Fair Trade Commission Disposal Directions (Policy Statements) on the Business Practices of Franchisers

1. Background

In recent years, franchise businesses have grown very rapidly in the country and their operations involve a large number of industries. As chain store and franchising operations are built up, the numbers of competition restriction and unfair competition issues in the transactions between franchisers and franchisees have also increased.

To maintain trading order in the franchise market and ensure fair competition between franchise businesses, the FTC has therefore analyzed and compiled patterns of conduct of franchisers that might be considered in violation of the Fair Trade Law and established this Exposition for franchisers.

2. Terminology

The terms in these Guidelines are defined as follows:

1. The term "franchiser" refers to the party in a franchise relationship that licenses the trademark or managing approaches and assists or instructs the other party to manage the business and collects the corresponding costs for the said services.
2. The term "franchisee" refers to the other party in the franchise relationship described in the preceding paragraph that uses the trademark or managing approaches licensed by the franchiser, accepts assistance or instruction from the franchiser, and pays the franchiser the corresponding costs for the said services.
3. The term "franchise relationship" refers to a continuing relationship in which a franchiser licenses a franchisee through a contract to use its trademark or managing approaches and assists or instructs the franchisee to manage the business while the franchisee pays the corresponding costs for the said services. However, purchases of products or services (hereinafter referred to as the products) at wholesale rates or lower for resale or leasing are not included.
4. The term "corresponding costs" refers to the franchise fee, licensing fee, the training charges, as well as the expenses for the products and capital equipment a franchisee is required to pay the franchiser to establish and maintain the franchise relationship.

3. Guidelines on Disclosure of Information

Franchisers providing their trading counterparts with the important franchise information in writing within 10 days or within a reasonably determined timeframe before signing the contract shall not be considered to be withholding important information and therefore not in violation of Article 24 of the Fair Trade Law.

The important franchise information as stated in the preceding paragraph includes the following:

1. Expenses before operation: such as the franchise fee, training charges, expenses for product purchases and capital equipment, etc., with the items, corresponding amounts and estimated total clearly listed.
2. Expenses during operation: such as licensing fee calculation and payment, and expenses for management instruction, purchases of products and raw materials, with the items and estimated amounts clearly listed.
3. The trademark right, patent and copyright involved, their contents, validity periods, extent of authorization, and restrictive conditions.
4. Contents and approaches of management assistance, training, and instruction.
5. Plans for setting up other franchisees of the same franchise system in the franchisee’s operating area.
6. The total number and locations of franchisees of the same franchise system in the same county/city and the statistics on the ratios of contract cancellation and termination in the previous year; the said locations may be presented in electronic documents.
7. Restrictions entailed in the franchise relationship during the contract period:
   1. Terms on supply of products, raw materials, capital equipment and furnishing work and related matters (such as specifications and names of suppliers or contractors.)
   2. The items and quantities of products or raw materials to be purchased.
   3. Other restrictions with regard to the franchise relationship.
8. Conditions on change, termination and termination of contract and handling approaches.

4. Contract Review and Establishment

Franchisers are required to allow at least 5 days or a reasonable timeframe determined in line with each case for their trading counterparts to review the contract before official establishment of the written contract.

The written contract shall be established in two copies for both parties to hold one copy each and the franchisers shall not refuse to comply with this regulation under any circumstances.

Franchisers who fail to comply with the regulations set forth in the two preceding paragraphs and where the conduct is regarded as likely to affect trading order can be considered to be in violation of Article 24 of the Fair Trade Law.

