Chiseng Co., Ltd.

1301st Commissioners' Meeting (2016)

Case:

Chiseng Co., Ltd. violated the Fair Trade Law by imposing restrictions on distributors

Keyword(s):

Pepper product, Chinese spicy seasoning
Reference:
Fair Trade Commission Decision of October 12, 2016 (the 1301st Commissioners’ Meeting); Disposition Kung Ch’u Tzu No. 105111

Industry:

Manufacture of Seasoning (0896)

Relevant Law(s):

Article 19 and 20 of the Fair Trade Law

Summary:

  1. Almost 80% of domestically produced seasonings were sold domestically. As a result of lifestyle changes in the past years, the number of people eating out increased and the demand for pepper powder and other spicy seasonings continued to grow. In order to understand the condition of the seasoning market, the FTC initiated an ex officio investigation.
  2. Findings of the FTC after investigation:
    1. The three major seasoning brands were Tomax from Tomax Enterprise Co., Ltd. (hereinafter referred to as Tomax), Flying Horse from Chiseng Co., Ltd. (hereinafter referred to as Chiseng) and Old Man Brand from Tong Long Enterprise Co., Ltd. (hereinafter referred to as Tong Long). They all offered a large variety of products, including pepper powder, pepper whole, pepper salt and other seasonings (such as allspice, rosemary, and so on). However, their main products and marketing approaches were different.
    2. Pepper was the primary wholesale item for Chiseng although the company also sold other spicy seasonings. In the sales agreement signed by Chiseng with its distributors, besides provisions regarding ways of payment and various incentives or sales thresholds for discounts, Paragraph 1 of Point 6 of the agreement specified that “[P]arty B shall sell the products according to the suggested marketing approaches established by Party A (Chiseng) and may not engage in price competition or jack up prices, to sabotage the market prices of products from Party A or market products in other districts and sabotage the order of such markets. Party A may cancel the rebate for the quarter or terminate the contract if any distributor should violation these provisions…” In addition, Chiseng assigned its employees to evaluate the sales performance of each distributor on a regular basis or check if any distributor was engaging in price competition or cross-district sales. The said provision must have been continued from previous versions of the sales agreement and it was impossible to find out when they were first established. However, the original idea was, with supplying capacity and profitability taken into consideration, probably that each distributor could make a reasonable profit if it concentrated on the management of the regional market to which it belonged. On the other hand, if any distributor engaged in cross-district sales, the profit of other distributors could be therefore affected. The sales contract did include punitive measures, but as a matter of fact no distributorship had ever been revoked. When distributors were found to be engaging in cross-district sales, moral persuasion was the only measure taken. If the situation remained unimproved, Chiseng would gradually cut back on the cooperation with such distributors and it might consider not renewing the contract in the following year, but this had rarely happened.
  3. Grounds for disposition:
    According to Paragraph 1 of Article 19 of the Fair Trade Law, an enterprise shall not impose restrictions on resale prices of the goods supplied to its trading counterpart for resale to a third party or to such a third party for making further resale; however, those with justifiable reasons are not subject to this limitation. Furthermore, in Subparagraph 5 of Article 20, it is also stipulated that “no enterprise may impose improper restrictions on its trading counterparts' business activity as part of the requirements for trade engagement and restrain competition as a consequence.” Chiseng employed its power provided by the sales contract to restrict the product prices and operating districts of its distributors, and further threatened to cancel the rebate for the quarter, terminate the contract or cut back on cooperation to force its trading counterparts to sell its products according to its suggested prices and within the districts to which they belonged. The conduct had obviously restricted the distributors their power to decide their resale prices and operating areas. Moreover, as the number of major players in the Chinese spicy seasoning market was limited, intra-brand competition was inadequate. Consumers usually stuck to the habit of using the seasonings of certain brands and seasoning businesses seldom made active investments such as advertising or offered services before or after sales. Furthermore, the resale price restrictions from the company could not be interpreted as a justifiable cause for promotion of competition. To the contrary, restricting distributors to operate only in certain areas could only weaken market competition. As the above two practices were respectively in violation of Paragraph 1 of Article 19 and Subparagraph 5 of Article 20 of the Fair Trade Law, the FTC imposed an administrative fine of NT$500,000 on Chiseng.

Appendix:
Chiseng Co., Ltd.'s Uniform Invoice Number: 04309819

Summarized by: Chen, Ru-Ya; Supervised by: Yang, Chia-Huig