Golden Communications Co., Ltd., was complained for supplying videotapes under unreasonable contract terms and at unreasonable prices
Chinese Taipei
Case:
Golden Communications Co., Ltd., was complained for supplying videotapes under unreasonable contract terms and at unreasonable prices
Key Words:
videotapes, distribute, rental, choice, market force
Reference:
Fair Trade Commission Decision of October 20, 1999 (the 415th Commissioners' Meeting); Letter (88) Kung Yi Tzu No. 8805559-008.
Industry:
Supply of Broadcast Television Program (8530)
Relevant Laws:
Summary:
A complaint was filed with the
Commission by a video rental business in 1999 alleging unfair competitive
practices by Golden along the following lines:
(1) Golden included many unreasonable terms and conditions in its franchise
contracts:
(i) The subject matters of the contracts were unspecified. The complainant
claimed that the contract should at least specify the producers whose videotapes
would be supplied by Golden, along with a rough estimate of the number of
the videotapes to be supplied. Otherwise, Golden might meet its contractual
obligation by supplying inferior videotapes; and the video rental businesses
that entered into the franchise relationship might not be able to ask for
damages if Golden terminated its supplies before the contract expired.
(ii) The video rental businesses that signed the franchise contracts were
assigned different quotas of videotape supplies, despite paying the same
franchise fees. (The quotas were set on the basis of sales performance,
according to Golden, and the proceeds from the videotape rentals had to
be divided between rental businesses and Golden.) Although all franchisees
would receive at least one copy of the videotape for each movie on the supply
list, the complainant felt that it has been unreasonably discriminated when
some franchisees might receive as many as 10 or 20 copies. Moreover, the
franchisees did not know how many copies they had been allotted until the
videotapes actually arrived. In light of the relatively higher franchise
fees they actually paid, some of the franchisees that received fewer copies
of videotapes decided to acquire separately the licensing of the right to
rent videotape after the latest contracts expired.
(iii) The contracts prohibited the video rental businesses from purchasing
videotapes from other direct-sale purchasers of the videotapes. In current
practice in the industry, the rights to rent videos to consumers and the
rights to sell them to consumers are given to different companies. Typically,
the time for the distribution of the videos for sales is two to three months
later than that of the distribution of videos for rental. Therefore, the
sale prices are relatively lower. The complainant acknowledged being aware
that Golden's motivation for prohibiting its purchases of videotapes from
direct-sale purchasers was to avoid the dilution of its share of profits
obtainable from the split of the proceeds from the franchisees' rental businesses.
The complainant argued, though, that allotting only a small number of videos
to a franchisee while at the same time restricting it from purchasing them
from direct-sale purchasers would leave it with no way to keep its business
afloat. Under the franchise contract, the ownership of the videos still
belongs to Golden. If Golden indefinitely postpones recalling its videos,
the rental businesses will never get the opportunity to purchase videos
from direct-sale purchasers.
(2)Golden failed to give the
video rental businesses a copy of the contract for retaining purpose.
(3)Golden set excessively high prices for separate acquiring of the licensing
of rights to rent videotapes. Other suppliers charged approximately NT$600
per tape, whereas Golden charged over three times the average market price
at NT$2,000. Video rental businesses were thus compelled to sign the franchise
contracts to avoid paying exorbitant fees for individual tapes.
Golden's responses to the foregoing
allegations were as follows:
(1)Regarding the complainant's concerns about the franchise contracts:
(i) The vagueness of the subject matter in the franchise contracts was inevitable
due to the unique feature of the industry in which it is impossible to predict
that what film the upstream suppliers would supply, when they would be available,
and what their contents would be. Thus, the contract could only address
these matters in general terms.
(ii) The franchisees were required
to pay half of their rental proceeds to Golden. Those that paid a higher
amount should by assumption have greater demand from the consumers. Therefore,
Golden would in turn assign larger quotas to those franchisees. Notwithstanding
this consideration, though, all franchisees were given at least one copy
of videotape for each film that Golden had been licensed to distribute.
