Product bundles part of the deal

Ian Jacobsberg, a partner, and Janine Reddi, an associate, at Eversheds, explain that bundling or tying arrangements are arrangements whereby a collection of products or services are offered as a package.

The supplier requires the consumer to buy the goods and services he needs as part of a bundle, as opposed to buying only the specific goods or services he actually wants.

Reddi says the reasons for such bundling may vary.

"It is particularly common in franchising, where franchisors use it to control the range of goods and services provided to customers by the franchisee under the franchisor's banner. This practice has come under scrutiny in recent years, leading to it being strictly controlled in terms of the Consumer Protection Act (CPA)."

Jacobsberg says section 13 of the CPA prohibits a franchisor from requiring franchisees to purchase any other goods or services from the franchisor or a specific authorised supplier, or to agree to enter into an agreement to purchase any goods or services from any other supplier, unless certain requirements are satisfied.

"In addition, in the terms of the recently published regulations in terms of the CPA, a franchisor must disclose any benefit he receives from any supplier to his franchisees.

"The principle underlying the right to choose is that the consumer must be given the opportunity to shop around for the best goods or services in respect of each individual component of the 'bundle' at the best available price.

"If the franchisor is already doing that on behalf of his franchisees, the franchisee is not prejudiced by the curtailment of his right to source goods and services from suppliers of his own choice," says Jacobsberg.

He says the consumer's right to select suppliers is not aimed at eliminating all forms of bundling. Instead, it is aimed at preventing suppliers who act unscrupulously for their own or a third-party's benefit from taking advantage of small businesses and individuals, and thereby promoting fairness and competition.

"The CPA permits bundling if the franchisor can show that the arrangement offers the franchisee a benefit in convenience or an economic benefit, or that the products are available separately and at individual prices," says Reddi.

"For example, the convenience requirement is satisfied when goods are imported exclusively by the franchisor or when goods are not easily accessible or freely available through other channels. There would be an economic benefit when the franchisor offers a bundle of goods, all of which are required by the franchisee, that results in the franchisee paying less than he would if he were to purchase each product individually."

In addition, and in recognition of the specific nature of franchising, Reddi says section 13(2) of the CPA allows a franchisor to bundle goods if he can show that the products are reasonably related to the branded products or services that are the subject of the franchise agreement.

"The phrase 'reasonably related' is not defined or explained in the act. It would seem, however, that what is implied is goods or services that incorporate the franchisor's intellectual property or give the franchise its unique identity."

According to Reddi, in this regard consideration must be given to the nature of the business, the core products and franchise accessories and the type of products involved.

Says Jacobsberg: "For example, the franchisor of a restaurant chain can insist that franchisees buy products formulated according to a 'secret recipe' that is unique to that chain from the franchisor or a supplier whom the franchisor has specifically authorised to produce them.

"While at first sight the prohibition on compulsory suppliers may cause concern among franchisors, the CPA does protect businesses that bundle products for the use and benefit of their franchisees.

"The ultimate goal is ensuring that they do not enforce unreasonable requirements on their consumers, the franchisees," Jacobsberg adds.

Source: Business Day