Diamond Service Center Co., Ltd.

Case:

Key Words:

false and untrue advertising, franchise

Reference:

Fair Trade Commission Decision of May 9, 2012 (the 1070th Commissioners' Meeting), Disposition Kung Ch'u Tzu No. 101054

Industry:

Retail Sale of Jewelry and Precious Metals Products in Specialized Stores (4745)

Relevant Laws:

Article 21 of the Fair Trade Law

Summary:

1. The FTC was informed by individuals A and B as well as Nuo Hua Boutique Co., Ltd. that they had been told by the sales representatives of Diamond Service Center Co., Ltd. (hereinafter referred to as the offender) that business profits could reach 30% of the revenue and therefore and thus had signed the franchise contract with DSC. However, in reality, the said figure was impossible to reach. During investigation, the FTC discovered that the offender had posted on the "Elite Franchise Network" an advertisement claiming the total number of franchisees was 29 and the "net profit for five years" would be "5 to 7.8 million." The FTC therefore initiated an investigation to determine if false and untrue advertising was involved.
2. Grounds for disposition:
   (1) The offender posted on the "Elite Franchise Network/franchise profile" claiming that "the franchisees reached 29 to date." However, the investigation showed that when the said advertisement was posted, there were only 10 franchisees (2 of them had volunteered to join the franchise and the other 8 had been accepted through special approval). Moreover, the informers had stopped operations in May 2011 already; the actual number of franchisees was only 7 when the advertisement was posted. The claim of having 29 franchisees was obviously inconsistent with the fact. It could make wrong perceptions about the total number of franchisees and the remaining quota of its franchisees to those who were interested in joining the franchise. Furthermore, the advertisement did not provide any explanation of how such numbers were calculated. The level of difference was hard for the general public to accept. It was a false, untrue and misleading representation.
   (2) On the "Elite Franchise Network/Franchisee requirements" web page, the claim of "DSC net profit for five years from 5 to 7.8 million" was indeed posted. According to the offender, the said figures were calculated (A) based on the monthly sales of 1 million: that was monthly sales million; goods cost around 650,000; business tax (5%) about 50,000; rent about 70,000; utilities, insurance and miscellaneous expenses 25,000 = 205,000 (gross profit); (B) 205,000 x 80% (taking out franchiser's profit share) = 164,000; (C) 164,000 - personnel cost about 60,000 - other management expenses about 5,000 = 99,000 (average monthly net profit); (D) 99,000 x 60 months = 5,940,000 (net profit for 5five years). The calculation was actually based on the monthly sales of 1 million. The offender admitted that the five-year (60-month) net profit of 5.0 to7.8 million could not be achieved if the monthly income was under 1 million. Moreover, the aforesaid net profit calculation was conducted according to the offender's own estimation of expenses and percentages, not the actual business data of any of its franchisees or the average of all its franchisees. The offender again confessed that since September 2010, none of the franchisees, either joining voluntarily or through special approval, had been able to achieve the monthly sales of 1 million. This meant the said calculation really had no objective statistical basis and could easily create wrong perceptions in parties interested in joining the franchise. It was a false, untrue and misleading representation. It violated Article 21 (3) of the Fair Trade Law as described above, and the FTC imposed on the company an administrative fine of NT$500,000.

Appendix:
Diamond Service Center Co., Ltd.'s Uniform Invoice Number: 28171118

Summarized by: Kuo, An-Chi; Supervised by: Chiou, Shwu-Fen