Procter & Gamble Co., Ltd. was accused of using its dominant market position against downstream businesses unfairly in violation of the Fair Trade Law
Case:
Procter & Gamble Co., Ltd. was accused of using its dominant market position against downstream businesses unfairly in violation of the Fair Trade Law
Key Words:
cosmetics; dominant market position; restriction of sales
Reference:
Fair Trade Commission Decision of July 14, 1999 (the 402nd Commissioners' Meeting); Letter (88) Kung Er Tzu No. 8709430-014
Industry: Cosmetics Manufacturing Industry (2240)
Relevant Laws:
Summary:
1. K'ou K'ou general merchandise ( K'ou K'ou) alleged that Procter & Gamble
(hereinafter, "P&G") used its dominant market position to demand
that downstream franchise outlets of its MaxFactor cosmetics line provide collateral
security in the form of real estate or a savings account at a bank when Procter
and Gamble entered into "MaxFactor Franchise Contracts." K'ou K'ou
also alleged that Procter & Gamble not only arbitrarily reduced the ratio
at which it paid an annual incentive for sales performance, but also stopped
supplying K'ou K'ou on the unfounded grounds that K'ou K'ou was disrupting the
market. These acts, K'ou K'ou, alleged, were obviously unfair.
2. Allegation of Diminished Profits
2.1 The allegation that when Proctor and Gamble arbitrarily reduced the ratio
at which it paid an annual incentive for sales performance (i.e. the franchise
store's commission), it diminished K'ou K'ou's profits:
Since Proctor and Gamble has no legal or contractual obligations in this matter,
Proctor and Gamble's management may decide whether or not to pay the incentive
and the amount of the incentive. The Fair Trade Law ("the Law") does
not apply to this point.
2.2 The requirement that K'ou K'ou provide collateral security before Proctor
& Gamble would contract with K'ou K'ou and make transactions:
The Fair Trade Commission (FTC) understands that three interests are competing for this sales channel: department stores, Lady Boss, and franchises. Proctor & Gamble required different degrees of collateral security from each trading counterpart as a contractual condition. By doing so, P&G placed different trading conditions on enterprises competing on the same level. What Article 19, subparagraph 2 of the Law calls "discriminating" means selling the same product or service at different prices or under different non-price conditions to different buyers who compete on the same level of competition. Proper reasons includes market conditions, cost differences, traded volumes, and credit risk factors. Accordingly, when P&G demanded that department stores, Lady Boss outlets, or franchise outlets provide collateral security in different amounts, it did so on the basis of the credit risks it incurred by trading with counterparts of different sizes. This is normal commercial practice and does not violate the Law.
3. The allegation that P&G stopped supplying K'ou K'ou without good reason: Whether the issue at hand was one of a violation of Articles 18 and 19(vi) of the Law or of a failure to perform obligations in a civil contract would depend upon whether P&G's warning that it would stop supplying K'ou K'ou was prompted because K'ou K'ou had failed to abide by stipulated resale prices or because K'ou K'ou had marketed the product through unauthorized channels. When the FTC investigated, it found that K'ou K'ou could not explain satisfactorily whether it had engaged in unauthorized marketing practices that caused Proctor and Gamble to cut off supply to it. A subsequent investigation sampled 22 franchise outlets and asked them to give explanations as interested parties. It could not be proven that P&G had violated Article 18 or 19(vi) of the Law contractually or in actual trading.
4. In sum, the FTC had insufficient evidence to find that P&G had violated
the Law.
Summarized by Hung Hsuan
Supervised by Li T'ing-hsi
Appendix:
Procter & Gamble, Co., Ltd.'s Uniform Invoice Number: 21238199