Skinfood Co., Ltd.

1184th Commissioners' Meeting (2014)

Case:

Skinfood Co., Ltd. violated the Fair Trade Law by posting a false advertisement and failing to fully disclose franchising information

Key Word(s):

False advertising, franchise, cosmetics

Reference:

Fair Trade Commission Decision of July 16, 2014 (the 1184th Commissioners' Meeting); Disposition Kung Ch'u Tzu No.103093

Industry:

Retail Sale of Cosmetics in Specialized Stores (4752)

Relevant Law(s):

Articles 21 and 24 of the Fair Trade Law

Summary:

The FTC received complaints from individuals stating that Skinfood Co., Ltd. (hereinafter referred to as the "Company") posted an false advertisement for "Skinfood Stores." The advertisement claimed that "Taipei City Hanzhong Store, Taoyuan Zhongzheng Store, Zhongli Station Store, Hsinchu Datong Store, Taichung Sanmin Store, Tainan Beimen Store, Kaohsiung Xinjuejiang Store, Pingtung Fengjia Store...etc. had gained stable profits for at least 3 years, especially in business districts with severe competition, and the average monthly revenue of Skinfood stores had maintained at NT$1~2.5 million." Furthermore, the complainant also asserted that the Company did not provide important franchising information before the franchise contract was signed.

Findings of the FTC after investigation:

(1) The Company stated that the average monthly revenue of all franchisees mentioned in the advertisement were indeed in the range NT$1~2.5 million in the first 3 years. The Company estimated the revenue of each franchisee based on the sales listed in their computer and reached the above number after the deduction of rent, personnel expense, and overhead expense. The Company then used this figure to claim that all 8 stores made a profit while they were in business, and their average monthly revenue was in the range NT$1~2.5 million in the first 3 years.

(2) The Company stated that it provided the franchise agreement, "information required to disclose that the franchise headquarters of Skinfood Co., Ltd.," and "directions for Skinfood store management" to trading counterparts within a reasonable period before the trading counterpart became its franchisee. After examining the materials, the FTC found that they did not include an important piece of trading information "total number of franchisees in all counties (cities), and ratio of franchise agreements terminated in the previous year."

Grounds of disposition:

(1) The franchise advertisement in question gave the public the impression that all stores of the Company in the business districts that were mentioned were profitable for at least 3 years, and that their average monthly revenue before and during the advertisement was at least NT$1 million. Companies provided information on their profitability, such as "revenue," in advertisements for parties to analyze the operating risk, return on investment, payback period, and growth of the franchise so that their potential franchisees could have basic information for evaluation and determine correctly whether or not to join a franchise. Revenue and profit varied with location, business operations, and overhead cost of each store. The Company stated in its advertisement that specific franchisees had revenues reaching a certain amount and had been profitable for at least 3 years. These figures should therefore be based on objective statistics and might not be fabricated based upon nothing. The FTC investigated the revenue of the 8 stores listed in the advertisement in the duration of the advertisement from July 2010 to July 2012, and found that only 4 of the stores had an average monthly revenue of NT$1 million or above before 2009; only 3 of the stores had an average monthly revenue of NT$1 million or above in 2010; only 2 of the stores had an average monthly revenue of NT$1 million or above in 2011; and only 1 of the stores had an average monthly revenue of NT$1 million or above in 2012. As a result, most of the stores were already unable to maintain stable profits with average monthly revenue in the range NT$1~2.5 million when the advertisement was posted, and the claim was a false, untrue and misleading representation. Although the Company revised contents of the advertisement in June 2013, deleting "Taoyuan Zhongzheng Store and Pingtung Fengjia Store" and "have gained stable profits for at least 3 years," and revising the wording to "Skinfood stores have maintained an average monthly revenue of NT$1~1.6 million," only 1 store fit the description in 2012 and the advertisement continues to be false.

