1. Background
Domestic Distribution enterprises have grown rapidly through technological progress and, with a business model of low costs and low sales prices, Distribution enterprises soon become the dominant sale access in the market. In step with changing consumption patterns, they employ a variety of delicate promotional programs to stimulate consumption, and utilize individualized distribution technology (including models of e-commerce supply chain management and customer relations management) to control and manage the sale prices, quantities, locations, times, and scopes of sales of goods.

Therefore, Distribution enterprises that have obtained a dominant position through expanding market may improperly demand their trading counterpart(s) to discontinue supply, and they may either improperly charge their trading counterparts additional fees, or improperly demand the "most favored" price from trading counterparts. In addition, Distribution enterprises may improperly restrict trading counterparts' business area and their transaction counter parties, or fail to unveil the conditions of product removal or withdrawal as well as inventory shortfall and product return. Furthermore, Distribution enterprises may improperly withdraw or remove the products from the display selves, impose improper penalty damages for shortages of inventory, or improperly return products, and so forth. Such conducts, which inherently restrict competition or result in unfair competition, undermine efficient competition in quality, price, and services that are the central concepts of fair competition, and/or are reprehensible in terms of commercial competition ethics. Moreover, such activities form impediment to the healthy development of Distribution enterprises.

In pursuit of preserving trading order and consumer interests, along with ensuring fair competition, as well as promoting economic stability and prosperity, plus in the hope of Distribution enterprises understanding clearly the relevant provisions of the Fair Trade Law, this Policy Statement is stipulated based upon an overall analysis of conducts, in which are the probable violations of the Fair Trade Law by Distribution enterprises. The Fair Trade Commission also intends this Policy Statement as a guide for helping the relevant enterprises to avoid violation and at the same time as a reference for handling future cases of such nature.

2. Definition of term

"Distribution enterprises" as used in this Policy Statement refer to hypermarkets, convenience stores, supermarkets, department stores, consumer cooperatives, and other enterprises engaged in general merchandise delivery and selling businesses.

3. Regulations governing the merger of Distribution enterprises:

Article 6, paragraph 1 of the Fair Trade Law provides:

The term "merger" as used in this Law means a situation:

(1) Where an enterprise and another enterprise are merged into one;

(2) Where an enterprise holds or acquires the shares or capital contributions of another enterprise to an extent of more than one-third of the total voting shares or total capital of such other enterprise;

(3) Where an enterprise is assigned by or leases from another enterprise the whole or the major part of the business or properties of such other enterprise;

(4) Where an enterprise operates jointly with another enterprise on a regular basis or is entrusted by another enterprise to operate the latter's business; or

(5) Where an enterprise directly or indirectly controls the business operation or the appointment or discharge of personnel of another enterprise.

Article 11, paragraph 1 of the Law further provides:

Any merger that falls within any of the following circumstances shall be filed with the central competent authority in advance:

(1) As a result of the merger, the enterprise(s) will have one-third of the market share;

(2) One of the enterprises in the merger has one-fourth of the market share; or

(3) Sales for the preceding fiscal year of one of the enterprises in the merger exceed the threshold amount publicly announced by the central competent authority.

Article11-1 additionally provides:

The provisions of Paragraph 1 of the preceding Article shall not apply to any of the following circumstances:

(1) Where any of the enterprises participating in a merger already holds no less than 50% of the voting shares or capital contribution of another enterprise in the merger and merges such other enterprise.

(2) Where enterprises of which 50% or more of the voting shares or capital contribution are held by the same enterprise merge.

(3) Where an enterprise assigns all or a principal part of its business or assets, or all or part of any part of its business that could be separately operated, to another enterprise newly established by the former enterprise solely;

(4) Where an enterprise, pursuant to the proviso of Article 167, Paragraph 1 of the Company Law or Article 28-2 of the Securities and Exchange Law, redeems its shares held by shareholders so that its original shareholders' shareholding falls within the circumstances provided for in Article 6, Paragraph 1, Subparagraph 2 herein.

The Fair Trade Law adopts an "premerger filing and opposition system" to regulate enterprise mergers, meaning that a merger of a certain scale, unless the merger falls under the exclusion clause of Article 11-1, obligates to file reports prior to merge. In other words, the Fair Trade Commission will review the merger reports filed by the enterprises pursuant to Article 12. And if the Fair Trade Commission does not raise any opposition within a certain period, the merger case may lawfully proceed.

