical price restraints are vertical agreements on the surface, they make an indirect horizontal price-fixing case at the dealer level and the circumstances are enforced by the franchisor. In some countries, courts treat this sort of vertical arrangement as they would treat a horizontal arrangement. In other jurisdictions, vertical agreements which support an unlawful horizontal agreement among dealers result in a rule of reason analysis in which a determination is made whether the restrictions on competition are significant. In Vietnam, there is no regulation, nor is there any case law regulating vertical restrictions that result in a horizontal agreement, which means that such vertical restraints are only prohibited subject to a rule of reason analysis.
(iii) Franchisor with a dominant market position or significant market power
Resale price restraints may be placed in an agreement between the franchisor who holds a dominant market position and the franchisee. In Vietnam, a franchisor is seen to have a significant market position if it has at least 30% market share or has significant market power. Significant market power is determined by several subjective factors: the franchisor's financial strength, technological advantages and technical infrastructure; the right to own, hold and access infrastructure or use subject matter protected by intellectual property; the ability to access and control the distribution or consumption market and other factors specific to their sector.2 In such cases, a franchisor with a dominant market position that unilaterally fixes an unreasonable selling price or a minimum resale price for goods or services is considered to abuse its dominant market position. Such conduct can be prohibited because it reduces market competition, thereby causing loss to customers.
Exemption
Franchisors and franchisees may, nevertheless, legally participate in franchise agreements that may seem to violate the Competition Law. To do so, they must apply for a time-limited exemption. They cannot participate in a franchise agreement which contains prohibited price restraints unless an exemption is granted. A time-limited exemption will be granted if:
- the franchise agreement overall is seen to be favorable to consumers, (for example: the franchise agreement guarantees that a product is sold only by retailers who provide high-quality products and adequate service); and
- one of the following conditions is met: (i) the impact of promoting technical and technological progress and improving the quality of goods and services outweigh infringement of the Competition Law; or (ii) the agreement strengthens the competitiveness of Vietnamese enterprises in the international market; or (iii) the agreement promotes the uniform application of quality standards and technical norms of product categories.
In conclusion, despite a lack of detailed regulatory requirements, the rules against resale price restraints in Vietnam's franchise environment are considered adequate to control anticompetitive arrangements under the Competition Law. However, as the Vietnam Competition Authority and the Vietnam Competition Council have not resolved many practical cases, actual enforcement guidelines remain open.
Footnotes
1. Commercial Law adopted by the National Assembly on June 14, 2005 ("Commercial Law"), Decree No. 35/2006/ND-CP of the Government (March 31, 2006) ("Decree 35") as amended by Decree No. 120/2011/ND-CP of the Government (December 16, 2011) ("Decree 120"), and Circular No. 09/2006/TT-BTM of the Ministry of Trade (May 25, 2006) ("Circular 09").
2. Decree No. 35/2020/ND-CP dated March 24, 2020, of the Government detailing a number of articles of the Competition Law, article 12.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
