Pacific Sogo Department Stores Co., Ltd. violated the Fair Trade Law by imposing improper restrictions on the business activities of a trading counterpart as a condition of trading
Case:
Pacific Sogo Department Stores Co., Ltd. violated the Fair Trade Law by imposing improper restrictions on the business activities of a trading counterpart as a condition of trading
Key Words:
advantageous market position, territorial restrictions, vendors, department store
Reference:
Fair Trade Commission Decision on May 23, 2002 (the 550th Commissioners' Meeting); Disposition (91) Kung Ch'u Tzu No. 091086
Industry:
Department Stores (4751)
Relevant Law:
Article 19(vi) of the Fair Trade Law
Summary:
1. Pacific Sogo Department Stores Co., Ltd. (Pacific Sogo) was accused of excluding other enterprises from entering the market in order to maintain its high revenues. The complaint alleged that Pacific Sogo, taking advantage of its dominant market position, stipulated in Article 14(2) of its agreement with vendors of goods or services that, without the consent of Pacific Sogo, they shall not sell the same or similar goods or services in any commercial district "within a radius of two kilometers of Pacific Sogo's business location." In the event of breach of this provision, Pacific Sogo could terminate the agreement under Article 28 thereof and claim compensation for any damage incurred. In this way, Pacific Sogo allegedly intended to use unfair territorial and customer restrictions to hinder the complainant and other legitimate enterprises from entering the market and from competing against Pacific Sogo on a fair basis. 2. After investigation, it is the finding of the Fair Trade Commission (FTC) that Pacific Sogo enjoys a market share as high as 29.54% in the greater Taipei area and is highly sought after by vendors seeking to set up department store outlets. That it as a result has an advantageous market position is quite self-evident. Pacific Sogo added the said disputed restrictive clause when neighboring large shopping malls were in the process of recruiting vendors to set up outlets. In addition, some of the vendors that had entered into the agreement with the disputed restrictive clause acknowledged that they had obtained Pacific Sogo's approval, and submitted to certain terms and conditions, before setting up outlets elsewhere. It was thus obvious that the restrictive clause had already exerted a substantial restrictive effect on vendors' decisions about setting up other outlets. 3. Disposition grounds and decision made by the FTC are as follows: (1) The FTC's investigation found that as many as 96.48% of the vendors associated with Pacific Sogo signed the agreement with the disputed restrictive clause. Such vendors knew that the commercial district where Pacific Sogo is located attracts sufficient customers and purchasing power to accommodate several outlets selling the same brands. The profit that could be generated there also outweighs the effect of intra-brand competition. However, such vendors were still willing to abide by the disputed territorial restriction clause. One of the major factors affecting their decisions on optimal outlet location was likely to be Pacific Sogo's advantageous market position. It could thus be reasonably inferred that, with its advantageous competitiveness and market position, Pacific Sogo unilaterally lays down the terms and conditions of the vendor agreement to limit its vendors' choices of optimal outlet location. (2) Articles 8, 23, and 26 of Pacific Sogo's former (pre-2000) vendor agreement were sufficient to prevent vendors from indiscriminately setting up outlets without assessing the problems of inter-brand competition, and to avoid free-riding behavior by vendors. In addition, in 2000 several large shopping malls in Taipei City's eastern commercial district had successively completed construction and were in the process of recruiting vendors, as was widely broadcast in the media at that time. In that year (2000), Pacific Sogo started to incorporate the disputed territorial restriction clause of Article 14(2) into the renewed agreements with its vendors. It was thus evident that Pacific Sogo intended to restrict its vendors in their choices of outlet location and hinder its competitors in the same commercial district from selecting their vendors. It was also evident that Pacific Sogo, by creating an entry barrier, intended to prevent potential competitors from entering the market. (3) Some of the vendors that had entered into the agreement with the disputed restrictive clause acknowledged that they had obtained Pacific Sogo's approval, and submitted to certain terms and conditions, before setting up outlets elsewhere. It was thus evident that the restrictive clause had already exerted a substantial restrictive effect on vendors' decisions about setting up other outlets. The restrictive clause prevented the vendors from becoming effective competitive entities, and also formed a barrier to new entrants to the department store business in terms of customer targeting and vendor attracting, and could thus reduce the degree of enhanced market competition associated with the entry by new competitors. (4) Weighing the motives and purposes of the violation, the degree to which it harmed trading order, Pacific Sogo's business scale and operating status, its market power, its records of past violations and evidence of repentance, the FTC ordered Pacific Sogo to immediately cease the violation and imposed an administrative fine of NT$2.5 million pursuant to the fore part of Article 41 of the Fair Trade Law.Appendix: Pacific Sogo Department Stores Co., Ltd.'s Uniform Invoice Number: 21257316 Summarized by Tai, Pei-Yi; Supervised by Chen, Yuhn-Shan