(iii) The prohibition on the purchases of direct-sale tapes by franchisees
until Golden recalled its tapes was justified because the franchise agreement
saved the franchisees any additional cost other than the fixed franchise
fee which might need to be incurred when the purchases of videotapes were
made separately. The franchisees also need not concern about how many tapes
they would have to purchase to generate profits without assuming excessive
risk. In view of these benefits, it would run counter to the principle of
good faith under the contract to permit the franchisees to purchase videotapes
directly from other sources, and thus evade their obligation to share rental
proceeds with Golden. Golden would recall tapes within a period of three
months to one and a half years. To optimize the franchisees' videotape collection,
recall of the tapes will be made on the consideration of the length of time
the videotape had been released, the number of the videotapes in the market,
the rental figures, and the special requests by the suppliers or the franchisees.
Once the videotape was recalled, the franchisee was no longer prohibited
from purchasing it directly from other sources.
(2)Duplicated copies of all franchise contracts between Golden and the franchisees
were provided to the franchisees, after they were internally reviewed by
Golden to ensure that they are properly signed. The duplicated copy of the
contract was usually delivered within one month after signing; however,
in cases where it had not been properly executed, and thus had to go back
and forth between the franchisee and Golden, the process could take as long
as three to four months.
(3)Regarding the allegations that it supplied videotapes only through franchising
arrangement, Golden replied that since the Commission's disposition against
VIDI, Golden had adopted a dual distribution system under which rental businesses
could choose from franchising or separate purchases arrangements. Businesses
that choose to accept the franchising arrangement were required to pay a
fixed franchise fee and to share half their rental proceeds to Golden. Golden
would not interfere with the use of the sold videotapes by businesses that
chose separate purchase arrangement. As for the complainant's allegation
that the prices for its videotapes were too high, Golden replied that the
prices it set for individual tapes vary on the basis of their contents,
quality, and box office performance.
The Commission's findings and
decisions after investigation are as follows:
(1)Regarding the dispute over the franchise arrangement:
(i) The provisions of the contracts at issue made only general reference
to audio-visual products for which Golden had obtained licenses, and did
not specify their sources. Because "subject matter" is the primary
legal elements in a contract, failing to specify it in the contract would
render the rights and obligations of the parties indeterminate and make
it hard for the franchisees to assert any legal claim against the videotape
supplier. On the other hand, however, if the contracts specified the licensed
videotapes beforehand, the contract would not include the licensed videotapes
that Golden subsequently acquired. This would not necessarily benefit the
franchisees. Given that the claims by both parties were reasonable made,
and the extent to which the subject matter should be specified to be clear
and fair is a matter subject to the mutual negotiation by the parties to
the contract, the Commission determined that it should not intervene. However,
in view of the franchisees' inferior bargaining position and the goal towards
making market information more transparent, the Commission had requested
that Golden stipulate the subject matter of its contracts more explicitly
in the future.
(ii) The complainant alleged discrimination by Golden because the quota
for the videotapes it received differed from those allotted to other franchisees
that paid the same franchise fee. In addition to the franchise fee, however,
the consideration paid by franchisees under the contract also included half
of their actual income from videotapes rental; as a result, the total consideration
in fact varied. The higher a franchisee's revenues, the greater the consideration
it had to pay Golden, and consequently, more videotapes will be allotted
by Golden to the franchisee to secure more profits. There is nothing improper
about such a business practice. Likewise, it is only reasonable that Golden
would maximize its profits by supplying more videotape to franchisees with
greater demand and higher turnover. The Commission held that at the center
of the problem was that Golden did not stipulate in the contract the minimum
quantities of videos to be supplied, and at the same time failed to disclose
its standards for determining the quota for videos actually to be supplied.