4. Regulation concerning the concerted action of Distribution enterprises

(1) Rules governing concerted action:

Article 7, Paragraph 1 of the Fair Trade Law provides:

The term "concerted action" as used in this Law means the conduct of any enterprise, by means of contract, agreement or any other form of mutual understanding, with any other competing enterprise, to jointly determine the price of goods or services, or to limit the terms of quantity, technology, products, facilities, trading counterparts, or trading territory with respect to such goods and services, etc., and thereby to restrict each other's business activities.

Paragraph 2 of the same article further provides:

The term "concerted action" as used in the preceding paragraph is limited to horizontal concerted action at the same production and/or marketing stage which would affect the market function of production, trade in goods, or supply and demand of services.

The Fair Trade Law towards concerted action stands upon "prohibition as principle, granting approval in exceptional circumstances".

Article 14 of the Fair Trade Law provides:

No enterprise shall have any concerted action; unless the concerted action that meets one of the following requirements is beneficial to the economy as a whole and in the public interest, and the application with the central competent authority for such concerted action has been approved:

(i) Unifying the specifications or models of goods for the purpose of reducing costs, improving quality, or increasing efficiency;

(ii) Joint research and development on goods or markets for the purpose of upgrading technology, improving quality, reducing costs, or increasing efficiency;

(iii) Each developing a separate and specialized area for the purpose of rationalizing operations;

(iv) Entering into agreements concerning solely the competition in foreign markets for the purpose of securing or promoting exports;

(v) Joint acts in regards to the importation of foreign goods for the purpose of strengthening trade;

(vi) Joint acts limiting the quantity of production and sales, equipment, or prices, for the purpose of meeting the demand orderly, while in economic downturn, the market price of products is lower than the average production cost so that the enterprises in a particular industry have difficulty to maintain their business or encounter a situation of overproduction; or

(vii) Joint acts for the purpose of improving operational efficiency or strengthening the competitiveness of small- medium enterprises.

(2) Type of concerted action likely to be involved by Distribution enterprises:

Collusively demand trading counterpart(s) to discontinue supply: If Distribution enterprises act jointly with any competing enterprise by means of contract, agreement, or other form of mutual understanding to demand trading counterpart(s) to discontinue supply thereby restricting each other's activities, and such activity is sufficient to affect market function in the distribution industry, they shall be considered as violating Article 14 of the Fair Trade Law, unless it is conformed to the exclusionary provisions of the first paragraph of Article 14 and the Fair Trade Commission has granted approval.

5. Regulations governing the conducts restricting competition or impeding fair competition by Distribution enterprises

(1) Regulations governing restricting competition or impeding fair competition:

Article 19 of the Fair Trade Law provides:

No enterprise shall have any of the following acts which is likely to lessen competition or to impede fair competition:

(i) Causing another enterprise to discontinue supply, purchase or other business transactions with a particular enterprise for the purpose of injuring such particular enterprise;

(ii) Treating another enterprise discriminatively without justification;

(iii) Causing the trading counterpart(s) of its competitors to do business with itself by coercion, inducement with interest, or other improper means;

(iv) Causing another enterprise to refrain from competing in price, or to take part in a merger or a concerted action by coercion, inducement with interest, or other improper means;

(v) Acquiring the secret of production and sales, information concerning trading counterparts or other technology related secret of any other enterprise by coercion, inducement with interest, or other improper means; or

(vi) Limiting its trading counterparts' business activity improperly by means of the requirements of business engagement.

(2) Types of restricting competition or impeding fair competition likely to be involved by Distribution enterprises

(i) Promotion with excessive giveaway or prize:

If Distribution enterprises hold a promotional activity featuring gifts or prizes with excessive value and reach the stage to induce the trading counterpart(s) of the competitor(s) to trade with themselves according to "Fair Trade Commission Guidelines on Cases Concerning Promotion by Means of gifts and Prizes", such act shall be subjected to Article 19, Subparagraph 3 of the Fair Trade Law.

(ii) Restricting sales price of trading counterpart(s):

If Distribution enterprises restrict trading counterpart(s) that the market sales price of a product shall not be lower than or equal to their own sales price, such act involves imposing improper restriction on the business activity of the trading counterpart(s) as a trading condition which shall be subjected to Article 19, Subparagraph 6 of the Fair Trade Law.

