Alleged violations of article 19(1)(iii) of the Fair Trade Law by the Cheng Kuo Corporation and Da Chang Hang due to improper means of attracting franchisees through inducement with profit or maintenance of lawsuits on their behalf, thus causing competitors' trading counterparts to do business with them.
Case:
Alleged violations of article 19(1)(iii) of the Fair Trade Law by the Cheng Kuo Corporation and Da Chang Hang due to improper means of attracting franchisees through inducement with profit or maintenance of lawsuits on their behalf, thus causing competitors' trading counterparts to do business with them.
Key Words:
inducement with profit, maintenance of lawsuits, competitor's trading counterparts, hinder fair competition
Reference:
Fair Trade Commission Decision of January 19, 2000 (the 428th Commissioners' Meeting)
Industry:
Tea and Beverage Shop Industry (5720)
Relevant Laws:
Article 19(1)(iii) of the Fair Trade Law
Summary:
1. A letter of complaint from Manabe Cafe Co., Ltd. (Manabe) and Kohikan Enterprise Co., Ltd. (Kohikan) (collectively, the complainant) on 12 August 1999 stated the following: The Manabe franchising system was originally managed by the predecessors of the complainant. Due to outstanding bank loans, Nieh Chu-ling et. al. were forced to sell the Manabe trade and service marks, the rights to which were acquired by Cheng Kuo Corporation and Da Chang Hang (collectively, the respondent). Thereafter, the complainant changed its name to "Kohikan" in cooperation with their Japanese headquarter's unification of their international trademark system, and notified all franchise managers that they must declare within a specified period of time their intent to change their logos. The respondent, however, attempted to induce franchisees from the Manabe system to enter into contractual membership in its own system, not through appeals to quality, service, or price, but instead through the improper means of induceme nt with profit or maintenance of lawsuits on their behalf. Attachments to the respondent's contracts stated that it would reimburse them for any costs if the new franchise members needed to change logos on their storefronts, table service, furniture or interior decoration; that it would acquire the franchise bonds originally paid to the complainant; and that it would assume any litigation between the franchisees and complainant, with the condition that those franchisees switching to its franchise would not enter into private settlements with the complainant. These actions caused the complainant to lose a total of 33 franchise members, allegedly as a result of restraint of unfair competition. 2. The Fair Trade Commission (the Commission) investigated and resolved as follows: (1) With regard to the respondent's willingness to offer reimbursement for logo changes in signs, table service, furniture and decoration, the Commission's investigation of franchisees switching from the Manabe system found that the respondent was acceding to a condition put forward by the new franchisees that it assumes those costs. In addition, Kohikan, in response to the sale of the Manabe mark, had also provided the same considerations in the contracts it signed with those franchisees entering into its unified trademark system. Further, these requirements were conditions of trade, and cannot be characterized as "creating expectations of unexpected gain or windfall profits." (2) With regard to the respondent acquiring the franchise bonds originally paid to Manabe and regarding them as bonds paid to itself, investigation showed this provision was made at the request of the new franchisees. The respondent allocated one percent of royalties as a performance bond, which was in fact equivalent to reducing the franchising fees and saving them on the franchisees behalf; it is difficult to categorize these actions as improper "competitive" measures. Further, the necessity of a performance bond and its amount are subject to free negotiation between the parties to a contract. With regard to whether there must be uniform collection of such a bond, the respondent's assessment was that it had a long history of association with Manabe and that collection of the bond was not necessary given the established trust between the two. This was judged to fall within the range of free management decisions. In addition, while franchisees' initial franchising contracts were signed with Kohikan, b onds paid earlier to the United Franchise Chain Corporation, Manabe or Kohikan were all regarded as having been paid to Kohikan, a position similar to that of the respondent. Thus these actions are dissimilar to those prohibited under Article 19(1)(iii) of the Fair Trade Law. 3. With regard to the respondent's takeover of litigation with Manabe on behalf of the new franchisees, and with reference to the Commission's "supervisory regulations for disclosure of franchising information" and the nature of the Manabe's franchise, the Commission found that trademark authorization is a necessary element in a coffee-shop franchise and that the two parties to this dispute both clearly stated the related rights and obligations in their franchise contracts. Further, when the complainant lost the right to use of the "Manabe" mark, it was rendered unable to maintain its contractual relations with the original Manabe franchisees, and it began to re-negotiate its agreements with them in order to sign contracts under the new, unified "Kohikan" mark system. Thus the respondent's handling of related legal cases was not seen as disrupting the trading order or the principle of good faith in contracts. Furthermore, handling of litigation by the respondent was a demand put forth by the franch isees, and the respondent only acceded to this condition of trade, which was beneficial to upholding associated rights following the respondent's succession to the original franchise bonds. The Commission did not find these actions in violation of Article 19(1)(iii). 4. Responses of the franchisees interviewed showed that none of them, regardless of whether they joined the complainant's or the respondent's franchises, felt that the respondent had used improper coercion, inducement, or any methods or conditions at odds with normal business ethics during the process of recruiting new franchisees to cause those franchisees to break contract with the complainant. Consideration of this fact indicates that the respondent's actions did not violate the business ethics or trading practices involved in normal business activities. 5. In conclusion, based on current evidence, the abovementioned actions of the respondent in attracting the franchisees of the complainant cannot be seen as sufficient to create expectations of unexpected gain or windfall profits on the part of the franchisees such as would influence their judgment or choices of products or services in violation of Article 19(1)(iii) of the Fair Trade Law. Appendix: Chen Kuo Corporation's Uniform Invoice Number: 16880183 Da Cheng Hang's Uniform Invoice Number: 16980188 Summarized by Ts'ai Yi-ch'un; Supervised by Lin Chin-lang