A complaint by Kingtown Industrial Co., Ltd. that eight of its distributors used inappropriate means to block trading of its "Kingtown Rice" product in violation of Article 19(i) of the Fair Trade Law
Case:
A complaint by Kingtown Industrial Co., Ltd. that eight of its distributors used inappropriate means to block trading of its "Kingtown Rice" product in violation of Article 19(i) of the Fair Trade Law
Key Words:
distribution network, boycott, grain and rice industry
Reference:
Fair Trade Commission Decision of January 11, 2001 (the 480th Commissioners' Meeting); Disposition (90) Kung Yi Tzu No. 8907202-013
Industry:
Rice wholesaling (5111)
Relevant Laws:
Article 19 of the Fair Trade Law
Summary:
1. The complainant, Kingtown Industrial Co., Ltd., alleged the following: Eight grain dealers-Chia He, Hung Ch'ang, Hsiang He, Wan Hsi, He Yi De, Hsi Luo, Fu Jung, and Pei Chi-were originally part of the distribution network for its "Kingtown Rice." However, Liu Kuo-li, the responsible person of two major distributors, Feng He Mi Hang and Hung Ch'ang Co., and Liao Tai-shan of Hsi Luo Co., observing the brisk sales of the Kingstown product, decided to attempt to damage its sales. In 1998 they met with a third party, Mr. Ts'eng Chien-chen, the responsible person of Chia He, to plan a scheme. They began producing a counterfeit of the original "Kingtown Rice" (Chin Tun Mi) brand that they called "Chang Tun Mi." Under the aegis of Chia He, Mr. Liu and Mr. Liao brought the other distributors together to get them to break off business dealings with Kingtown; and to strengthen their resolve to switch to the "Chang Tun" brand, they provided a certificate of assignment allowing the distributors as a group to use the "Chang Tun and device" mark. In addition to prohibiting the grain dealers from selling the Kingtown product, as a further means of reaching their goal of breaking up Kingtown's distribution network, they also asked each of them to provide a check for NT$1.5 million as a guarantee of their commitment. Thus from March of 1999, the eight former Kingtown distributors stopped selling the Kingtown rice, and the new "Chang Tun" brand flooded the market. Kingtown's sales dropped sharply, bringing heavy losses to the complaint, particularly due to sales of the "Chang Tun" brand at extra low prices.
2. The Fair Trade Commission (the Commission) requested all parties to appear and provide information, including the complainant, Kingtown Industrial Co., the firms suspected of involvement in the boycott (Hsiang He, Wan Hsi, He Yi De, Fu Jung, and Pei Chi) and the parties suspected of initiating the boycott: Liu Kuo-li (the Feng He and Hung Chang companies), Hsi Luo (Liao Tai-shan), and Chia He (Tseng Chien-chen). Their findings are as follows: (1) With regard to the question of guarantees brought up by the complainant, the explanation of Chou Tien-shou, the responsible person of Pei Chi, is summarized as follows: Chou said that seven distributors each paid out sums of NT$ 1.5 million for the purpose of doing business in grains. Later, Kingtown became dissatisfied with its distributors in the northern area of Taiwan, and began to cut off supply to them. Kingstone asked Chou for a receipt for the aforesaid NT$1.5 million check, and at the same demanded that he stop selling "Chang Tun" rice, after which he said he would write a letter guaranteeing continued supply of Kingtown stock. All this had nothing to do with not wanting to sell the Kingtown rice product. Chou said that since the risk was too great, he withdrew from the business in grains and took back his check. Kingtown later terminated its relationship with the other distributors over the question of supply. The receipt mentioned had nothing to do with "Chang Tun" rice, which the distributors began to buy after the supply of Kingtown rice was discontinued. The Commission also found that the respondents and other interested parties denied any attempts to block trade in Kingtown rice, and it did not find any concrete evidence of intent to mutually agreement on a boycott of the Kingtown product. The complainant also failed to offer the Commission any concrete evidence of unlawful activity on the part of the respondents. It was concluded that no concrete evidence had yet been adduced showing collusion to boycott trade in "Kingtown Rice." (2) The Commission learned the following from information provided by the complainant on sales of "Kingtown Rice" for the years 1996-1999 in the northern area of Taiwan: Of the respondents, Hsi Luo accounted for about 30% of total sales of Kingtown Rice, and Feng