Complaints against President Chain Store Co., Ltd. for its unfair contract that deprives freedom of work and refrains from competition
Chinese Taipei
Case:
Complaints against President Chain Store Co., Ltd. for its unfair contract that deprives freedom of work and refrains from competition
Key Words:
franchise, refrain from competition
Reference:
Fair Trade Commission Decisions of January 8, 1997 ( the 271st Commission Meeting), and 18 June 1997 (the 294th Commission Meeting); Letter (86) Kung Yi Tzu No. 8508251-012
Industry:
Retail Industry (5319)
Relevant Laws:
Article 24 of the Fair Trade Law
Summary:
1. According to Mr. Li and Mr. Wu, they became franchisees of President Chain Store Co. in 1991. In July 1996, their franchise agreements expired. Pursuant to such agreements, renewal shall be applied one month prior to the expiration thereof. However, President notified the above complainants of its refusal to renew the agreements only one week prior to the expiration of the agreements. Due to the non-competition clause, Mr. Li believed that his means of living was deprived. 2. Explanations provided by President to this Commission are summarized as follows:
(1) Franchise agreements are not automatically renewed if there is any dispute regarding the terms of conditions of renewal. The stores operated by the franchisees did not have good reputation, often ran out of stock, and did not perform well in quality assurance. As a result, President decided not to renew the franchise agreements. On July 1, 1996, President executed termination agreements with the franchisees, conducted the liquidation and took the inventory; the complainants did not raise any objection.
(2) President has devoted a considerable amount of manpower, materials, capital and time to develop professional operating techniques for modern convenient stores, and such techniques are trade secrets with high commercial value. To protect such valuable trade secrets of President from any infringement, it is both necessary and lawful to require franchisees not to engage in any business that will compete with President within three years following the termination of the franchise.
3. With respect to the alleged unjustified refusal by President to renew complainants' franchise agreements, the Commission is of the opinion that President's reliance on the protection of its corporate image is not unjustified. The dispute over franchise renewal is a civil case and has nothing to do with the Fair Trade Law.
4. With respect to the alleged deprivation of freedom of work by President through the non-competition clauses, the Commission finds as follows:
(1) Such non-competition clauses are quite common in franchise agreements in many countries, with varied scopes of restriction. President's effort to protect its trade secrets by imposing the non-competition requirement on its franchisees is not unjustified and does not violate the Fair Trade Law.
(2) The non-competition clauses in President's franchise agreements may be analyzed from the perspectives of the length of time, territorial coverage and scope set forth therein:
a. Length of Time: A non-competition period of three years seems too long. To facilitate market competition and be consistent with the spirit of the Fair Trade Law, it is necessary to issue a "warning" to President.
b. Territorial Coverage: President holds that it is reasonable to include whole Chinese Taipei area as the territory to be restricted under non-competition clauses. Judging from the facts that Chinese Taipei is a geographically small island whose transportation networks is rapidly developing, that distances between cities and rural areas are shortening, and that there exists a great concentration of convenience stores in cities, it is difficult for the Commission to define the proper extent in terms of distance, area or territory that can be included in the obligation of non-competition clauses.
c. Scope of Actions: President prohibits its franchisees from "investing or participating in, instructing, being employed by, or forming a partnership with any business with similar store operation." President stated that it is acceptable to the company to amend the scope of restriction as "retail stores similar to convenience stores" and to delete "investing" from the clause. Accordingly, the amended clause will be "participating in, instructing, being employed by, or forming a partnership with any business operating retail stores similar to convenience stores."
5. Based on the foregoing reasons, this Commission decides to issue a warning to President. Furthermore, future cases involving "non-competition clauses" will be reviewed on a case-by-case basis.
Summarized by Wu, Ting-hung
Supervised by Pai, Yu-chuang
Appendix:
President Chain Store's Uniform Invoice No: 22555003
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