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【Fair Trade Act】Franchise Disclosure Requirements under Taiwan FTC’s Guidelines

2019-07-18 Yen-Chia Chen
 Eliminating Information Asymmetry
- Franchise Disclosure Requirements under Taiwan FTC’s Guidelines -

Franchising is attractive to entrepreneurs worldwide because franchising not only offers a flexible mechanism for franchisors to expand their business domestically or internationally,[1] but also increases franchisees’ chance of success in growing their business.[2]  Franchise regulations vary from one jurisdiction to another.[3]  Entrepreneurs seeking to internationalize their business through the franchising mechanism should be mindful of and conform to the franchise-related requirements set forth by the legal system of each target market, including Taiwan.[4] 
 
Under the applicable franchise-related regulations in Taiwan,[5] an entrepreneurial franchisor desiring to develop a franchise business in Taiwan should be aware of and comply with the franchise information disclosure requirements under the “Fair Trade Commission Disposal Directions (Guidelines) on the Business Practices of Franchisors” (the “Guidelines”)[6] prior to entering into a franchise relationship with a franchisee in Taiwan.[7]  The franchise information disclosure requirements under the Guidelines facilitate eliminating information asymmetry between franchisors and franchisees.[8]  An entrepreneurial franchisor failing to comply with the franchise information disclosure requirements under the Guidelines will possibly violate the Fair Trade Act (the “FTA”)[9] in Taiwan, resulting in facing an administrative penalty assessed by the Fair Trade Commission in Taiwan (the “TFTC”) as well as a TFTC order demanding rectification within the period prescribed in the TFTC order.[10]  In recent years, the TFTC has not been hesitated to assess administrative penalties against franchisors failing to disclose the franchise information required under the Guidelines to franchisees before entering into a franchise relationship.[11]  For instance, in 2017 the TFTC (1) assessed an administrative penalty of five million New Taiwan Dollars against President Chain Store Corporation (“PCSC,” a well-known company in Taiwan engaging in the operation of chain convenience stores) for violation of the FTA because PCSC’s failure to disclose the required franchise information to its franchisee(s) before entering into a franchise relationship constituted obviously unfair conduct sufficient to affect the trading order; and (2) ordered PCSC to cease therefrom and rectify its conduct within two months upon the receipt of the TFTC order.[12]
 
I. Definition of “Franchisor,” “Franchisee,” and “Franchise Relationship”
 
The TFTC established the Guidelines with the aims of “maintain[ing] the trading order in the franchise market,” and “ensur[ing] free and fair competition among franchise businesses.”[13]  Under the Guidelines, a “franchisor” means “an enterprise[14] in a franchise relationship that licenses the trademark or operational techniques, assists or counsels the management of franchisee business, and collects the corresponding charges for such services from the franchisee.”[15]  On the other hand, a “franchisee” means an “enterprise in the franchise relationship that uses the trademark or operational techniques licensed by the franchisor, receives assistance or counsel from the franchisor, and pays the franchisor the corresponding charges for such services.”[16]  Moreover, a “franchise relationship” refers to “an ongoing relationship in which a franchisor licenses a franchisee through a contract to use its trademark or operational techniques, and assists or counsels the franchisee to manage the business, while the franchisee pays the corresponding charges for such services.”[17]  Nevertheless, a franchise relationship, according to the Guidelines, does not include “the purchase of products or services . . . at wholesale or lower rates for resale or leasing.”[18]
 
II. Disclosure Requirements
 
The Guidelines requires a franchisor to disclose the following franchise information to a franchisee before entering into a franchise relationship: (1) the initial costs and fees before starting up;[19] (2) the continuing cost and fees during the franchise operation;[20] (3) details and restrictions about franchisor’s intellectual property rights licensed to the franchisee;[21] (4) the “contents and methods of operational assistance, training, and guidance” offered by the franchisor; (5) “plans for setting up other franchisees of the same franchise system in [the] franchisee’s existing area of operation”; (6) restrictions on the franchisee;[22] and (7) the terms and conditions for the “alteration, termination and cancellation of a franchise contract.”[23]  Only with any of the following justifications may a franchisor be exempted from disclosing the aforementioned franchise information to a franchisee: (1) the franchisor and the franchisee are continuing or expanding their existing franchise relationship; (2) “the franchisor is indeed in lack of such information;” or (3) any other circumstances where there is no information asymmetry between the franchisor and the franchisee.[24]
 
