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:

Articles 19 , 24 of the Fair Trade Law

Summary:

  1. As copyrighted works, videotapes are non-substitutable in nature. In practice, videotape distributors usually acquire the sole distribution rights from upstream producers. This exclusive right gives distributors an economic advantage over video rental businesses, causing the existence of unbalanced market position between the distributors and the rental business. Distributors may therefore abuse their competitive advantage over the rental businesses and market positions to compel video rental business to accept unfair contract terms in standard form of contracts and thereby to restrict the business activities of rental businesses. For fear of being cut off the videotape supply and to maintain as broad as possible their videotape collection, video rental businesses frequently are forced to accept those terms. In 1995, the Fair Trade Commission ("the Commission") found on these grounds that the VIDI Videotape Corporation ("VIDI") had violated Article 19(vi) of the Fair Trade Law by improperly restricting the business activities of trading counterparts through tied sales in its franchise agreements. The Commission therefore demanded that rental businesses be provided reasonable alternatives to purchase the videotapes separately. VIDI happens to be mutually invested with Golden Communications Co., Ltd. ("Golden"), the respondent in the present case.

  2. 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.

  3. 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.

  4. 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


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