KQ Tea

1336th Commissioners' Meeting (2017)

Case:

KQ Tea violated the Fair Trade Law by failing to fully disclose important franchise information to its trading counterparts in writing before the franchise contracts were signed

Keyword(s):

Franchise, important information, product purchase, material cost

Reference:

Fair Trade Commission Decision of June 14, 2017 (the 1336th Commissioners' Meeting); Disposition Kung Ch'u Tzu No. 106044

Industry:

Beverage Serving Activities via Shops (5631)

Relevant Law(s):

Article 25 of the Fair Trade Law

Summary:

1. The Association of Chain and Franchise Promotion, Taiwan held the "2016 Taipei International Chain and Franchise Spring Exhibition" from Mar. 11 to 14 in 2016. In order to understand the condition of franchisee recruitment of participating businesses, the FTC sent its staff members to visit the exhibition. During the visit, the FTC's staff members found out that KQ Tea did not disclose in writing important franchise information, including the costs to purchase products and materials, during its talks with the persons interested in joining the franchise. As such conduct was in violation of Article 25 of the Fair Trade Law, the FTC initiated an ex officio investigation to understand whether KQ Tea disclosed information regarding the costs of product and raw material purchases and related restrictions.
2. Findings of the FTC after investigation:
   By administering a questionnaire survey and interviewing its franchisees, the FTC found out, before the franchise contract were signed, KQ Tea would give a briefing on the strengths of its brand name, a business startup interview, information about the franchiser and contract documents to those interested in joining the franchise. However, an inspection of such documents revealed KQ Tea did not fully disclose important franchise information with regard to the costs needed to purchase products and materials before and during the franchise operation.
3. Grounds for disposition:
   (1) As a result of KQ Tea's failure to fully disclose in writing before the franchise contracts were signed important franchise information regarding the costs of product and material purchases before and during the franchise operation, persons interested in joining the franchise would find it difficult to assess the amount of the necessary capital to invest and the expenses needed to run the business. The aforesaid information was exactly what would-be franchisees needed to evaluate whether they would become part of the KQ Tea franchise or choose a different franchiser. In other words, KQ Tea was the party with the information superiority but took advantage of the information asymmetry by not fully disclosing the aforementioned franchise information before the franchise contract were signed to impede its trading partners from making correct transaction decisions. The practice was obviously unfair to the trading counterparts or unspecific potential trading counterparts, and consequently caused its competitors to lose opportunities to find franchisees. Hence, it was obviously unfair conduct able to affect the trading order on the marketplace that was in violation of Article 25 of the Fair Trade Law.
   (2) After assessing the duration of the unlawful act, the sales of the company and the franchise fees received, the number of existing franchisees, the company's cooperativeness during the investigation and the violation being the first, the FTC cited the first section of Article 42 of the Fair Trade Law to order KQ Tea to cease its unlawful act and at the same time imposed an administrative fine of NT$100,000 on the company.