5. Conduct of Competition Restriction or Impediment to Fair Competition

Franchisers who abuse their relative advantageous status or the dependence of their franchisees and engage in any of the following conduct can be considered to be in violation of the Fair Trade Law:

1. Differentiated treatment
   Franchisers engaging in differentiated treatment in prices, trading terms or transactions to various franchisees or other businesses at the same competition level without justifiable reasons and leading to competition restriction or impediment of fair competition can be considered to be in violation of Subparagraph 2, Article 19 of the Fair Trade Law.
2. Improper restrictions on franchisees
   To protect their intellectual property rights, brand image and interests, or the overall business reputation of the franchise system, franchisers may impose on their franchisees necessary restrictions that are deemed reasonable in chain store and franchise operations. If franchisers abuse their relatively advantageous status or the dependence of their franchisees and impose on the business activities of their franchisees improper restrictions beyond what is deemed reasonable in chain store and franchise operations and such conduct leads to competition restriction or to the impediment of fair competition, such conduct can be considered to be in violation of Subparagraph 6, Article 19 of the Fair Trade Law. Likely patterns of such illegal conduct include the following:
   1. Tie-in sales
      Franchisers demand that their franchisees without justifiable reasons purchase other products when purchasing certain products and the conduct is regarded likely to lead to competition restriction or to the impediment of fair competition.
   2. Trading counterpart restriction
      Franchisers impose restrictions on their franchisees without justifiable reasons with regard to product sales, capital equipment, raw materials, and furnishing work, such as the use of suppliers or contractors designated by franchisers, and such conduct is regarded likely to lead to competition restriction or to the impediment of fair competition. However, recommendation of suppliers or contractors without any binding effect is not included.
   3. Compulsory purchase amounts
      Franchisers demand that their franchisees without justifiable reasons purchase specific quantities of products or raw materials and disallow returning of goods and such quantities exceed the quantities a franchisee is able to sell within a reasonable number of business days or surpass the stock quantities a franchisee requires and such conduct is regarded as being likely to lead to competition restriction or to the impediment of fair competition.
   4. Other improper restrictions that are regarded likely to lead to competition restriction or to the impediment of fair competition.

6. Deceptive or Obviously Unfair Conduct

Franchisers engaging in deceptive or obviously unfair conduct that is able to affect trading order can be considered to be in violation of Article 24 of the Fair Trade Law.

7. Other Regulations on Unfair Competition

Aiming at false and untrue advertising, comparative advertising and deceptive or obviously unfair conduct from franchisers, the FTC has also established the "Fair Trade Commission Directions (Guidelines) on Handling Cases Governed by Article 21 of the Fair Trade Law", "Fair Trade Commission Directions (Guidelines) on Handling of Cases of Comparative Advertising", and "Fair Trade Commission Directions (Guidelines) on the Application of Article 24 of the Fair Trade Law". Franchisers are advised to study and abide by the related regulations.

8. Penalty Regulations for Violations against the Fair Trade Law and Legal Responsibilities

With enterprises that are in violation of the Fair Trade Law, the FTC may act in line with Article 41 of the same law to order such enterprises to cease or rectify the unlawful acts or take necessary corrective measures within a specified period and at the same time impose on such enterprises administrative fines no less than NT$50,000 and no more than NT$25,000,000. With those failing to cease, rectify the unlawful acts or take necessary corrective measures, the FTC may continue to order them to cease or rectify the unlawful acts or take necessary corrective measures within a specified period as well as impose administrative fines no less than NT$100,000 and no more than NT$50,000,000 each time until such enterprises have ceased, rectified the unlawful acts or taken necessary corrective measures.

Those in violation of Article 19 of the Fair Trade Law and failing to cease, rectify the unlawful acts or take necessary corrective measures after the FTC has acted in line with Article 36 of the same law and ordered them to cease, rectify the unlawful acts or take necessary corrective measures or engaging in the same or similar unlawful acts again may be subject to a 2-year prison sentence or detention or administrative fines of up to NT$50,000,000.

Franchisers in violation of the Fair Trade Law shall be held for the criminal or administrative responsibility. In addition, the franchisees in concern may also act in line with the regulations in Chapter 5 of the same law and request damage compensation.

9. These Guidelines (Policy Statements) only illustrate a number of types of important information that franchisers are required to disclose and certain patterns of conduct regarded in violation of the Fair Trade Law. The FTC shall make necessary supplementation or revision to rectify any deficiency found therein. When handling each case, the FTC will make its decision based on the concrete facts available.