Mercuries and Associates Holding Ltd.

1359th Commissioners' Meeting (2017)

Case:

Mercuries and Associates violated the Fair Trade Law for adopting unlawful practices during franchisee recruitment

Keyword(s):

Supermarket, franchise, important information

Reference:

Fair Trade Commission Decision of November 22, 2017 (the 1359th Commissioners' Meeting); Disposition Kung Ch'u Tzu No. 106107

Industry:

Other Retail Sale in Non-specialized Stores (4719)

Relevant Law(s):

Articles 25 of the Fair Trade Law

Summary:

1. A number of franchisees of the Simple Mart chain complained that Mercuries and Associates Holding Ltd. (hereinafter referred to as Mercuries and Associates) compulsorily distributed to them 4??refrigerated beverages and desserts of short shelf life according to the arrangements made with its computer system. The company also irregularly forced its franchisees to purchase products that could not be returned and therefore the franchisees had to absorb the costs when such products were not sold out or had to be scrapped. In addition, it was complained that the franchisees had not found out there were as many as 64 penalty items only until Mercuries and Associates gave them the contracts to review.
2. Findings of the FTC after investigation:
   Mercuries and Associates stated that its uniform product distribution mechanism and the computerized automatic product supply system were measures adopted to distribute products to its franchisees without their efforts of making orders. The uniform distribution mechanism was set up for the purpose of distribution of new products and promotional items. The quantity of new products was the figure indicated in the "quantity required by outlets" on the new product notification whereas the quantity of promotional items was calculated according to the quantity to be allocated through the uniform distribution mechanism indicated in the display arrangement table and each franchisee's stock amount. At the same time, the computerized automatic product supply system was mainly used for low-temperature commodities to be distributed each day. When the quantities ordered by the franchisees were inadequate, the system would calculate automatically to work out the right quantities. In other words, during the contract period, the franchisees were subject to minimum quantities or standards defined by Mercuries and Associates as a restriction on their franchise relationship. The 64 items listed in the Franchisee Operation Evaluation Table as the violations to be penalized were the detailed regulations established by Mercuries and Associates to facilitate franchisee administration. The franchisees had to abide by the administrative regulations specified in the Franchisee Operation Evaluation Table because it was clearly stipulated in the contract that each franchisee was required to follow the regulations and rules established by Mercuries and Associates. They were part of the restriction on the franchisees.
3. Grounds for disposition:
   A. Before the franchise contract at issue was signed, Mercuries and Associates collected a draft contract viewing fee from its trading counterpart. The company would charge tens of thousands of NT dollars when a draft contract was canceled due to causes attributable to the trading counterpart. In other words, Mercuries and Associates never provided its trading counterparts with important trading information before the contract was signed.
   B. The written information Mercuries and Associates provided to its trading counterparts before the franchise contract was signed did not include any information related to the restriction of minimum quantities or quantity standards of products to be distributed according to the uniform product allocation mechanism and the computerized automatic product supply system. In the franchise contract it was stipulated that franchisees had to abide by related administrative regulations and follow other restrictive instructions included in the contract. However, Mercuries and Associates never provided the contract to those who were interested in joining the franchise to read before they signed the contract. In the written information the company provided only the wording of "the franchise relationship shall be subject to the provisions set forth in the official contract" implied the restrictions while the concrete restrictions to be imposed on the franchisees were not disclosed.
   C. During the recruitment process, Mercuries and Associates, being the side with information advantages, took advantage of the information asymmetry for its trading counterparts and did not fully disclose important trading information before the contract was signed. The practice was using information asymmetry to increase business opportunities and could impede trading counterparts from making right decisions. The contact had an effect on a large number of trading counterparts signing franchise contracts with the company. It was unfair to the trading counterparts and also caused competitors to lose potential business partners. Unfair competition was created as a consequence. As the company had signed contracts with many trading counterparts, there was certain influence on trading order of the market. Therefore, the FTC concluded the practice at issue was obviously unfair competition able to affect trading order in violation of Article 25 of the Fair Trade Law. While making reference to Article 36 of the Enforcement Rules of Fair Trade Law, the FTC imposed an administrative fine of NT$700,000 on the company.