Easy Way Group

Case:

Key Words:

false advertisement, franchise, failing to disclose material trading information

Reference:

Fair Trade Commission decision of March 3, 2010 (the 956th Commissioners' Meeting); Disposition Kung Ch'u Tzu No.099031

Industry:

Non-alcoholic Beverage Businesses (5621)

Relevant Laws:

Paragraph 3 of Article 21, mutatis mutandis application of Paragraph 1 of the same article, and Article 24 of the Fair Trade Law

Summary:

1. Two informers accused Easy Way Group (hereinafter referred to as Easy Way) of failing to disclose to them information in regard to the interior design and expenses for the furnishing and equipment required as well as the methods by which Easy Way would calculate or collect the costs for the ingredients and utensils 10 days before signing the contract for their franchise "Meet Fresh" operations.
2. Findings of the FTC after investigation:
   1. Easy Way stated in its "Guideline for Franchising of Meet Fresh Beverage Shops" (hereinafter referred to as the Franchising Guideline) that the expected net profit rate would be around 20~25% and the investment could be earned back in 6 to 15 months. However, the income statements of 16 directly-managed shops provided by the company covering from January 2007 to August 2009 showed that, only in January 2008, the only one month out of the thirty-two month period, the net profit rate reached 23.63%, which was above the average net profit rate of 20% indicated in the franchise guidelines. The average startup investment was about 4.7 million NT dollars. The monthly net profit rates of these 16 shops since they first opened for business showed that only the shop in Tonghua Street and the one in Breeze Department Store were able to earn back the invested capital in 11 months, meeting the expected rate of return on investment. The net profit of 11 shops after 11 months was still negative, while the 3 remaining shops did not earn back their investments although the net profit was in positive figures.
   2. The FTC also examined the documents provided to franchisees. There was no information disclosure on the expenses required for the initial supply of commodities, utensils, foods and raw materials.
3. Grounds for Disposition:
   1. The "expected profit rate" is an important indicator according to which the parties interested can judge the possible growth and the operation risk in joining the franchise system. On the other hand, the "net profit rate" probably is also the most critical index the interested parties apply when making the decision of joining the franchise system or not. In the case in question, the net business profit figure provided in advertisements apparently would be regarded by interested parties as the minimum guaranteed net profit or give the impression that the figure represented the average revenue of existing franchises. Such figures had the capacity to influence the decision of interested parties. When making such a claim, the advertiser must have the support of objective statistics and clearly describe in the advertisements the signification of the statistics provided so as to avoid any misunderstanding. The statistics Easy Way provided on the average monthly net profit rate of the 16 directly-managed shops between January 2007 and August 2009 showed that the average monthly net profit rate of the 16 shops went above the alleged 20% threshold, at 23.63%, only once in the 32-month period, in January 2008. Among all these shops under the company's direct management, the one in Tonghua Street had the best performance and achieved over 20% net profit in 7 months (but fell below 20% in the other 25 months still.) FTC's investigation revealed that the startup investment for each of the directly managed shops was around 4.7 million NT dollars and only the shop in Tonghua Street and the one in Breeze Department Store were able to earn back the invested capital in 11 months, justifying the alleged full return on investment in 6 to 15 months. However, the total net profit of 11 shops stayed negative throughout that 32-month period. The 3 remaining shops made positive total net profit but they have not retrieved their invested capital even until today. Even if the net profit rate advertised had its basis, the performance of the two best shops could by no means represent the average sales of the Meet Fresh chain (including directly managed shops and franchises.) Moreover, in the nearly two years from February 2007 to the end of 2008 in which the advertisements were run, the actual performance of the directly managed shops or the franchises were unable to achieve the rate of return on investment as asserted the advertisement. The company made no effort to correct the content of the advertisements as a responsible advertiser would have. On the contrary, the franchise recruitment continued under the same advertisements. The FTC found it difficult to exempt the company from the administrative responsibility of an advertiser.
   2. The costs of the initial supplies a franchise needs to begin operation (including equipment, office supplies, commodities, foods, and raw materials, etc.) are considered expenses required for "purchases of products or services" before signing the contract or throughout the contract term. The franchiser is the only one with full information about these expenses. At the same time, most of the commodities are designated items that franchisees are not able to purchase elsewhere. It is therefore imperative that the franchiser provides the information in writing to the prospective franchisee before signing the contract that does not have as much access to such information so that the latter can assess its financial capacity and the cost benefit before deciding whether to become a franchise. The FTC's investigation showed that Easy Way not only did not advise on the expenses for the initial supplies but also stipulated in the contract that the franchisee had the obligation to purchase the designated items only from the franchiser. The initial supplies cost between 300 and 400 thousand NT dollars. They were all basic commodities required to begin operation. Therefore, the failure of Easy Way to disclose before signing the contract the information about the said expenses was apparently an abuse of its advantageous position in the access to related information. The withholding from disclosing important trading information such as the costs and calculation of the initial supplies was obviously unfair to the trading counterpart and had the capacity to affect the trading order in chain franchising. It was in violation of the regulation of Article 24 of the Fair Trade Law and Easy Way was imposed a fine of 500 thousand NT dollars.

Summarized by: Kuo,An-Chi; Supervised by: Hung,Hsiu-Hsing

Appendix:
Easy Way Group's Uniform Invoice Number.: 80617317