Kingyo International Co., Ltd.

Case:

Kingyo International violated the Fair Trade Law for failing to disclose full and complete franchise information

Key Word(s):

Franchise, important franchise information, ratio of contract cancellation or termination

Reference:

Fair Trade Commission Decision on December 11, 2013 (the 1153rd Commissioners' Meeting); Disposition Kung Ch'u Tzu No. 102208

Industry:

Nonalcoholic Beverage Services via Shops (5621)

Relevant Law(s):

Article 24 of the Fair Trade Law

Summary:

1. A complainant wrote a letter to the FTC alleging that Kingyo International Co., Ltd. (hereinafter referred to as Kingyo International) failing to provide important franchise information and also requesting franchisees to purchase products that were not necessary for business operation. The complainant believed the above conduct was in violation of Article 24 of the Fair Trade Law and therefore filed a complaint with the FTC.
2. Findings of the FTC after investigation:
   

   Kingyo International contested that before the contract was signed, it had provided the trading counterpart with the business operation information of each store, the franchisee manual, details of needed equipment and utensils, remodeling and the identity system, the material price lists, the list of items to be supplied the first time, trademark registration certificate, training items and course list, as well as copies of franchise contracts (the contract signed between the two parties on January 30, 2012 and the 2012 version of franchise contract). After examining the aforesaid documents, the FTC concluded that Kingyo International had not fully disclosed important franchise information of the expenses required before and during business operation, including contract cancellation and termination statistics, conditions on provision of remodeling work, items and quantities of products and materials to be purchased, and criteria of penalties for breaches of contract. The conduct was obviously unfair and likely to affect trading order in the franchise market and shall be considered as in violation of Article 24 of the Fair Trade Law.

3. Grounds for disposition:
   

   (1)

   Important franchise information includes the amount of capital needed, the size of investment, rate of profitability, brand growth, market scale changes, level of ease of withdrawal from the franchise and management risks, as well as quality of remodeling engineering. These are all matters of concern to a potential franchisee. However, due to information asymmetry between two parties, a franchiser has advantages over a potential franchisee with respect to access to related information. The latter is unable to fully obtain such information simply by asking orally. For this reason, before signing the contract, a franchiser has the obligation to disclose such information in writing to ensure information symmetry. In this particular case, despite that the complainant had store management experience and was familiar with the products and materials needed, as well as prices and expenses to be paid each month, it had no idea about the costs, items and specifications of capital equipment and remodeling work, contract cancellation and termination statistics, the items and quantities of products and ingredients to be purchased, as well as the criteria of penalties for breaches of contract. Therefore, Kingyo International had to be held liable for failing to disclose such important franchise information.

   (2)

   Kingyo International collected franchise fees, guarantees, licensing fees, and advertising and marketing expenses from franchisees who also had to pay for machine equipment, materials, products and remodeling of shop space. The amount a franchisee had to invest was not small and it could not be used for other purposes. Once a potential franchisee signed a contract with Kingyo International, other competitors who provided similar products or services would lose their opportunity to establish business relations with the potential franchisee. For this reason, Kingyo International’s failure to fully disclose the afore said trading information during the recruitment process by taking advantage of information asymmetry and thus obstructing trading counterparts from making correct trading decisions was obviously unfair to the trading counterparts and unspecific trading counterparts while the conduct also deprived competitor of the opportunity to establish business relations with such trading counterparts. The conduct could affect the trading order of the franchise market and was in violation of Article 24 of the Fair Trade Law. In addition to ordering the company to cease its unlawful act, the FTC also imposed an administrative fine of NT$500,000 on the company.

Appendix:
Kingyo International Co., Ltd.’s Uniform Invoice Number: 53273520

Summarized by Yang, Chung-Lin; Supervised by Hung, Shui-Hsing