The franchisees were unable to ascertain the quantities of videos they would
receive, and had no basis for conducting a cost-benefit analysis before
entering into the franchise relationship. The Commission therefore requested
Golden to disclose its standards for determining the quota for video supply.
(iii) As for Golden's prohibition against franchisees purchasing tapes from
direct-sale purchasers, the franchise arrangement makes the tapes available
to the franchisees earlier than they would be through direct-sale channels.
If the franchisees were permitted to purchase the tapes as soon as they
came on the market for direct sale, and thereby avoid sharing subsequent
rental revenues with Golden, the franchise contract would be bereft of any
real value. Hence, Golden's assertion that such purchases would be against
the good-faith principle in contract law. The Commission held that the prohibition
was a way for Golden to ensure that the franchisees would faithfully perform
their obligations under the franchise contract. Moreover, since the arrangement
would be effective only until Golden recalled the tapes. At the heart of
the problem, again, is the issue of the quota for videotape supply. Since
the franchisees receiving fewer videotapes are under less inventory pressure,
there is less need to regulate their inventory. Therefore, their tapes will
be recalled later and the period for which they are prohibited from purchasing
direct-sale tapes is longer. Yet it is exactly the franchisees with lower
business turnover that need to purchase direct-sale tapes from other sources
since they receive fewer tapes through the franchise arrangement. The Commission
therefore requested that Golden disclose to potential franchisees information
such as the periods and criteria for initiating a recall.
(2) The Commission found from
a questionnaire survey of the franchisees that a vast majority of them had
received a duplicated copy of the original franchise contract. As to the
very exceptional small number of franchisees that had not, it was because
they had not so demanded. Clearly, Golden had not refused across the board
to let the franchisees have a duplicated copy of the original contract.
The Commission also found, though, that Golden was inconsistent in the time
it took to deliver the contracts, and did not always deliver them of its
own initiative. The written contract is the most important documentation
of the rights and obligations of the contractual relationship. Since Golden
was the party that initially drafted the adhesive contracts, it clearly
was better informed of the content of the contract than were the franchisees,
and thus would enjoy informational advantage over its counterparts. If Golden
failed to give a franchisee a duplicated copy or delayed doing so, the franchisee
would have difficulties in presenting the contract as evidence to assert
its rights and to protect its interests. The Commission therefore requested
that Golden henceforth take the initiative in delivering franchisees their
duplicated copy of the original contract within a reasonable period of time.
(3)Contrary to the complainant's allegation that Golden's prices for separate
purchases were three times higher than those of other suppliers, an examination
of Golden's price lists for 1998 showed that most videotape were priced
at NT$600 and the average price per tape was NT$844. That price is not exorbitant
by comparison with the NT$600 price per tape asserted by the complainant
to be the prices charged by other suppliers. Furthermore, the market value
of videotaped films inevitably varies with their respective unique feature
and their non-subtitutability.
As mentioned above, the consideration paid by the franchisees under the
contract included the franchise fee and half of their rental income for
the licensed tapes. Taking into account the higher number of videotapes
supplied at their fixed cost (the franchise fee), the franchisees with higher
rental volumes thus enjoyed lower costs per video, although they paid more
to Golden overall. Thus, the franchise arrangements might not be cost-effective
for businesses with lower rental volumes, and it is for this reason that
the Commission has asked distributors to make separate licensing available.
The complainant itself had asserted that it had already switched to separate
purchase arrangement because the signing of a franchise agreement was not
worthwhile for the businesses with lower videotape quota allotment. This
bears out Golden's assertion that it allowed rental businesses to choose
either a franchise arrangement or a separate sale arrangement, depending
on their own cost considerations. The Commission thus held that Golden had
offered rental businesses a reasonable opportunity to switch to separate
purchase arrangement.
Summarized by Lin Ch'ing-wen
Supervised by Lin You-ch'ing
Appendix:
Golden communications Co., Ltd.'s Uniform Invoice Number: 22714311