Nikomart Co., Ltd. did not disclose important trading information prior to signing franchise agreement, in violation of the Fair Trade Law

Chinese Taipei

Case:

Nikomart Co., Ltd. did not disclose important trading information prior to signing franchise agreement, in violation of the Fair Trade Law

Key Words:

convenient store, franchise, agreement

Reference:

Fair Trade Commission Decision of September 29, 2005 (the 725th Commissioners’ Meeting); Disposition Kung Ch’u Tzu No. 94101

Industry:

Chained Convenient Store (4753)

Relevant Laws:

Article 24 of the Fair Trade Law

Summary:

1. Several franchise stores of Nikomart Co., Ltd. (hereinafter referred to as Nikomart) have send complaints to the Fair Trade Commission, alleging that Nikomart has stipulated the suggested minimum order quantity for every product sold by its franchise stores. The suggested minimum order quantities always exceeded the retail stores’ sales volume, causing the franchise stores to incur large amount of scrapped losses. The franchise stores were considered as violating Nikomart’s directives if their orders were less than the prescribed minimum order quantity and they may receive warnings or even their agreements with Nikomart will be terminated. The franchise stores suspected Nikomart did not include the aforementioned stipulation in the agreements signed with Nikomart.

2. The Fair Trade Commission’s investigation found that Nikomart indeed has stipulated the suggested minimum order quantity for every product. The franchise stores were penalized when they did not comply with the aforementioned stipulation. Nikomart only told its franchise stores the stipulation of the suggested minimum order quantity after signing the agreements. However, Nikomart argued that the suggested minimum order quantity was prescribed to avoid the circumstance of product that is out of stock. Nikomart further argued that, in accordance with the agreement signed between the said Company and its franchise stores, the franchise stores have obligations to comply with directives of the said Company when making orders.

3. Grounds for disposition:
   • Nikomart has stipulated the suggested minimum order quantity to reduce the circumstance of product that is out of stock and hence to ensure the products’ sales volume and consumers’ desires to visit the stores were not affected. It is therefore difficult to conclude that such stipulation is improper. Yet, since Nikomart did not allow its franchise stores to freely decide the order of goods; such conduct in essence has restricted the business activities of the franchise stores. Moreover, under the circumstances that the franchise stores were responsible for the scrapped losses of goods, hence the order quantity will directly affect their profits. Therefore, such stipulation of the minimum order quantity is considered as important trading information and certainly should be fully disclosed at the time the agreement is signed. The trading counterparts will consider this stipulation in their decisions of joining the franchise operation. The Fair Trade Commission, in order to avoid concealment by franchisers of important information during recruitment of franchisees and to ensure fair competition in franchise business, has adopted “Fair Trade Commission Guidelines on the Disclosure of Information by Franchisers” as standards to be abided by the industry.
   • In this case, Nikomart has uniformly determined the product items to be sold by its franchise stores and the suggested order quantities. It is obvious that the said Company was in control of the information and occupied a dominant position. However, the agreement signed between Nikomart and its franchise stores merely and vaguely stipulated that the franchise stores must follow “directives” or “regulations” of the said Company in selling products, without stating explicitly the scope of such directives or regulations, also not stating clearly that the said Company has stipulated the suggested minimum order quantities for all products. The conduct of Nikomart has caused its franchise stores signing agreements with it under the situation of incomplete information. They only learned about the stipulation of the suggested minimum order quantity after joining the franchise operation. However, the franchise stores were afraid of breaching agreement and thus have no choice but to comply with the said stipulation. Such conduct of Nikomart Company in essence is considered as exploiting the relevant dominant position in the market, concealing, or delaying to disclose important trading information, and hence is obviously unfair to its trading counterparts.
   • In consideration of Nikomart Company already has 360 franchise stores and is the fifth largest in the chained convenient store market, its conduct has significant impact on market trading order, and furthermore the said Company has two prior records of the Fair Trade Law violations, therefore, the Fair Trade Commission has ordered Nikomart Company to cease the unlawful act and imposed a fine of NT$ 2 million.

Summarized by Lin, Hsin-Wen;
Supervised by Chen, Yuhn-Shan

Appendix:

Nikomart’s Uniform Invoice Number: 22853777