(2) The "total number of franchisees in all counties (cities), and ratio of franchise agreements terminated in the previous year" is an important piece of trading information inaccessible by trading counterparts unless disclosed by the franchise. It is also important to the evaluation of the franchise's future growth, degree of intra-brand competition, and brand stability. The Company had the upper hand in this asymmetric information but in fact did not disclose important information in this case. The conduct made its trading counterparts unable to accurately assess the risk of joining the franchise and was obviously unfair to trading counterparts. The conduct was therefore in violation of Article 24 of the Fair Trade Law.

(3) The advertisement in question had been used for roughly 2 years, during which the company recruited at least 6 franchisees. Therefore, the Company did not fully disclose important franchising information for roughly 2 years. Up to the end of May 2014, at least 10 franchisees had been recruited and each franchisee paid a franchise fee of NT$400,000. However, this was the Company's first violation and the Company was cooperative during the investigation. Acting in accordance with the first section of Article 41(1) of the Fair Trade Law, the FTC thus imposed a total administrative fine of NT$300,000 on the Company, including NT$200,000 for violating the part of Article 21(3) applicable mutatis mutandis under Article 21(1), and NT$100,000 for violating Article 24 of the same law.

Appendix:
Skinfood Co., Ltd.'s Uniform Invoice Number: 80117376

Summarized by Lin, Pin-Yu; Supervised by Chiou, Shwu-Fen

! : For information of translation, click here

(1)	The franchise advertisement in question gave the public the impression that all stores of the Company in the business districts that were mentioned were profitable for at least 3 years, and that their average monthly revenue before and during the advertisement was at least NT$1 million. Companies provided information on their profitability, such as "revenue," in advertisements for parties to analyze the operating risk, return on investment, payback period, and growth of the franchise so that their potential franchisees could have basic information for evaluation and determine correctly whether or not to join a franchise. Revenue and profit varied with location, business operations, and overhead cost of each store. The Company stated in its advertisement that specific franchisees had revenues reaching a certain amount and had been profitable for at least 3 years. These figures should therefore be based on objective statistics and might not be fabricated based upon nothing. The FTC investigated the revenue of the 8 stores listed in the advertisement in the duration of the advertisement from July 2010 to July 2012, and found that only 4 of the stores had an average monthly revenue of NT$1 million or above before 2009; only 3 of the stores had an average monthly revenue of NT$1 million or above in 2010; only 2 of the stores had an average monthly revenue of NT$1 million or above in 2011; and only 1 of the stores had an average monthly revenue of NT$1 million or above in 2012. As a result, most of the stores were already unable to maintain stable profits with average monthly revenue in the range NT$1~2.5 million when the advertisement was posted, and the claim was a false, untrue and misleading representation. Although the Company revised contents of the advertisement in June 2013, deleting "Taoyuan Zhongzheng Store and Pingtung Fengjia Store" and "have gained stable profits for at least 3 years," and revising the wording to "Skinfood stores have maintained an average monthly revenue of NT$1~1.6 million," only 1 store fit the description in 2012 and the advertisement continues to be false.
(2)	The "total number of franchisees in all counties (cities), and ratio of franchise agreements terminated in the previous year" is an important piece of trading information inaccessible by trading counterparts unless disclosed by the franchise. It is also important to the evaluation of the franchise's future growth, degree of intra-brand competition, and brand stability. The Company had the upper hand in this asymmetric information but in fact did not disclose important information in this case. The conduct made its trading counterparts unable to accurately assess the risk of joining the franchise and was obviously unfair to trading counterparts. The conduct was therefore in violation of Article 24 of the Fair Trade Law.
(3)	The advertisement in question had been used for roughly 2 years, during which the company recruited at least 6 franchisees. Therefore, the Company did not fully disclose important franchising information for roughly 2 years. Up to the end of May 2014, at least 10 franchisees had been recruited and each franchisee paid a franchise fee of NT$400,000. However, this was the Company's first violation and the Company was cooperative during the investigation. Acting in accordance with the first section of Article 41(1) of the Fair Trade Law, the FTC thus imposed a total administrative fine of NT$300,000 on the Company, including NT$200,000 for violating the part of Article 21(3) applicable mutatis mutandis under Article 21(1), and NT$100,000 for violating Article 24 of the same law.