SofyDOG Co., Ltd.

1201st Commissioners' Meeting (2014)

Case:

SofyDOG violated the Fair Trade Law for restricting distributors pet food resale prices

Key Word(s):

Resale price restriction, suggested price, pet food

Reference:

Fair Trade Commission Decision of November 12, 2014 (the 1201st Commissioners Meeting); Disposition Kung Ch'u Tzu No. 103132

Industry:

Wholesale of Other Food (4549)

Relevant Law(s):

Article 18 of the Fair Trade Law

Summary:

SofyDOG Co., Ltd. (hereinafter referred to as SofyDOG, an agent for pet food from ZiwiPeak of New Zealand and others, violated Article 18 of the Fair Trade Law for restricting the resale prices of its distributors. The FTC therefore started an investigation on SofyDOG's behaviors.

Findings of the FTC after investigation:

(1) SofyDOG had signed contracts with its distributors. SofyDOG delivered products according to orders made by its distributors and the distributors made their payments either in cash each time or on a monthly basis. SofyDOG admitted that the "New Zealand K9 Frozen Raw Food Sales (One-year) Agreement," the "US Nature's Variety Pet Food Contracted Sales Cooperation Agreement," and the "New Zealand ZiwiPeak Pet Food Contracted Sales Cooperation Agreement" the company signed with its distributors included provisions that restricted distributors' resale prices.

(2) The main reason why SofyDOG demanded its distributors to sell the products in accordance with the suggested prices stipulated in their sales contracts was that SofyDOG gave contract signers discounts when they achieved the minimum monthly amount of purchases. Therefore, it had to impose resale price restrictions to prevent its distributors from using such discounts to compete with each other by offering lower prices and affecting the profit of other shops because the higher the profit, the more willing the distributors would be to sell SofyDOG's products. Furthermore, by doing so, potential disputes over price differences could also be avoided.

Grounds for disposition:

(1) The FTC's investigation indicated that SofyDOG was the sole agent for ZiwiPeak pet food, K9 raw pet food from New Zealand, and Nature's Variety pet food from the US. SoftDOG signed different sales contracts with its distributors on the above products of different brands. The distributors placed orders according to SofyDOG's price quotations and either paid cash on each delivery or paid on a monthly basis. Some distributors were required to issue a check in advance for the total amount of the minimum monthly purchases and ordered products according to their sales performance. All distributors made profits from the difference between their selling prices and purchasing (wholesale) prices. The distributors also shouldered the potential risk arising from their product sales. Hence, since the trading relationship between SofyDOG and the distributors was outright sales, the distributors should have been given the liberty to determine their own retail prices.

(2) The FTC investigation also revealed that Item 4 of the Notices in the "New Zealand K9 Frozen Raw Food Sales (One-year) Agreement" stipulated that "to maintain reasonable prices and protect distributors' profits, Party B shall sell the products in accordance with the retail prices suggested by Party A; otherwise, Party A has the right to terminate the contract at any time and then demand Party B to compensate for transportation expenses." Meanwhile, it was also set forth in Article 3 of the "US Nature's Variety Pet Food Contracted Sales Cooperation Agreement" and the "New Zealand ZiwiPeak Pet Food Contracted Sales Cooperation Agreement" that "licensed sales of trademarked products shall be conducted according to the retail prices suggested by Party A to prevent malicious competition among distributors. All promotional and special offer activities shall require Party A's consent in advance." These restrictions appeared in the 2013 to 2014 and 2014 to 2015 contracts. It was evident that SofyDOG did impose resale price restrictions on its distributors.

