Guidelines Concerning Unjust Return of Unsold Goods
under the Antimonopoly Act

April 21, 1987
Executive Bureau, Fair Trade Commission

Introduction

1. In Japan's distribution system, it is common practice for consumer products purchased for sale by retailers or wholesalers to be returned to the seller if unsold, through the specific customs vary substantially depending on the product and the distribution stage. Groups representing merchants that supply goods to large retailers have for some time been making presentations to the Commission calling for the prohibition of this practice in those cases where it seems unfair under the provisions of the Antimonopoly Act. There
has also been foreign criticism that the practice of returning unsold goods constitutes a barrier to market participation by those wishing to sell foreign goods in the Japanese market.

2. In Japan new consumer goods are developed in rapid succession, and many are manufactured in anticipation of market trends. The distribution sector is fiercely competitive. In this environment, the Japanese practice of returning unsold goods is an integral part of transaction conditions among partners dealing with each other on a continuing, long-term basis. From the economic viewpoint, the custom of returning goods
facilities the introduction of new products and offers a number of other advantages, including better ability to respond quickly to regional shifts in supply and demand. There are also problems, however. The practice increases distribution costs, leads to easygoing management habits in businesses who are able to return unsold goods, and can impose an unfair burden on businesses accepting returned goods. These and other circumstances must be taken into account when studying the application of competition policies to the practice of returning goods. Efforts must be made to discover ways of retaining the advantages of the practice while eliminating its disadvantages.

3. This document presents the Commission's thinking on the application of the Antimonopoly Act to regulate the unjust return of unsold goods. It is hoped that this document will help to ensure fair trade by preventing unjust returns from occurring.

1. Legal Restraints on Unjust Returns

In general the practice of returning unsold goods is not covered by the regulations provided under the Antimonopoly Act. However, when there are differences in the status of the parties to a transaction and the party with an advantageous status employs that status to force the other party to accept unwarranted returns of unsold goods, thereby damaging that party, the returns can be regarded as an abuse of dominant bargaining position and subjected to regulation under the Antimonopoly Act.

The unjust return of unsold goods can be regulated under the provisions of Article 14, paragraphs 3 and 4, of Unfair Trade Practices (FTC Notification No.15 of 1982; hereinafter referred to as "General Designations"). In addition, when the unsold goods are returned by large retailers to their suppliers, regulations can be applied under the provisions of Article 1 of Specific Unfair Trade Practices in the Department Store Industry (FTC Notification No.7 of 1954; hereinafter referred to as "Specific Designations for the Department Store Industry").

2. Interpretation of General Designations

The following stipulations are provided in Article 14, Item 3 and 4, of the General Designations:

(Abuse of dominant bargaining position)
Article 14. Taking any act specified in one of the following paragraphs, unjustly in the light of the normal business practices, by making use of one's dominant bargaining position over the other party:
3. Setting or changing transaction terms in a way disadvantageous to the said party;
4. In addition to any act coming under the preceding three paragraphs, imposing a
disadvantage on the said party regarding terms or execution of transaction.

The viewpoint of the Commission with regard to the application of these stipulations to returns of goods is as follows.

(1) Dominant bargaining position

The phrase "dominant bargaining position over the other party" is understood as a situation in which the party purchasing goods enjoys a relatively superior bargaining position over the supplier, irrespective of whether the purchaser has a monopolistic or an oligopolistic position in the market, and is therefore capable of unfairly causing losses to the other party. The existence of such an advantage must be determined
individually and specifically, taking into account such factors as overall differences in business capabilities (according to a comparison of capital, numbers of employees, gross sales, etc.), the trading relationship (including the degree of dependence on the transaction and the need to trade on a continuing basis), and the supply-and-demand situation for the goods being traded.