(iii) Restricting the business area of trading counterpart(s):

If Distribution enterprises demand the trading counterpart(s) not to transact with other competed enterprises in a specific business area otherwise they will not trade with the trading counterpart(s) or they will terminate the present transaction or change the trading condition, such act involves improperly restraining trading counterparts' business activities by means of a requirement to engage business which shall be subjected to Article 19, Subparagraph 6 of the Fair Trade Law.

(iv) Restricting the transaction counter party of trading counterpart(s)

If, without a due reason, Distribution enterprises restrain the trading counterpart(s) to provide a product to a specific transaction counter party otherwise they will not trade with the trading counterpart(s) or they will terminate the present transaction or change the trading condition, such act involves improperly retraining trading counterparts' business activities by means of a requirements to engage business which shall be subjected to Article 19, Subparagraph 6 of the Fair Trade Law.

6. Regulations governing the deceptive or obviously unfair conduct sufficient to affect trading order by Distribution enterprises

(1) Regulations governing the deceptive or obviously unfair conduct capable of affecting trading order: Article 24 of the Fair Trade Law provides:

In addition to what is provided for in this Law, no enterprise shall otherwise have any deceptive or obviously unfair conduct that is able to affect trading order.

Article 24 of the Fair Trade Law is a catch-all provision regulating unfair competition. Any inherently unfair competition activity, if cannot be regulated by any specific provision of the Law, one may then consider the application of the Article 24. The regulatory intent of Article 24 of the Law aims to establish "competition order in the market" and to control "deceptive conduct" or "obviously unfair conduct" that are "sufficient to affect trading order". Hence, in a specific business transaction the emphasis focuses on whether one party has used misleading means such as "deception" or "concealment of material facts" to attract the trading counterpart(s) to engage business, or has used "deceptive conduct" to cause competitor(s) losing trading opportunity; or on the other hand the party has engaged in "obviously unfair conduct" of unfair competitions such as improperly suppressing trading counterpart(s), impeding the free will of the trading counterpart(s) to decide whether to trade and/or utilize information asymmetry or other relative trading disadvantages of the trading counterpart(s).

(2) Types of deceptive or obviously unfair conduct sufficient to affect trading order by Distribution enterprises

(i) Demanding the "most favored" price from trading counterpart(s)

Distribution enterprises, requiring the trading counterpart(s) to give the "most favored" price, penalize or adopt any disadvantage measures against the trading counterpart(s) if it fails to offer such price; such act deems as an obviously unfair conduct sufficient to affect trading order which shall be subjected to t Article 24 of the Fair Trade Law.

(ii) Fail to clearly and specifically articulate the conditions or standards of products removal or withdrawal

Distribution enterprises fail to negotiate with trading counterpart(s) in advance to articulate clear and specific conditions or standards in respect of products removal or withdrawal in written, instead improperly demand the trading counterpart(s) to remove or withdraw products, or to change the trading conditions, and/or without fully disclosing relevant supporting evidence information; such act deems as an obviously unfair conduct sufficient to affect trading order which shall be subjected to Article 24 of the Fair Trade Law.

(iii) Fail to clearly and specifically attribute liability of inventory shortfalls

Distribution enterprises fail to negotiate with trading counterpart(s) in advance to articulate clear and specific attributions or standards of inventory shortfall liability in written, instead faulting inventory shortfall liability to the trading counterpart(s), and/or without fully disclosing relevant supporting evidence information; such act deems an obviously unfair conduct sufficient to affect trading order which shall be subjected to Article 24 of the Fair Trade Law.

(iv) Improperly calculating penalty damage for inventory shortfall

Distribution enterprises, in a period of inventory shortfall, exploit the trading counterpart(s) by improperly increasing product orders or compounding the calculation of cumulative shortfall in pursuit of raising amount of penalty damage; such act deems as an obviously unfair conduct sufficient to affect trading order which shall be subjected to Article 24 of the Fair Trade Law.

(v) Fail to clearly and specifically articulate the conditions or standards of products return

Distribution enterprises fail to negotiate with the trading counterpart(s) in advance to articulate clear and specific conditions or standards of products return, instead improperly return products, and/or without fully disclosing relevant supporting evidence information; such act deems as an obviously unfair conduct sufficient to affect trading order which shall be subjected to Article 24 of the Fair Trade Law.

