Zhong Wei Enterprise Co., Ltd.

1262nd Commissioners’ Meeting (2016)

Case:

Zhong Wei Enterprises violated the Fair Trade Law for adopting unlawful practices in franchisee recruitment

Keyword(s):

Franchise, important information

Reference:

Fair Trade Commission Decision of January 13, 2016 (the 1262nd Commissioners’ Meeting), Disposition Kung Ch’u Tzu No. 105001

Industry:

Wholesale of Frozen Prepared Foods (4544)

Relevant Law(s):

Article 25 of the Fair Trade Law

Summary:

1. The Taiwan Chain Stores and Franchise Association organized the “16th Taipei International Chain and Franchise Spring Exhibition” in March 2014. The FTC sent staff members to understand the recruitment results of the participating franchise businesses. After examining the advertising flyers, recruitment brochures and website information of Zhong Wei Enterprise Co., Ltd. (hereinafter referred to as Zhong Wei Enterprises), the FTC’s staff members discovered that the recruitment flyers for the southern Taiwan chain carried the wording of “average gross margin achieving 50~55%” as information regarding financial forecast. However, there was no indication of how the figure had been established or any supporting evidences and neither did the company provide any other important franchise information for potential trading counterparts to review. Therefore, the FTC initiated an ex officio investigation.

2. Findings of the FTC after investigation:

   The FTC has reviewed the written information provided by Zhong Wei Enterprises to the potential franchisees including franchise contract, franchise advertising flyers for southern Taiwan, notices for franchisees, order forms, the preliminary operation manual, the addresses of the franchisees in all counties and cities, the menus of existing franchisees, and gross margin analyses on a few main product items. Besides, the company was also invited to make its statement at the FTC. However, the FTC concluded that it was obvious that the company did not fully disclose the important franchise information regarding contents of the rights of franchisees to use its trademark, the length of time they could use the trademark, and the number of franchisees in each county (city) and their addresses.

3. Grounds for disposition:

   (1)

   The contents of the rights of franchisees to use the trademark, the length of time franchisees can use the trademark, and the number of franchisees in each county (city) and their addresses are important franchise information regarding use of trademark rights, brand growth stability, market scale changes, expected business performance and risks. These are information that potential franchisees need in their assessment of whether they will sign the contract or choose other franchisers. As the party with the status of information superiority, Zhong Wei Enterprises took advantage of the information asymmetry and signed contracts with its trading counterparts without fully disclosing important information. As a result, it was obviously unfair conduct as stated in Article 25 of the Fair Trade Law. Moreover, Zhong Wei Enterprises applied the practice repeatedly to sign contracts with unspecific trading counterparts and the practice could have an effect on many potential victims in the future if it was not stopped. Furthermore, it might also cause the company’s competitors to lose their opportunity to sign contracts with potential franchisees. The above practices would therefore result in unfair competition. The conduct was able to affect trading order in the franchise market and was in violation of Article 25 of the Fair Trade Law.

   (2)

   After assessing the duration that Zhong Wei Enterprises did not fully disclose important trading information, the company’s net income from 2012 to 2014, the total franchise fees (not including equipment expenses) collected between 2012 and 2014, the total number of franchisees, the attitude of cooperation throughout the investigation, and the violation being the first offense of the company, the FTC imposed on the company an administrative fine of NT$150,000.