The disclosure of the franchise information must be “in writing”[25] and may be provided in either hard copy or electronic form[26].[27]  According to the Guidelines, the franchisor bears the burden of proving that the franchisor did disclose the required franchise information to the franchisee.[28]  In addition, the timing of the disclosure is within ten days, a reasonable timeframe determined in each individual case, or any other timeframe agreed by both parties, prior to a franchisor enters into a franchise relationship with a franchisee.[29] 
 
III. Prohibited Conduct
 
In addition to the foregoing disclosure requirements, the Guidelines prohibits a franchisor from doing any of the following “obviously unfair” conduct when entering into a franchise contract with a franchisee: (1) failing to give the franchisee a reasonable period, which must be at least five days or any other reasonable period determined in each individual case, for reviewing the franchise contract before the execution of that franchise contract; or (2) failing to deliver a copy of the executed franchise contract to the franchisee within thirty days after the execution of the franchise contract.[30]  However, failure of delivering the executed franchise contract to the franchisee within thirty days after the execution of the franchise contract does not constitute obviously unfair conduct by a franchisor if such failure is “not attributable to the franchisor”[31].[32]
 
IV. Two-Step Inquiry
 
In determining whether a franchisor’s failure to disclose franchise information constitutes a violation of the FTA (speaking specifically, Article 25 of the FTA[33]), recent TFTC decisions show that the TFTC has adopted a two-step inquiry: (1) the first inquiry is whether the franchisor’s conduct constitutes “obviously unfair” conduct; and (2) the second inquiry is whether the franchisor’s obviously unfair conduct is “sufficient to affect the trading order.”[34]
 
1. Obviously Unfair
 
Under the Guidelines, a franchisor’s conduct constitutes “obviously unfair” conduct when the franchisor (1) fails to comply with the Guidelines’ franchise information disclosure requirements;[35] or (2) conducts any act prohibited under the Guidelines.[36]  According to the TFTC, the term “obviously unfair” used in Article 25 of the FTA refers to “engaging in market competition or commercial transactions by obviously unfair means.”[37]  Taking advantage of information asymmetry is one of the typical types of conduct considered obviously unfair.[38]  In the view of the TFTC, a franchisor’s failure to do either of the followings when recruiting a franchisee is considered taking advantage of information asymmetry: (1) disclosing important franchise information in writing to a franchisee; or (2) providing the franchisee with a reasonable period for reviewing the franchise contract.[39]  The TFTC has long held that there is an excessively high level of information asymmetry between franchisors and franchisees,[40] and franchisors are “in a dominant position” with respect to the franchise information.[41]  Courts in Taiwan also have expressed the same view.[42]  This is one of the reasons why the TFTC establishes the Guidelines requiring franchisors to disclose important franchise information to franchisees before entering into a franchise relationship.[43]  Thus, a franchisor’s failure of disclosing the franchise information required under the Guidelines to a franchisee, in the opinion of the TFTC, is thus regarded as “obviously unfair” conduct.[44]
 
2. Sufficient to Affect the Trading Order
 
A franchisor’s aforementioned obviously unfair conduct is in violation of Article 25 of the FTA if such obviously unfair conduct is “sufficient to affect the trading order.”[45]  Under Article 25 of the Fair Trade Act, the term “trading order” refers to “the economic order of the marketplace for all goods or service transactions,”[46] which “may involve all the stages regarding research and development, production, sales, and consumption,” and “includes horizontal competition order, market order of vertical trading relationship, and trading order that comports with the spirit of free and fair competition.”[47]  In determining whether a franchisor’s failure of disclosing the franchise information required under the Guidelines to a franchisee, constituting an obviously unfair conduct, is sufficient to affect the trading order, recent TFTC decisions reveal that the TFTC will look into various factors below and take into account the entire evidence in each individual case: (1) “the number of victims;” (2) “the quantity and degree of harm caused;” (3) “the deterrent effect on other enterprises;” (4) “whether [any] specific organizations or groups [has] been targeted by the alleged acts;” (5) “whether the case [at issue] would affect a majority of future potential victims;” (6) “the method or the means of the [alleged] act[s];” (7) “the frequency and [scale] of the alleged acts;” (8) “the reciprocity of the information with respect to the actor and [the actor’s] trading counterpart;” (9) “dispute resolution resources;” (10) “market power;” (11) “the presence of [. . .] dependency;” and (12) “the trad[ing] habit and industry characteristics.”[48]  It is worth noting that the inquiry of whether the franchisor’s obviously unfair conduct is sufficient to affect the trading order does not require proving that “the trading order has in fact been affected.”[49]  Instead, the element of “sufficient to affect the trade order” under Article 25 of the FTC is met as long as there is a possibility that the franchisor’s obviously unfair conduct is sufficient to affect the trading order.[50]
 