(vi) Improper conducts of returning products

Despite that Distribution enterprises negotiate in advance with the trading counterpart(s) in respect to the conditions or standards of returning products in written, the following still considered as an improper conduct of returning products; such act deems as an obviously unfair conduct sufficient to affect trading order which shall be subjected to Article 24 of the Fair Trade Law:

(a) The reason that result in the pollution, damage or expiry of a product is non-fault to the trading counterpart(s) while Distribution enterprises return it;

(b) Without due reason Distribution enterprises return a product by means of storage adjustment, sale sites renovated or altering display selves;

(c) Distribution enterprises purchase large amount of products with low price for the promotion; after that return the residual at a normal price, and ask the trading counterpart(s) refunds the price difference;

(d) With no other due reason Distribution enterprises return a product.

7. Regulations governing other unfair competitive practices

In regard to other unfair competitive practices such as imposing surcharges, piracy, false advertisement, comparative advertisement, commercial slander, deception or obliviously unfair conduct, the Fair Trade Commission has previously stipulated "Fair Trade Commission Guidelines on Additional Fees Charged by Distribution Businesses", "Fair Trade Commission Guidelines on Handling Cases Governed by Article 20 of the Fair Trade Law ", "Fair Trade Commission Guidelines on Handling Cases Governed by Article 21 of the Fair Trade Law ", "A General View of Comparative Advertisement in Violation of the Fair Trade Law", "Fair Trade Commission Guidelines on the Reviewing of Cases Involving Enterprises Issuing Warning Letters for Infringement on Copyright, Trademark, and Patent Rights", "Fair Trade Commission Guidelines on the Application of Article 24 of the Fair Trade Law", etc. Distribution enterprises should be attentive and abide by them.

8. Penalty and legal liability in violation concerning regulations of the Fair Trade Law

(1) Where an enterprise violates the obligation to report a merger or proceeds with a merger before the end of the opposition period set by the Fair Trade Commission, or carries out a merger that the Fair Trade Commission has prohibited after filing of the report, or fails to perform burdens attached to the merger by the Fair Trade Commission, the Fair Trade Commission may, pursuant to Article 13 of the Fair Trade Law, prohibit the merger, order the merging enterprises to establish separate enterprises within a specified time limit, dispose of all or a part of the shares, transfer a part of the operations, order resignations, or make other necessary dispositions, and may impose administrative fines under Article 40 of the Fair Trade Law.

(2) Under Article 35, Paragraph 1 of the Fair Trade Law, if any enterprise violating Article 14 or the Law is ordered by the Fair Trade Commission pursuant to Article 41 to cease the violation, rectify its conduct, or take necessary corrective measures within a specified time period and fails to do so within such time period, or, having ceased the violation then subsequently engages again in the same or a similar law of violation, the actor shall be punished by imprisonment for not more than three years or detention, or by a fine of not more than one hundred million New Taiwan Dollars, or by both.

(3) Under Article 36 of the Fair Trade Law, if any enterprise violating Article 19 of the Law is ordered by the Fair Trade Commission pursuant to Article 41 to cease the violation, rectify its conduct, or take necessary corrective measures within a specified time period and fails to do so within such time period, or, having ceased the violation then subsequently engages again in the same or a similar law of violation, the actor shall be punished by imprisonment for not more than two years or detention, or by a fine of not more than fifty million New Taiwan Dollars, or by both.

(4) Under Article 41 of the Fair Trade Law, the Fair Trade Commission may order any enterprise that violates any provision of the Fair Trade Law to cease the violation, rectify its conduct, or take necessary corrective measures within a specified time period; in addition, the Fair Trade Commission may impose an administrative fine of not less than fifty thousand nor more than twenty-five million New Taiwan Dollars. If the enterprise fails to cease the violation or rectify its conduct or to take necessary corrective measures within the specified time period, the Fair Trade Commission may continue to order the enterprise to cease or rectify its conduct or take necessary corrective measures within a specified time period, and each time may assess an administrative fine of not less than one hundred thousand and not more than fifty million New Taiwan Dollars until the enterprise has ceased the violations, rectified the conduct, or taken the necessary corrective measures.

(5) An enterprise that violates the Fair Trade Law, in addition to bearing criminal or administrative liability under the law, shall also be liable for damages under Chapter V of the Fair Trade Law.

9. Supplementary provisions

This Policy Statement merely raises and describes a number of commonly encountered types of conducts by Distribution enterprises that may contravene the Fair Trade Law. The handling of individual cases shall be determined by the concrete facts of each one. ÿ