On March 2009, the Business Competition Supervisory Commission (“KPPU“) enacted Decree of KPPU No. 57/KPPU/Kep/III/2009 concerning Implementing Guidance on the Provisions of Article 50 Sub-Paragraph b of Law No. 5 Year 1999 concerning Monopoly Practices and Unfair Business Competition with Regard to Agreements related to Franchises (“Decree 57/2009“), attached to which is guidance for assessing anti-monopoly compliance of franchise agreements. This Decree aims at promoting legal certainty and a sound business climate for the development of franchise business in Indonesia, which has been rising recently, as many domestic players start to gain significant penetration of the market.
According to Government Regulation No. 42 Year 2007 concerning Franchises, “Franchise means a special right held by an individual or business entity over a business system with a special business nature for the purpose of marketing the goods and/or services which have proven to be successful and can be beneficial and/or utilized by other parties pursuant to a franchise agreement.” Under this system a franchisor will appoint a franchisee to make use of its business system by virtue of a mutual agreement between them.
Legal issues arise if such agreement, considering its vertical nature, creates a monopoly in the market and unfair business practices. As a franchise agreement will also govern the transfer of certain intellectual property rights through a license agreement, it is also subject to the types of agreement to be excluded from the application of Law 5/1999 pursuant to Article 50 (b) of Law 5/1999.
The article states that “Exempted from the provisions of this Act are… contracts connected with rights over intellectual property, such as licenses, patents, trade marks, copyrights, industrial product designs, integrated electronic circuits, and trade secrets, and contracts connected with franchises.” As this provision does not provide profound insight on the issue, Decree 57/2009 is expected to elaborate further guidance, especially for business players.
However, as Decree 57/2009 serves as guidance for franchise businesses, it does not stipulate any legally binding requirements, obligations, or restrictions on any practices. Instead, it provides theoretical frameworks, academic discussions, and examples related to the issues.
Several examples of franchise practices that may not be exempted from Law 5/1999, and thus subject to the sanctions set out therein, are as follows:
Resale price maintenance clause (the Franchisor sets a certain sale price that the Franchisee must comply with). The scope of a franchise agreement only covers the intellectual properties and business system (know-how), and it cannot control the flow of distribution, because it will diminish competition among franchisees.
Requirements to purchase the supply of goods and/or services only from the Franchisor or parties appointed by the Franchisor. However, this can be excluded if the purchasing obligation is to maintain the identity, quality, or reputation of the Franchisor.
Requirements to purchase other goods and/or services from the Franchisor (tied agreements). This applies especially to the obligation to purchase certain goods and/or services not included in the franchise package, which definitely violates Law 5/1999.
Area restriction, provided that the area restriction is established not for the purpose of establishing a franchise business network, but instead to limit the market and consumers.
Requirements not to commence similar business activities during a certain period of time after the termination of the franchise agreement
Although KPPU has issued the above guidelines, KPPU still reserves the right to examine franchise agreement on a case-by-case basis through both economic and legal analysis of the market, until it reaches a conclusion on whether a particular franchise agreement could result in the occurrence of monopoly practices or unfair business competition.