V. Consequences
 
Recent TFTC decisions indicate that the TFTC tends to find that a franchisor’s failure to disclose the required franchise information to its franchisee before entering into a franchise relationship, as required under the Guidelines, constitutes obviously unfair conduct sufficient to affect the trading order, resulting in violating Article 25 of the FTA.[51]  When finding that a franchisor is in violation of Article 25 of the FTA, the TFTC may (1) order the violating franchisor to “cease therefrom, rectify its conduct or take necessary corrective action within the time prescribed in the order;” and (2) assess upon the violating franchisor “an administrative penalty of not less than fifty thousand nor more than twenty-five million New Taiwan Dollars.”[52]  If the violating franchisor “fails to cease therefrom, rectify the conduct or take any necessary corrective action after the lapse of the prescribed period,” the TFTC may continue ordering the violating franchisor to “cease therefrom, rectify the conduct or take any necessary corrective action within the time prescribed in the order.”  Furthermore, “each time” the TFTC may “successively assess thereupon an administrative penalty of not less than one hundred thousand nor more than fifty million New Taiwan Dollars” until the violating franchisor’s “ceasing therefrom, rectifying its conduct or taking the necessary corrective action.”[53]
 
 
This Article, including the information contained herein, has been prepared only for educational and general information purposes to contribute to the understanding of the franchise disclosure requirements under the applicable franchise regulations in Taiwan.  This Article does not and is not intended to constitute, offer, or convey individual legal advice, legal opinion, or any other professional advice on any subject matters covered herein.  Please obtain specific legal advice before acting on any matters discussed herein.  While the author makes every attempt to ensure that the information covered herein is accurate, the author disclaims any liability for any omissions or errors that may be contained in this Article.
 
 
 
