Violation of the Fair Trade Law by Life International Co. for its Franchise Agreement
Chinese Taipei
Case:
Violation of the Fair Trade Law by Life International Co. for its Franchise Agreement
Key Words:
franchise chain, convenience store, adhesion contract
Reference:
Fair Trade Commission Decision of March 17, 1999 (the 384th Commissioners' Meeting); Letter (88) Kung Yi Tzu No. 8711679-008
Industry:
Chain Convenience Stores (5313)
Relevant Laws:
Summary:
It was alleged that the franchisee selection process, the draft of the franchise agreement, the content of training courses, the franchise agreement and the management rules of Life International Co., Ltd. (hereinafter "Life Co.") had violated the Fair Trade Law (FTL).
In July 1998, Life Co. provided a draft of the franchise agreement through its Taoyuan office for the complainant's review and introduced the franchise system and the contents of the draft to the complainant. Both parties signed the draft of the franchise agreement on September 2 of the same year. During that period, both parties had negotiated over the terms of the draft for several times. Those negotiations include the alteration of some of the provisions in the adhesion contract, the renovation of the franchised store, the requirement for the franchisee to attend training sessions as a condition for joining the franchise, the inspection of the goods or services provided by the franchisee, stock and business accounts, the inequality between the rights and obligations assigned to each party, the amount of collateral the franchisee should provide, the conditions for the franchisee to appoint a third party to participate in the training sessions, and the contested provisions in the franchise agreement and the management rules, such as the method of calculating profits (or losses), the estimate of the prices of goods, the responsibilities of the franchisee, the collection of royalties for inventory technique and the method of calculating its amount, the method of calculating penalties for the breach of agreement, and the method of calculating interest on excessive inventory. Both had also exchanged opinions on future cooperation. Moreover, the complainant admitted that on August 8 of that year, it notified Life Co. that if Life Co. did not intend to establish this franchise relationship, the complainant would negotiate a franchise contract with President Enterprises. Afterwards, the two parties in November of the same year applied to the Fair Trade Commission (this Commission) for approval of their merger; and after obtaining this Commission's approval, they signed a franchise agreement on December 2, 1998. A check of Life Co.'s franchise-style mergers revealed that it has obtained this Commission's approval for 105 such cases through the end of January 1999.
A review of the franchise system of chain convenience stores in Chinese Taipei shows that there are twelve major companies in the industry including President Enterprises, Family Mart Convenience Stores, Fu Ch'un Supermarket, Life Enterprises, etc. In 1997, Life Co. had revenues equal to 6.6% of those of the total chain convenience stores in Chinese Taipei. Moreover, other franchise systems existed in the market at the time that could serve as alternatives. Thus, Life Co. could not obstruct other companies' freedom to decide independently whether or not to establish a franchise system. Also, the contents of the adhesion contract did not raise concerns of unfair competition. And since a franchise agreement bears close relationship with the protection of trade secrets, the consistency in the franchise network, and the maintenance of reputation, it should not be rashly changed. Therefore, it would be difficult to conclude that Life Co.'s using adhesion contract to establish franchise relationships with other enterprises are obviously unfair acts capable of affecting trading order.
Since Life Co. did not attempt to conceal its franchise rules or contractual provisions, it would be hard to conclude that Life Co. improperly caused another enterprise to participate in a merger by means of deception, coercion, or profit inducement. The provisions in the draft of the franchise agreement, providing that Life Co. would be responsible for the designing, planning, and inspecting of the franchise store's renovations, are necessary for the protection of its trade secrets and the maintenance of consistency and reputation of the franchise network. Its assertion that no work done by a single contractor could be compared in terms of efficiency or quality to the work done cooperatively by its various supporting contractors on refurbishing 606 outlets etc. is not unjustifiable. The above behavior does not restrain competition or constitute unfair competition.
It has been shown that the contents of the training sessions were primarily training regarding franchise rights and obligations, pre-opening training and operational training, etc. They are beneficial for franchisees in obtaining Life Co.'s know-how, fostering their ability to generate profits, and could enable franchisees to be familiar with the operation of convenience store which could thereby reduce operational risks and maintain Life Co.'s business image and reputation. Thus, Life Co.'s requiring the training sessions and the attendance of those sessions to be conditions of joining the franchise should not be deemed improper. Also, in order to avoid the franchisee from reneging on its contractual obligation that in turns would jeopardize the consistency of the franchise and the trademark image, it is necessary for the franchiser to monitor franchisees. Therefore, provisions in the franchise agreement that require the franchisees to allow the franchiser to inspect their places of business and/or the transportation equipment, including the goods already sold or services already provided by the franchisee, stock, and accounts, are necessary for the protection of the franchiser’s trade secrets and the maintenance of the consistency and reputation of the franchise network.
With regard to the other contested provisions of the draft of the franchise agreement, including the inequality of rights and obligations assigned to each party, the amount of collateral to be provided by the franchisee, the conditions for the appointment of a third party to attend training sessions and other contested items regarding the franchise agreement and management rules such as the method for calculating profits (or losses), the estimation of product prices, the responsibilities of the franchisee, the method of calculating the amount of royalties to be collected for the inventory technique, and the method of calculating penalties for breach of the agreement and interest on excess inventory, they do not constitute unfair trade practices. There is no need to consider the applicability of the FTL in this case.
In conclusion, there is no evidence showing that Life Co. has violated the provisions of the FTL.
Summarized by T'ao Jung
Supervised by Hung Te-ch'ang
Appendix:
Life International Co. Ltd.'s Uniform Invoice No.: 23285582