1188th Commissioners' Meeting (2014)
Case:
Hi-Life International violated the Fair Trade Law during its franchisee recruitment
Key Word(s):
Franchise, important information, trademark right
Reference:
Fair Trade Commission Decision of August 13, 2014 (the 1188th Commissioners' Meeting); Disposition Kung Ch'u Tzu No.103101
Industry:
Retail Sale in Non-specialized Stores with Food, Beverages or Tobacco Predominating (4711)
Relevant Law(s):
Article 24 of the Fair Trade Law
Summary:
The FTC's investigation indicated that before contract signature Hi-Life International had provided the party interested in joining the franchise the applicant information form, draft franchise contract, franchise contract, franchise overview, franchise disclosure documents, management proposal, franchiser's disclosure statement, shop choice statement, franchisee training manual, Ministry of Economic Affairs website for information on the company and branch offices, and description of shop remodeling work required but failed to fully disclose important franchise information such as the content and validity period of trademark right, the total number of franchisees of the same franchise system in all counties/cities, and the ratios of contract cancellation and termination in the preceding year.
| (1) | The content and validity period of trademark right is the basis of a franchiser's authorization for others to use its business symbols (such as brand name and logo). They may also be applied to assert exclusion, determine whether a franchisee can continue its operation, and affect the willingness of trading counterparts to join the franchise. Since a trading counterpart is required to pay a certain amount of funds to join the franchise, such information therefore is important in an interested party's decision of whether to join the franchise or choose a different franchiser. Meanwhile, the total number of franchisees of the same franchise system in all counties/cities and the ratios of contract cancellation and termination in the preceding year are also important information based on which parties intended to join the franchise can assess the scale, business performance, growth potential, franchisee survival rate, management risks of the franchise system. However, information asymmetry between a franchiser and its trading counterparts (parties intending to join the franchise) is high. In comparison, a franchiser has the upper edge and a party intending to join the franchise finds it hard to fully acquire trading information by asking. For this reason, a franchiser has the obligation to fully disclose such information in writing to a party intending to join the franchise before contract signature in order to balance the information status of both sides. Therefore, the FTC concluded that the action of Hi-Life International, being the side with information edges, to take advantage of the information asymmetry and not fully disclose the important information in its possession before contract signature was the obviously unfair conduct defined in Article 24 of the Fair Trade Law.
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| (2) | Hi-Life International first requested parties intending to join its franchise to pay a contract performance bond ranging from NT$100,000 to NT$200,000 upon signature of the preliminary contract. Then, when signing the franchise contract, such parties were still required to pay a franchises fee between few thousand to hundreds of thousands of NT dollars. At the same time, they also needed to pay for the remodeling expenses. The amount to be invested was by no means small and could not be transferred for other purposes. Once the franchise contract was signed, the franchisee lost the opportunity to work with other competitors that provided the same product or service. Hence, being the side with information edges, Hi-Life International's failure to fully disclose the aforesaid trading information in writing before contract signature could obstruct the trading counterpart from making the correct transaction decision. The interests of the latter would therefore be jeopardized. The practice was obviously unfair to the trading counterpart and also deprived competitors of business opportunities. The result was unfair competition being able to affect the trading order in the chain store franchise market and was in violation of Article 24 of the Fair Trade Law. |
Summarized by Lin, Cheng-Yu; Supervised by Hung, Shui-Hsing
Appendix:
Hi-Life International Co., Ltd.'s Uniform Invoice Number: 23285582