[2] Mark Abell, Chapter 1. What is Franchising?, in The Franchise Law Review 2 (Mark Abell ed., 6th ed. 2019).
[4] Id. at 26.
[5] E.g., Gongping Jiaoyi Weiyuanhuei Dueiyu Jiameng Yejhu Jingying Singwei Anjian Jhih Chuli Yuanze [Fair Trade Commission Disposal Directions (Guidelines) on the Business Practices of Franchisors] (initially established and passed by the 359th Commission Meeting on June 2 1999; last amended and promulgated by Order Kung Fu Tzu No. 10712604971 on Aug. 1, 2018) [hereinafter the “Guidelines”]; Gongping Jiaoyi Weiyuanhuei Dueiyu Gong Ping Jiaoyi Fa Di Er Shih Yi Tiao Anjian Jhih Chuli Yuanze [Fair Trade Commission Disposal Directions (Guidelines) on Handling Cases Governed by Article 21 of the Fair Trade Act] (initially established and passed by the 151st Commissioners' Meeting on August 31, 1994; last amended and promulgated by Order Kung Jing Tzu No. 10514613231 on November 14, 2016); Gongping Jiaoyi Weiyuanhuei Dueiyu Bijiao Guanggao Anjian Jhih Chuli Yuanze [Fair Trade Commission Disposal Directions (Guidelines) on Comparative Advertising] (initially passed by the 995th Commissioners' Meeting on December 1, 2010; last amended and promulgated by Order Kung Jing Tzu No. 10514613351 on November 14, 2016); and Gongping Jiaoyi Weiyuanhuei Dueiyu Gongping Jiaoyi Fa Di Er Shih Wu Tiao Anjian Jhih Chuli Yuanze [Fair Trade Commission Disposal Directions (Guidelines) on the Application of Article 25 of the Fair Trade Act] (initially passed by the 117th Commissioners' Meeting on December 29, 1993; last amended and promulgated by Order Kung Fa Tzu No.10615600201 on January 13, 2017) [hereinafter the “Guidelines on Application of Article 25 of the FTA”].
[6] Gongping Jiaoyi Weiyuanhuei Dueiyu Jiameng Yejhu Jingying Singwei Anjian Jhih Chuli Yuanze [Fair Trade Commission Disposal Directions (Guidelines) on the Business Practices of Franchisors] (initially established and passed by the 359th Commission Meeting on June 2 1999; last amended and promulgated by Order Kung Fu Tzu No. 10712604971 on Aug. 1, 2018) [hereinafter the “Guidelines”].
[7] Abell, supra note 3, at 8, 26.
[8] Taiwan Gaodeng Fayuan Taichung Fenyuan 104 Shang No. 255 Civil Judgment (Aug. 26, 2015) (臺灣高等法院臺中分院104年度上字第255號民事判決) [Taiwan High Court Taichung Branch Court 104 Shang No. 255 Civil Judgment] (hereinafter “104 Shang 255”); Zuigao Xingzheng Fayuan 102 Pan No. 90 Administrative Judgment (Feb. 27, 2013) (最高行政法院102年判字第90號行政判決) [Taiwan Supreme Administrative Court 2013 Pan No. 90 Administrative Judgment] (hereinafter “102 Pan 90”).
[9] Gongping Jiaoyi Fa [The Fair Trade Act] (promulgated on February 4, 1991; last amended on June 14, 2017) [hereinafter the “FTA”].
[10] Id. art. 42.
[11] E.g., Yuangi Brunch House, Gong-Cu-Zi No. 107018 (F.T.C.) (Apr. 12, 2018) [hereinafter “Gong-Cu-Zi No. 107018”]; Mercuries & Associates, Ltd., Gong-Cu-Zi No. 106107 (F.T.C.) (Nov. 24, 2017) [hereinafter “Gong-Cu-Zi No. 106107”]; Happy Water House et al., Gong-Cu-Zi No. 106106 (F.T.C.) (Nov. 24, 2017) [hereinafter “Gong-Cu-Zi No. 106106”]; Cama Coffee Inc., Gong-Cu-Zi No. 106104 (F.T.C.) (Nov. 16, 2017) [hereinafter “Gong-Cu-Zi No. 106104”]; Kq-Tea, Gong-Cu-Zi No. 106044 (F.T.C.) (June 15, 2017) [hereinafter “Gong-Cu-Zi No. 106044”]; President Chain Store Corporation, Gong-Cu-Zi No. 106016 (F.T.C.) (Mar. 17, 2017) [hereinafter “Gong-Cu-Zi No. 106016”]; Caffè Bene, Gong-Cu-Zi No. 105029 (F.T.C.) (Apr. 14, 2016) [hereinafter “Gong-Cu-Zi No. 105029”]; Dongcheng Guoji Zhongjie Jingji, Gong-Cu-Zi No. 104082 (F.T.C.) (Sept. 10, 2015) [hereinafter “Gong-Cu-Zi No. 104082”]
[14] FTA art. 2.
[15] Guidelines, point 2, item (1).
[16] Id. item (2).
[17] Id. item (3).
[18] Id.
[19] E.g., “the cost or estimated fees paid to the franchisor or the person designated by the franchisor, for training, merchandise purchases, raw materials, capital equipment, interior decoration, and so on.” Guidelines, point 3, ¶1.
[20] E.g., the “calculation and payment of licensing fee, and the cost or estimated fees paid to the franchisor or the person designated by the franchisor, for management guidance, marketing and promotion, purchase of merchandise or raw materials, and so on.” Id.
