New Vision Co., Ltd.

1174th Commissioners' Meeting (2014)

Case:

New Vision Co., Ltd. violated the Fair Trade Law by concealing important trading information when recruiting franchisees for "HealthCom Medical Supply" stores

Key Word(s):

License chain, start-up chain, security deposit, payback period

Reference:

Fair Trade Commission Decision of May 7, 2014 (the 1174th Commissioners' Meeting); Disposition Kung Ch'u Tzu No.103058

Industry:

Manufacture of Other Medical Instruments and Supplies (3329)

Relevant Law(s):

Article 21 of the Fair Trade Law

Summary:

The complainant stated that when he browsed the "Invitation to Join the Chain of HealthCom Medical Supply Stores" section of the official website of New Vision Co., Ltd. (hereinafter referred to as the "Company"), the section's contents included a franchise fee of NT$300,000, security deposit of NT$900,000, contract period of 3 years, and claiming "average payback period of 6 to 8 months." The complainant further negotiated with the Company on the terms of becoming a franchisee of the Company under the abovementioned contents, and signed a franchise agreement for the Banciao Yadong HealthCom Medical Supply Store. After operating the said store for 1 year, the complainant only gained a profit of roughly NT$76,000, which is clearly lower than the "average payback period of 6 to 8 months for the franchise fee of NT$300,000." The FTC thus initiated an investigation to find if the Company violated the Fair Trade Law.

Findings of the FTC after investigation:

(1) The profit information offered by the Company in the said section of its official website was based the advertisement on the profits of Yadong, Shuanghe and Wanfang stores in January 2012, which had an average net profit after tax of roughly NT$30,000. Therefore, the Company estimated that a store should gain a profit of NT$210,000 in 7 months. However, the monthly profits of the abovementioned stores were not a fixed amount, and some months see profit while others see loss. Hence, only using the profits of some stores in January 2011 was not a sound basis for calculating the payback period.

(2) Although the Company argued that the advertisement referred to "on average 6 to 8 months will pay back NT$100 thousand of the franchise fee per year." However, there were no remarks on the website or any other franchise documents regarding the payback amount, and the Company was unable to prove that the payback amount was the customary practice for franchisers. As a result, the FTC found that the payback amount for "on average 6 to 8 months" in the advertisement was indeed disputable.

Grounds of disposition:

(1) The Company began recruiting franchisees for HealthCom Medical Supply Store in February 2012 using the advertisement in question, the advertisement was indeed posted on the "Invitation to Join the Chain of HealthCom Medical Supply Stores" section of its official website before the FTC received the complaint, and the complainant became a franchisee operating the Yadong Store of HealthCom Medical Supply Store in March 14, 2012 after seeing the advertisement. Contents of the advertisement included a franchise fee of NT$300,000, security deposit of NT$900,000, contract period of 3 years, and the statement that "average payback period of 6 to 8 months," which aimed to attract trading counterparts to become franchisees. Hence, the advertisement fits the description of an advertisement referred to in the Fair Trade Law. The Company admitted that it made and posted the advertisement and is thus the party responsible for the advertisement.

(2) The payback period is an important factor used by potential franchisees in assessing the risk involved and conducting cost-benefit analysis. It is in fact the key to whether or not they become a franchisee. Hence, franchisers provide information on the expected payback period in their advertisements for franchisees to gain the perception that they will be able to regain their investment within a specific period of time. This information is capable of affecting the trading decision of potential franchisees, and franchisers should thus use objective data as the basis for calculating the payback period, as well as provide the basis in the advertisement to avoid misleading representation.

(3) The Company had set up 7 HealthCom Medical Supply Stores by the end of 2011. Calculating based on its annual financial statements, the average net profit after tax for each store was under NT$100,000. The net profit after tax for its Wanfang store in 2011 also did not reach NT$100,000, showing that there are indeed stores unable to gain back NT$100,000 of its franchise fee each year. According to Article 5 of the franchise agreement, 40% of the net profit would go to the Company and 60% would belong to the complainant. Calculating based on the net profit after tax of the Yadong store in 2011, the expected profit of the complainant was also lower than NT$100,000. In other words, there was no solid basis supporting the Company's claims and the degree of deviation was hard to accept by most people. Hence, the FTC determined that the Company intentionally misled parties interested in joining the franchise using false, untrue and misleading representations of service contents, and violated Article 21 of the Fair Trade Law. The FTC thus imposed upon the Company an administrative find of NT$200,000.

Appendix:
New Vision Co.'s Uniform Invoice Number: 27995183

Summarized by Lin, Hsiao-Hung; Supervised by Lin, Gin-Lan

! : For information of translation, click here

(1)	The Company began recruiting franchisees for HealthCom Medical Supply Store in February 2012 using the advertisement in question, the advertisement was indeed posted on the "Invitation to Join the Chain of HealthCom Medical Supply Stores" section of its official website before the FTC received the complaint, and the complainant became a franchisee operating the Yadong Store of HealthCom Medical Supply Store in March 14, 2012 after seeing the advertisement. Contents of the advertisement included a franchise fee of NT$300,000, security deposit of NT$900,000, contract period of 3 years, and the statement that "average payback period of 6 to 8 months," which aimed to attract trading counterparts to become franchisees. Hence, the advertisement fits the description of an advertisement referred to in the Fair Trade Law. The Company admitted that it made and posted the advertisement and is thus the party responsible for the advertisement.
(2)	The payback period is an important factor used by potential franchisees in assessing the risk involved and conducting cost-benefit analysis. It is in fact the key to whether or not they become a franchisee. Hence, franchisers provide information on the expected payback period in their advertisements for franchisees to gain the perception that they will be able to regain their investment within a specific period of time. This information is capable of affecting the trading decision of potential franchisees, and franchisers should thus use objective data as the basis for calculating the payback period, as well as provide the basis in the advertisement to avoid misleading representation.
(3)	The Company had set up 7 HealthCom Medical Supply Stores by the end of 2011. Calculating based on its annual financial statements, the average net profit after tax for each store was under NT$100,000. The net profit after tax for its Wanfang store in 2011 also did not reach NT$100,000, showing that there are indeed stores unable to gain back NT$100,000 of its franchise fee each year. According to Article 5 of the franchise agreement, 40% of the net profit would go to the Company and 60% would belong to the complainant. Calculating based on the net profit after tax of the Yadong store in 2011, the expected profit of the complainant was also lower than NT$100,000. In other words, there was no solid basis supporting the Company's claims and the degree of deviation was hard to accept by most people. Hence, the FTC determined that the Company intentionally misled parties interested in joining the franchise using false, untrue and misleading representations of service contents, and violated Article 21 of the Fair Trade Law. The FTC thus imposed upon the Company an administrative find of NT$200,000.