He (Hung Chang Enterprise) and Chia He only accounted for 8% and 0.12% respectively; further, the Commission did not find any concrete evidence of intent to mutually agreement on a boycott of the Kingtown product. Hsi Luo also reported that since the complainant wished to conduct its IPO on the stock market, it needed to assume direct operation of what had previously been volume outlets and chain retail outlets operated by mid-level distributors. Therefore, it terminated its relations with them as distributors, and from 1 January 1999, the outlets previously operated by Hsi Luo were taken over by personnel sent out from the complainant's company, and are still in operation. The complainant, however, expressed that with regard to the volume outlets, ever since it terminated its contract with Hsi Luo it had needed to boost its sales volume because the performance of the northern area distributors were so poor that it decided to regain direct control over those. In conclusion, the respondents and interested parties seemingly lacked sufficient market power to direct a boycott against the Kingtown product. (3) "Kingtown Rice" is a brand owned by the complainant and has been on the market for years. There is strong brand loyalty among consumers and customers who have dealt with Kingtown over the years, and for this reason its sales and distribution network could not be quickly replaced. The respondents were the downstream distributors of the complainant, and in terms of financial resources, economic scale and type of operations, they lacked the bargaining power to cause other distributors to stop buying from or trading with Kingtown. Furthermore, given the current lack of clear and concrete evidence, it is impossible to judge whether the actions in question represented a concerted boycott of the Kingtown product or a reorganization of the upstream producer's distribution network in accordance with its own commercial and operating goals. It is also understandable that frayed relations may develop between upstream and downstream firms as distribution systems are developed over time, with possible operating losses for both sides, but this does not necessarily imply damage to the fundamental mechanisms in the market for rice or any negative influence on the overall trading order. In short, private disputes between the parties over distribution matters would seem to be best resolved through recourse to other legal forums. (4) The market share of the Kingtown product can be calculated according to the Council of Agriculture's statistics for 1999 and the sales figures for "Kingtown Rice" provided by the complainant. The total value of rice sales is calculated from the retail prices of polished Japonica and Indica rice multiplied by the total production of unpolished rice. Government purchases of rice accounts for about 20% of this, leaving about 80% on the market. Based on this, the Kingtown brand had a share of about 1.33% to 1.69% between 1996 and 1999, and thus had limited effect on market competition. (5) One of the interested parties, Hsiang He Grains Co., Ltd., said that current distributors of Kingtown rice in the Taipei City area also include Tung Tai, Shen Lung Mei, Ts'ai Chi, and Chih Cheng Hsing Ye. He Yi De stated that when it was still selling Kingtown Rice, the Yung Hsin rice seller no more than 300 meters away had also begun selling it; Fu Jung stated that due to business conditions, the respondent's firm had been taken over by Yi Feng Hang, with a sales territory that included Hsin Chu, in March of 1966. It was also found that the respondent's previous distribution territory had been divided into northern, central, and southern districts, with the northern district extending from Tao Yuan (inclusive) northward, including the Yi Lan area, with 12 distributors; the central district ran from Hsin Chu (inclusive) to Chia Yi (inclusive), including the Hua Lien and Kinmen-Matsu areas and 12 more distributors; and the southern district extended from Tainan (inclusive) southward, with 10 distributors including those in Taitung. Thus, distributors of the complainant's product in the northern area were not limited to those it listed in its complaint, and the operations of the respondents and downstream distributors were not non-substitutable.
3. Disposition and grounds: In light of the above factors, the conduct in question in this case was not considered a violation of Article 19(i) of the Fair Trade Law.
Appendix:
Kingtown Industrial Co., Ltd.'s Uniform Invoice Number: 84579700 Summarized by Lou Meei Shya; Supervised by Lin Yow Ching