[21] E.g., the name, “contents, periods of validity, [the] extent of authorization, and corresponding restrictions of trademark rights, patents and copyrights involved.” Id.
[22] E.g., “A. the supply of merchandise or raw materials from the franchisor or the supplier designated by the franchisor, and designated brands and specifications; B. the items and minimum quantities of merchandise or raw materials should be purchased each time; C. the supply of capital equipment from the franchisor or the supplier designated by the franchisor, and designated specifications; D. interior decoration that should be conducted by a contractor designated by the franchisor, and designated specifications; [and] E. other restrictions on franchise operation relationships.” Id.
[23] Id.
[24] Id. ¶3.
[25] Id. ¶1.
[26] E.g., “via email, in electronic storage, through social media or communication software.” Id. ¶2.
[27] Id.
[28] Id.
[29] Id. ¶1.
[30] Id. point 4.
[31] E.g., the delay in the delivery of the executed franchise contract is resulting from (1) “that the franchisee is located on an outlying island or remote area,” (2) the “delays in real estate mortgage procedures not attributable to the franchisor,” or (3) the “delays that are attributable to the franchisee.” Id.
[32] Id.
[33] FTA art. 25.
[34] E.g., Gong-Cu-Zi No. 107018, at 3-8; Gong-Cu-Zi No. 106106, at 12-21; Gong-Cu-Zi No. 106104, at 2-6; Gong-Cu-Zi No. 106044, at 5-9; Gong-Cu-Zi No. 106016, at 13-18; Gong-Cu-Zi No. 105029, at 6-10; Gong-Cu-Zi No. 104082, at 3-5.
[35] Guidelines, point 3, ¶1.
[36] Id. point 4.
[37] Guidelines for Application of Article 25 of the FTA, point 7, ¶1; Gong-Cu-Zi No. 107018, at 3; Gong-Cu-Zi No. 106107, at 9; Gong-Cu-Zi No. 106106, at 12; Gong-Cu-Zi No. 106104, at 3; Gong-Cu-Zi No. 106044, at 5; Gong-Cu-Zi No. 106016, at 13; Gong-Cu-Zi No. 105029, at 6-7; Gong-Cu-Zi No. 104082, at 3.
[38] Guidelines for Application of Article 25 of the FTA, point 7, ¶2, item (5); Gong-Cu-Zi No. 107018, at 3; Gong-Cu-Zi No. 106106, at 12-13; Gong-Cu-Zi No. 106016, at 13; Gong-Cu-Zi No. 105029, at 7; Gong-Cu-Zi No. 104082, at 3.
[39] Guidelines for Application of Article 25 of the FTA, point 7, ¶3; Gong-Cu-Zi No. 107018, at 3; Gong-Cu-Zi No. 106107, at 10-13; Gong-Cu-Zi No. 106106, at 19-21; Gong-Cu-Zi No. 106016, at 17-18; Gong-Cu-Zi No. 105029, at 7.
[40] Gong-Cu-Zi No. 107018, at 3; Gong-Cu-Zi No. 106107, at 9; Gong-Cu-Zi No. 106104, at 3; Gong-Cu-Zi No. 106044, at 5-6; Gong-Cu-Zi No. 106016, at 13; Gong-Cu-Zi No. 105029, at 7; Gong-Cu-Zi No. 104082, at 3.
[41] Guidelines for Application of Article 25 of the FTA, point 7, ¶3.
[42] Zuigao Xingzheng Fayuan 107 Pan No. 530 Administrative Judgment (Sept. 13, 2018) (最高行政法院107年判字第530號行政判決) [Taiwan Supreme Administrative Court 2018 Pan No. 530 Administrative Judgment] (hereinafter “107 Pan 530”).
[43] Guidelines for Application of Article 25 of the FTA, point 7, ¶3; 104 Shang 255; 107 Pan 530; 102 Pan 90; Gong-Cu-Zi No. 104082, at 3-4.
[44] Guidelines for Application of Article 25 of the FTA, point 7, ¶3; Gong-Cu-Zi No. 107018, at 3-7; Gong-Cu-Zi No. 106107, at 9; Gong-Cu-Zi No. 106106, at 16-19; Gong-Cu-Zi No. 106104, at 3-6; Gong-Cu-Zi No. 106044, at 6-8; Gong-Cu-Zi No. 106016, at 17-18; Gong-Cu-Zi No. 105029, at 7-10; Gong-Cu-Zi No. 104082, at 4.
[45] Guidelines, point 5.
[46] Zuigao Fayuan 107 Tai Shang No. 1967 Civil Judgment (Feb. 25, 2019) (最高法院107年度台上字第1967號民事判決) [Taiwan Supreme Court 2018 Tai Shang No. 1967 Civil Judgment].
[47] Guidelines for Application of Article 25 of the FTA, point 5, ¶1; Gong-Cu-Zi No. 107018, at 3; Gong-Cu-Zi No. 106107, at 9; Gong-Cu-Zi No. 106106, at 12; Gong-Cu-Zi No. 106104, at 3; Gong-Cu-Zi No. 106044, at 5.
[48] Guidelines for Application of Article 25 of the FTA, point 5, ¶2; Gong-Cu-Zi No. 107018, at 3-8; Gong-Cu-Zi No. 106107, at 9, 13-14; Gong-Cu-Zi No. 106106, at 20-21; Gong-Cu-Zi No. 106104, at 6; Gong-Cu-Zi No. 106044, at 8-9; Gong-Cu-Zi No. 106016, at 13-18; Gong-Cu-Zi No. 105029, at 6-10; Gong-Cu-Zi No. 104082, at 4-5.
[49] Guidelines for Application of Article 25 of the FTA, point 5, ¶2; Gong-Cu-Zi No. 105029, at 6; Gong-Cu-Zi No. 104082, at 3.
[50] Gong-Cu-Zi No. 105029, at 6; Gong-Cu-Zi No. 104082, at 3.
[52] FTA art. 42.
[53] Id.