Formosa Petrochemical Corporation allegedly violated the Fair Trade Law by improperly vying for the business of trading counterparts of its competitors by means of inducements such as offers to pay their performance bonds
Case:
Formosa Petrochemical Corporation allegedly violated the Fair Trade Law by improperly vying for the business of trading counterparts of its competitors by means of inducements such as offers to pay their performance bonds
Key Words:
performance bonds, allowances and rebates
Reference:
Fair Trade Commission Decision of March 7, 2002 (the 539th Commissioners' Meeting)
Industry:
Petroleum Refineries (1910)
Relevant Law:
Article 19 (iii) of the Fair Trade Law
Summary:
1. This case concluded with a 7 March 2002 Decision of the 539th Commissioners' Meeting. Formosa Petrochemical Corporation (FPCC) had been reported to the Fair Trade Commission (FTC) for allegedly improperly vying for the business of trading counterparts of its competitors by means of inducements such as offers to pay their performance bonds, in violation of the Fair Trade Law. However, based upon observation of the business environment in the domestic petroleum product market and on domestic price competition strategies, the FTC was not convinced that the FPCC had intended to affect gas station operators' choices of trading partners by inciting operators' desire for speculation and profiteering with its offer of more favorable business terms such as price, quantity, quality, and service. The FTC therefore did not find FPCC to have acted in a way likely to diminish competition or impede fair competition on the market. 2. The 451st Commissioners' Meeting had previously passed an Explanation of the Regulation of Petroleum Supply Under the delegation of the Fair Trade Law Before the Overall Liberalization of the Domestic Petroleum Product Market. Acts of "inducement with profit" referred to therein are subject to strict scrutiny only if they meet the further prongs of "likelihood to diminish competition or impede fair competition on the specific market." The term "competition" as used in Article 4 of the Fair Trade Law refers to conduct whereby an enterprise vies for trading opportunities by offering relatively favorable terms of business such as price, quantity, quality, and service. The term "inducement with profit" in Article 19(iii) of the Fair Trade Law shall be construed as conduct whereby an enterprise induces customers to do business with itself by taking advantage of customers' desire for speculating and profiteering and by using lure of profit to prejudice customers' ordinary choices of goods or services. A key issue for the competent authority in the enforcement of Article 19(iii), is how to draw a bright line between conduct that "properly vies for trading opportunities" and conduct that "improperly induces with profit." Only when the difference is clearly distinguished can enterprises engage in beneficial competition without fear of overstepping the bounds of fair competition. To determine whether competitive conduct of enterprises amounts to "inducement with profit," it remains necessary to take common commercial practice and business ethics as a yardstick, as well as to consider the competitive strategies involved in each specific case. 3. In this case, the FTC did not find FPCC's contested acts to violate Article 19(iii) of the Fair Trade Law: (1) Since FPCC entered the domestic petroleum market and began vying for trading counterparts to join its Formosa Life Station chain as franchisees, allowance and rebate price competition mechanisms have been forming in the market, positively affecting overall price mechanics. (2) In this particular case, the performance bonds that had been paid by the gas station operators were NT$600,000 and NT$300,000 for voluntary franchisees and affiliated suppliers respectively. Calculating on the basis of the special allowances and rebates offered by the FPCC, the damages payable by a typical gas station operator for breach of contract could be amortized over an average span of three to seven months. The long-term potential advantages that gas station operators would obtain for as long as five years after joining the Formosa Life Station chain as franchisees through discounted petroleum purchase prices and partnership benefits obviously exceeded the losses they would incur by forfeiting their performance bonds. It is thus evident that the gas station operators' willingness to breach their contracts and join the Formosa Life Station chain was based upon considerations of long-term benefits to their business operations. (3) National Petroleum Corporation (NPC), an interested party in this case, had decided to terminate its partnership with Chinese Petroleum Corporation (CPC) and join the Formosa Life Station chain as a franchisee. Its decision was based primarily on consideration of future commercial benefits of the partnership, and was not prompted merely by special allowances and rebates against its existing performance bond.Appendix: Formosa Petrochemical Corporation's Uniform Invoice Number: 86522210 Summarized by Huang, Po-Chia; Supervised by Lin, Gin-Lan