President Chain Store Corp.

1323rd Commissioners' Meeting (2017)

Case:

President Chain Store Corporation violated the Fair Trade Law during its franchisee recruitment practice

Keyword(s):

Convenience store, franchise, important information

Reference:

Fair Trade Commission Decision of March 15, 2017 (the 1323rd Commissioners??Meeting); Disposition Kung Ch? Tzu No. 106016

Industry:

Convenience Stores, Chains (4711)

Relevant Law(s):

Article 25 of the Fair Trade Law

Summary:

1. In order to understand whether President Chain Store Corporation (hereinafter referred to as President Chain Store Corp.) disclosed to parties interested in joining the franchise important information regarding the placement of products orders before the contract was signed when recruiting franchisees, the FTC launched an investigation. Later, the FTC received complaints from former franchisees of President Chain Store Corp. pointing out President Chain Store Corp. had not explained matters about product orders and purchases during talks associated with franchise relationship establishment. Moreover, after the franchisees began operation, staff members of President Chain Store Corp. would check whether the store had achieved the sales targets set by the company and would give pressure over the phone or in person by reprimanding the store operators had no ambition and also applied giving low performance evaluation grades, sending legal attest letters or not renewing the contract as a threat. As a result, the stores had to spend tens of thousands of dollars to scrap products.
2. Findings of the FTC after investigation:
   The results of a survey administered by the FTC indicated that 23 franchisees had opinions about the items or quantities of products that the headquarters requested them to order and 11 expressed that the headquarters refused to accept complains or take action accordingly (48%). Meanwhile, of the 15 franchisees who ticked off the item of having the experience of refusing to place orders because President Chain Store Corp. had not made any stipulations regarding quantities of product orders or maintenance of stock quantities but would often or sometimes request or instruct them to place orders, 4 people expressed they had been penalized by the headquarters (27%), and 6 had received warnings without penalties (40%), and 5 had never been warned or penalized (33%). Several franchisees interviewed concurred if they had not placed orders as requested, staff members from the headquarters would visit their stores to express their concerns or increase the number of visits, or the franchisees would have to attend review meetings (exchange meetings and workshops), and inspections would become stricter or the result of performance evaluation would not be so good, or stock deficiency inspections indicating product shortages would be listed as anomalies or defects and recorded.
3. Grounds for disposition:
   (1) The quantities of products to be ordered by franchisees or the standards of product orders set or requested by President Chain Store Corp. were not merely suggestive. Some franchisees expressed having been penalized for failing to comply with the request of the headquarters and others were warned or had to attend review meetings while their franchisee performance evaluation could also be affected and it would have an effect on their bonuses. All the above did not come from only one of the franchisees interviewed. Such conduct could only restrain the freedom of franchisees to decide their product orders and quantities. It was a restriction imposed on the product orders and quantities, yet President Chain Store Corp. had never fully disclosed such information in writing before the contract was signed.
   (2) The conduct of President Chain Store Corp. taking advantage of its information superiority and continuing to sign contracts with unspecific parties interested in joining the chain was repeated over and again. The use of its information superiority and the information asymmetry that was disadvantageous to its trading counterparts could only impede parties interested in joining the chain from making the right decisions. The practice already had an impact on most existing franchisees and was obviously unfair to parties intending to join the chain as well. At the same time, it could also cause its competitors to lose opportunities to get new franchisees. It was enough to create certain negative influence on the trading order of the marketplace. If such conduct had not been stopped, it would continue to affect other potential trading counterparts and bring greater harm to the trading order on the marketplace. It was obviously unfair conduct able to affect trading order in violation of Article 25 of the Fair Trade Law.
   (3) After assessing the sales of President Chain Store Corp., the total number of stores of the chain, the number of new franchisees, the duration of the company? failure to disclose important trading information, the amount of capital franchisees invested between 2013 and 2015, as well as the company? cooperativeness throughout the investigation, the FTC, citing Article 42 of the Fair Trade Law, ordered President Chain Store Corp. to immediately cease the unlawful act and to make necessary corrections within two months after receiving the disposition. At the same time, an administrative fine of NT$5 million was imposed on the company.