Chung-Hwa Broadband Best Network Co., Ltd., Chung-Hwa United Telecom Co., Ltd., and Chung-Hwa United Co., Ltd.

Case:

Key Words:

multimedia services, franchise

Reference:

Fair Trade Commission Decision of December 14, 2011 (the 1049th Commissioners' Meeting), Disposition Kung Ch'u Tzu No. 100251

Industry:

Telecommunications (6100)

Relevant Laws:

Article 24 of the Fair Trade Law

Summary:

1. The FTC received a letter forwarded by the Ministry of Economic Affairs from a private citizen to request concerned agencies to look into the legality of the recruitment made by Chung-Hwa Broadband Best Network (hereinafter referred to as CHWBN) of shareholders and franchisees for "Yes 5TV". As franchise recruitment fell under the regulation of the "Fair Trade Commission Disposal Directions (Guidelines) on Handling of Cases Involving Franchisers' Disclosure of Information", the FTC therefore initiated an ex officio investigation.
2. Findings of the FTC after investigation: According to the operating model of the "Yes 5TV" franchise system, new franchisees would receive assistance to set up shops to display products and recruit subscribers for online multimedia services provided by "Yes 5TV." From January to December 4, 2010, CHWBN was responsible for providing the services and Chung-Hwa United Telecom Co., Ltd. was in charge of sales although all the contracts with subscribers were signed by CHWBN. Starting from December 5, 2010, Chung-Hwa United Telecom Co., Ltd. continued to manage both business promotion and sales until March 1, 2011 when the work was taken over by Chung-Hwa United Co., Ltd. During this last period, all the three companies signed contracts with new franchisees separately. According to the Fair Trade Commission Directions (Policy Statements) on the Business Practices of Franchisers, since CHWBN and the two other enterprises had offered their authorization for the use of trademark and technology as well as conducted franchisee training and collected franchise fees, they had to be considered the franchisers of "Yes 5TV" at different stages. The charges they collected before the franchisees were set up and in operation, the content and approaches of management assistance and training provided, the restrictions entailed in the franchise relations, and the terms and handling of franchise contract changes, termination and cancellation as indicated in the contracts they signed with franchisees and related franchise information fell under the regulations in Subparagraphs 1, 2, 4, 7 and 8, Paragraph 2, Point 3 of the Fair Trade Commission Directions (Policy Statements) on the Business Practices of Franchisers. However, except for the authorized range of use of trademark and related limitations, the content or length of validity was not disclosed. Meanwhile, no written or electronic documents regarding the "current or planned number of franchisees of the same franchise system in the operation area of the new franchisee" and the total number of franchisees of the same franchise system and their locations in all counties and cities" were provided.
3. Grounds for disposition:
   (1) Usually the information asymmetry between a franchiser and its trading counterparts is quite high. Before signing the contract, a franchisee does not have full access to important trading information and the franchiser is in a relatively more advantageous position. Therefore, before establishing the franchise relationship, franchisers ought to disclose to their trading counterparts the important trading information in writing to ensure information balance between both sides and thus prevent prospective franchisees from making wrong decisions as a result of lack of information or incomplete information. The investigation indicated that the franchisees of "Yes 5TV" provided integrated IP services. Subscribers could use the set-top box through USB drives to enjoy various value-added telecom services such as movie and program channels on their computers or cell phones. The services provided were somewhat similar to those from connected TV and thus new types of services resulted from digital convergence. The related products and services were still in the introduction stage and not yet mature. Franchisees were actually in high risk when promoting the services. Therefore, the content and duration of the trademark right could reveal the process and legality of the franchiser's acquisition of the intellectual property right. At the same time, the information regarding the "current or planned number of franchisees of the same franchise system in the operation area of the new franchisee" and the "total number of franchisees of the same franchise system and their locations in all counties and cities" could serve as important indicators of the potential growth, internal competition and stability of the franchise brand and help prospective franchisees to assess and choose specific regional markets and business districts to set up their operations. In other words, it was important for the trading counterparts to understand the spread of the franchisees of the same brand, the competition, and the management performance of the franchiser and potential growth before deciding on the franchiser and establishing the franchise contract. Furthermore, in addition to the franchise authorization fee between NT$150,000 and NT$800,000 to be paid to the franchiser when signing the contract, the trading counterparts would have to pay for other necessary expenses. The overall investment was not small and it could not be applied for other purposes. Therefore, the act of a franchiser using its information advantage and the information asymmetry of its trading counterpart by not disclosing the important information in its possession when signing with the trading counterpart a franchise contract was obviously unfair conduct as stated in Article 24 of the Fair Trade Law.
   (2) CHWBN and the two other enterprises recruited unspecific targets to join their franchise. The continuous use of their relatively advantageous status to establish contracts with different trading counterparts was considered repeated transactions. If the said action was not stopped, there could be more victims in the future. The failure of the three enterprises to disclose the aforesaid trading information in writing completely could make it impossible for the trading counterparts to make their right trading judgments and thus leave their interests in jeopardy. The conduct was obviously unfair to the trading counterparts or unspecific potential counterparts and able to affect trading order in violation of Article 24 of the Fair Trade Law. Acting in accordance with Article 41 (1) of the same law, the Commission ordered the three enterprises to cease the unlawful act and at the same time imposed on CHWBN and Chung-Hwa United Co., Ltd. an administrative fine of NT$200,000 each and NT$100,000 on Chung-Hwa United Telecom Co., Ltd.

Appendix:
Chung-Hwa Wideband Best Network Co., Ltd.'s Uniform Invoice Number: 80093830
Chung-Hwa United Telecom Co., Ltd.'s Uniform Invoice Number: 12724254
Chung-Hwa United Co., Ltd.‘s Uniform Invoice Number: 53307248

Summarized by Tsai, Hui-Chi; Supervised by Liu, Chi-Jung