A Study on Franchise Management Practice Regulation

1. Background of Study
As a result of economic transformation, service industries make up a principal proportion of domestic economy today. At the downstream of these industries, the retailers, dining businesses, etc. are mostly franchise operations, indicating the growing prevalence of chain and franchise management. According to statistics from the Taiwan Chain Stores and Franchise Association, chain or franchise operations in the country have exceeded 100 types and there are over 200 franchise systems and 24,000 franchise establishments. Apparently, chain stores and franchise businesses have flourished and covered all kinds of professions. Meanwhile, the continuing increase of participants in the franchise fair held by the Association of Chain and Franchise Promotion each year also proves that franchise management has become one of the most popular options for starting a business. However, the number of disputes in franchise relations has also escalated, but there are no specific laws in the country to regulate the business relations between franchisers and franchisees. Therefore, this study is intended to review the regulations in the Fair Trade Law on franchise management practices and also analyze precedents processed by the Fair Trade Commission to classify the main patterns of franchisers’ violations of the Fair Trade Law in order to understand the effects of law enforcement.

2. Main Suggestions
(1) The law enforcement of the Fair Trade Commission
A. Keeping track of competition in the franchise market to understand the developments therein: Competition in the franchise market is becoming increasingly concentrated. To maintain competition order, the FTC needs to observe if there is the tendency of unfair competition changing to restricted competition in both the structural and behavioral aspects.
B. Reinforcing case analysis to perfect the regulations in the Fair Trade Law: The FTC has established the Disposal Directions (Policy Statements) on the Business Practices of Franchiser in which the information to be disclosed was listed so that related businesses know the rules to follow. In actual law enforcement, however, the regulations in the Fair Trade Law will apply. Hence, composition of dispositions in the future should be adjusted promptly. Quotation of provisions set forth in the aforesaid Disposal Directions (Policy Statements) should be avoided and the regulations in the Fair Trade Law should be analyzed.
C. Reviewing franchise regulations in accordance with changes of trading patterns: As changes of trading patterns occur, it is necessary to study international trends and domestic market structure changes and consider whether the information to be disclosed is adequate to serve as the basis for joining a franchise system and whether further violation patterns should be listed according to changes in the competition mechanism. In other words, existing regulations ought to be reviewed promptly to promote trading information transparency and ensure fair competition.
D. Establishing a case screening mechanism to reduce administrative costs: Past violations have mostly been against Article 24. The key factor in determination of whether franchisers’ business practices have violated the said article is whether they are “capable of affecting trading order.” In the future, more concrete standards should be established to facilitate such determination and provide the basis for the FTC’ law enforcement, including the business scale of franchisers, the percentage of market share they account for, the number of franchisees they have recruited, their business sales, and the number of trading counterparts affected by the conduct.
(2) Franchisers: Franchisers are required to fulfill their corporate responsibility. Before starting to recruit, they ought to ascertain the advertising information to be provided is truthful and correct. They should also disclose completely all franchise conditions in writing before joining a franchise system. Such conditions include required expenses, use of trademark, training, minimization of intra-brand competition in the same are spread of franchisees, etc. They must also respect the right of franchisees to determine their own prices. Failure to achieve any of the above will be a violation of related regulations.
(3) Parties interested in joining franchises: Such parties must inspect the contract closely to understand fully the rights and obligations involved and choose the franchiser carefully. They should also keep the following 6 points in mind: (i) whether the franchiser has disclosed important information as specified in franchise regulations, (ii) whether the franchiser has set up branches under direct management or licensed other franchisees, (iii) whether the franchiser is a member of the franchise association, (iv) whether the franchiser licenses franchisees to use its trademark or management techniques, (v) whether the franchiser agrees to provide assistance and guidance in management, and (vi) whether the interested party will actually participate in management of the franchise business. Before deciding whether to join a franchise system, they should think over all the considerations.