(3) SofyDOG contested that the purpose of its resale price restrictions was to prevent its contracting distributors from taking advantage of purchase discounts to compete in the market by offering lower prices and affecting the profit of other shops. In doing this, it asserted, pet supply shops would be more willing to sell the company's products while sales channel stability could be maintained and disputes over price differences could be prevented. SofyDOG also emphasized that if any distributor was found to be selling its products at prices lower than the suggested prices, it would admonish them to cooperate and it had never really cut supply on any distributor. However, it was set forth in the aforementioned agreements that "if Party B violates the abovementioned approaches of cooperation, Party A may cancel the discounts for Party B" and "...if Party B fails to abide by to the sales principle, Party A has the right to terminate the contract at any time and demand Party B to compensate for transportation expenses." Judging from the above provisions of the agreements, apparently SofyDOG could immediately cancel the discounts it offered to the distributors or terminate the distribution contracts. This could easily formed mental pressure on the distributors. With their liberty to determine prices obviously constrained by such sanction threats, the distributors had no choice but to follow the suggested prices. Even though SofyDOG had never implemented the breach-of-contract provisions, the resale price restrictions remained effective. The conduct of SofyDOG deprived the distributors of their freedom to determine their retail prices according to the competition they faced and their own cost structures. The result would lessen intra-brand price competition among different distributors in violation of Article 18 of the Fair Trade Law. Therefore, the FTC applied the first section of Article 41(1) of the same law and imposed an administrative fine of NT$150,000 on SofyDOG.

Appendix:
SofyDOG Co., Ltd.'s Uniform Invoice Number: 28225732

　 Summarized by Yang, Hsiang-Yu; Supervised by Chiou, Shwu-Fen

! : For information of translation, click here

(1)	The FTC's investigation indicated that SofyDOG was the sole agent for ZiwiPeak pet food, K9 raw pet food from New Zealand, and Nature's Variety pet food from the US. SoftDOG signed different sales contracts with its distributors on the above products of different brands. The distributors placed orders according to SofyDOG's price quotations and either paid cash on each delivery or paid on a monthly basis. Some distributors were required to issue a check in advance for the total amount of the minimum monthly purchases and ordered products according to their sales performance. All distributors made profits from the difference between their selling prices and purchasing (wholesale) prices. The distributors also shouldered the potential risk arising from their product sales. Hence, since the trading relationship between SofyDOG and the distributors was outright sales, the distributors should have been given the liberty to determine their own retail prices.
(2)	The FTC investigation also revealed that Item 4 of the Notices in the "New Zealand K9 Frozen Raw Food Sales (One-year) Agreement" stipulated that "to maintain reasonable prices and protect distributors' profits, Party B shall sell the products in accordance with the retail prices suggested by Party A; otherwise, Party A has the right to terminate the contract at any time and then demand Party B to compensate for transportation expenses." Meanwhile, it was also set forth in Article 3 of the "US Nature's Variety Pet Food Contracted Sales Cooperation Agreement" and the "New Zealand ZiwiPeak Pet Food Contracted Sales Cooperation Agreement" that "licensed sales of trademarked products shall be conducted according to the retail prices suggested by Party A to prevent malicious competition among distributors. All promotional and special offer activities shall require Party A's consent in advance." These restrictions appeared in the 2013 to 2014 and 2014 to 2015 contracts. It was evident that SofyDOG did impose resale price restrictions on its distributors.
(3)	SofyDOG contested that the purpose of its resale price restrictions was to prevent its contracting distributors from taking advantage of purchase discounts to compete in the market by offering lower prices and affecting the profit of other shops. In doing this, it asserted, pet supply shops would be more willing to sell the company's products while sales channel stability could be maintained and disputes over price differences could be prevented. SofyDOG also emphasized that if any distributor was found to be selling its products at prices lower than the suggested prices, it would admonish them to cooperate and it had never really cut supply on any distributor. However, it was set forth in the aforementioned agreements that "if Party B violates the abovementioned approaches of cooperation, Party A may cancel the discounts for Party B" and "...if Party B fails to abide by to the sales principle, Party A has the right to terminate the contract at any time and demand Party B to compensate for transportation expenses." Judging from the above provisions of the agreements, apparently SofyDOG could immediately cancel the discounts it offered to the distributors or terminate the distribution contracts. This could easily formed mental pressure on the distributors. With their liberty to determine prices obviously constrained by such sanction threats, the distributors had no choice but to follow the suggested prices. Even though SofyDOG had never implemented the breach-of-contract provisions, the resale price restrictions remained effective. The conduct of SofyDOG deprived the distributors of their freedom to determine their retail prices according to the competition they faced and their own cost structures. The result would lessen intra-brand price competition among different distributors in violation of Article 18 of the Fair Trade Law. Therefore, the FTC applied the first section of Article 41(1) of the same law and imposed an administrative fine of NT$150,000 on SofyDOG.