(2) Unjust return of unsold goods

1. Two conditions must be taken into account before the return of unsold goods by a party that enjoys a dominant bargaining position is judged to be an act that is taken unjustly in the light of normal business practices and that imposes a disadvantage on the other party. Here, "normal business practices" are defined as practices that are acceptable from the viewpoint of maintaining and promoting fair competition. In this sense, a practice cannot automatically be justified simply because it
   conforms to existing business customs.
   
   Condition 1: A clear prior understanding was reached between both parties at the time of purchase to the effect that the return of goods is permitted under the terms of the transaction.
   Condition 2: The risk burden from the return of unsold goods under the terms of the transaction is not disadvantageous to the other party when seen in relation to the other transaction conditions.
   
   The need to return unsold goods and the circumstances under which the goods are returned must also be taken into account in deciding on specific cases.
2. In general, businesses engage in transactions on the basis of mutual understanding, after taking into account all the conditions relating to the transaction and calculating the advantages and disadvantages. The same is true of transactions between unequal parties that provide for the return of unsold goods.
   If it is not clearly understood by both parties prior to the transaction that the terms of the transaction provide for the return of unsold goods, the party whose trading position is weaker may incur losses that could not be taken into account beforehand when goods are returned. Such a case may be deemed an unjust return of goods.
   When one party to a transaction is superior in status to the other party and the burden of risk to suffer a disadvantage associated with the return of unsold goods is only on the party whose status is inferior, in view of the terms of transactions such as margins this may also be deemed an unjust return of goods.
3. Regardless of the preceding two conditions, the return of unsold goods shall not be deemed unjust under the following circumstances: First, returns due to reasons attributable to the supplier, such as where the goods supplied were defective or differed from those ordered; second, returns due to the specific circumstances of a party to the transaction where the party accepting the returns will clearly not incur
   any loss and where the request by one party for the return is accepted be the other party.

3. Interpretation of Specific Designations for the Department Store Industry

The following stipulations are provided in Article 1 of the Specific Designations for the Department Store Industry:

Article 1: The return to a supplier of all or part of goods purchased from the said supplier by a department store (including, here and hereinafter, actions that amount in essence to the return of goods, such as the conversion of the purchase agreement into a consignment sales agreement or the replacement
of the goods), except under one of the circumstances defined in the following paragraphs.

• If the goods delivered are soiled, damaged, incomplete, or in any other way imperfect due to reasons attributable to the supplier, and the said goods are returned to the supplier within a reasonable period of time from the date of delivery.
• If the goods delivered are different from those ordered, and the said goods are returned to the supplier within a reasonable period of time from the date of delivery.
• If it is the normal trade practice in general wholesale transactions other than those between the department store and the supplier to return goods within a certain period of time from the date of delivery or up to a certain amount of the total supplied, and the goods are returned to the supplier within the period of time or up to the amounts that constitute the said normal practice.
• If the goods are returned to the supplier subject to the payment by the department store of any costs that would normally be incurred in the return of goods and subject to the agreement of the supplier.
• If the goods are returned in response to a request from the supplier in a case where the supplier will profit directly from the disposal of the said goods after they are returned.

When a large retailer that can be characterized as a department store, as defined in the Specific Designations for the Department Store Industry, has purchased goods from a supplier whose trading status is inferior to that of the large retailer, the retailer is prohibited from returning the goods to the supplier except under the circumstances defined in each Item of Article 1, such as where the goods are imperfect due to reasons
attributable to the supplier. In applying the provisions of Article 1, Item 3, the Commission will determine whether the return of goods constitutes a normal trade practice according to whether or not the following conditions are fulfilled.

Condition 1: A clear prior understanding exists between both parties at the time of purchase to the effect that the return of goods is permitted.
Condition 2: The risk burden from the return of unsold goods under the terms of the transaction is not disadvantageous to the other party when seen in relation to the other conditions of transaction.
Condition 3: The period during which unsold goods may be returned is, in principle, understood beforehand by both parties.

The need to return unsold goods and the circumstances under which the goods are returned must also be taken into account in deciding on specific cases.