By Hung Ou Yang & Chan-Chi Chang
Under Taiwanese Fair Trade Act, does price restraint between upstream and downstream businesses admissible? If a foreign company wishes to impose price restraint in Taiwan, or it has a certain degree of influence on the prices of downstream businesses in Taiwan, what should be taken care of?
.jpg)
1. Legal Framework
Regarding vertical price restraint between upstream and downstream businesses, Article 19 of the Fair Trade Act provides: "Unless there is a justifiable reason for price restraint, an enterprise shall not impose restraints on resale prices of the goods it supplied to its trading counterparty at which the trading counterparty make resale of the goods to a third party or the third party make further resale of the goods. The preceding paragraph shall be applicable mutatis mutandis to services provided by an enterprise." The legislative purpose of this article is to protect the pricing freedom of the trading counterparty at first, because either direct or indirect price restraint imposed on the resale prices that would be made by the trading counterparty or a third party, will deprive dealers of their freedom to decide the sales price in light of situation of competition therefore injure the price competition among distributors and retailers of the same brand; furthermore, because concerted actions in resale price maintenance or price fixing constitute restraints on core competitive matters such as prices, which may have similar anti-competitive effects, therefore are also prohibited for the purpose of the law mentioned above. On the other hand, resale price maintenance may also have positive effects such as improving quality of sales channels and promoting competition between brands under exceptional circumstances, thus enterprises may argue for their justifiable reasons to do so in accordance with the proviso of said article.
It can be seen from above that the law holds resale price maintenance illegal in principle but legitimate under exceptional circumstances. Therefore, if an upstream supplier wishes to keep a certain degree of influence on downstream prices in compliance with said law, it could make arrangements from three aspects that are "not a restraint", "not a resale", or "having a justifiable reason", respectively, to avoid the risk of illegality. This article will first focus on the aspect of “not a restraint” first.
2. Type of Restraints
Some may have the opinion that since resale price maintenance is prohibited by law due to its similar effect as that of concerted actions in price fixing, if the actual sales prices of downstream distributors are not consistent, should they be exempted from said law? In practice, the answer is no. The courts generally hold that, the purpose of Article 19 of the Fair Trade Act that limits resale price maintenance is to protect the pricing freedom of the trading counterparty, any conduct that may restrain the trading counterparty from deciding the sales prices freely, shall be subject to said rule. Therefore, fixed, maximum, or minimum resale price, resale price range, admitted resale price, and implied resale price are all types of resale price maintenance that shall be subject to said rule, it is not required by law that downstream distributors must resell the goods at a consistent price to constitute resale price maintenance (see 106 Taipei High Administrative Court Judgment on Litigation No.336). According to said court judgment, the following types all constitute restraints as regulated by Article 19 of the Fair Trade Act:
(1) Fixed Resale Price: Downstream counterparties or third parties are required by upstream supplier to resell the goods at a certain price designated.
(2) Maximum Resale Price: Downstream counterparties or third parties are required by upstream supplier not to resell the goods above certain price.
(3) Minimum Resale Price: Downstream counterparties or third parties are required by upstream supplier not to resell the goods below certain price.
(4) Resale Price Range: Upstream supplier set a range between a ceiling price and a floor price for the resale prices and downstream counterparties or third parties are required to resell the goods within the range.
(5) Admitted Resale Price: Distributors, before deciding the resale prices, shall seek approval of upstream supplier in advance.
(6) Implied Resale Price: Upstream supplier has not set the resale prices expressly, but distributors will receive sanctions if they decide the resale prices below certain price.
.jpg)
3. Does recommended price or reference price also constitute one kind of restraint?
In daily life, it is commonly seen that the product itself or the catalog has a price or recommended price which are usually printed on by the manufacturers. The distributors would also sell the goods at such prices. Thus, under this situation, has the manufacturer restricted the distributors’ resale prices therefore violated said rule? In addition, it is also commonly seen that upstream supplier provides downstream distributors with reference prices of goods or even stipulates recommended prices in contract. Sometimes Fair Trade Commission ("FTC") made unfavorable decisions upon the parties involved in like situations. Within what boundary recommended price is legal?
3.1 It is legal for upstream business to provide recommended price without binding effect
Regarding this question, FTC has issued certain administrative interpretations, such as:
(1) FTC Interpretation No. 7 stated: "…What the law wishes to regulate is the agreement on the resale price between the business and the trading counterparty. If the publisher does not require or agree with the downstream distributors that they should sell at a fixed price or should never grant discounts to the buyer, simply a printed price on the publication does not violate the law…".
(2) FTC Interpretation No. 022 stated: "As for the products that were affixed with a price or value label sold to the retailers, since the purpose of Article 18 (now Article 19) of the Fair Trade Act is to regulate is the agreement on the resale price between the business and the trading counterparty, unless the distributor requires or agrees with the downstream retailers that they should sell at a fixed price or should never grant discounts to the buyer, simply a price label on the products does not violate the Fair Trade Act".
(3) FTC Interpretation No. 032 stated: "The sales price was clearly agreed between NTD 2,700 and NTD 4,000 in the distribution agreement, if the downstream distributors are not required or does not agree that they should sell within the range or should never grant discounts to the buyer, simply a printed recommended price shall not be deemed as violation…" and "the manufacturer has printed 'Recommended Price: NTD 4000 all over the province' on the outer package of the products, if it does not require or agree with the downstream distributors that they should sell at the recommended price or should never grant discounts to the buyer, simply a printed recommended price shall not be deemed as violation of the law…".
It clearly can be seen from above interpretations that FTC's holding is: When there is a printed price on the products or a recommended price mentioned in the contract, if it is only a pure proposal by the upstream business without any binding effect, it does not constitute the restraint referred to in this article therefore is not illegal.
3.2 If the recommended sales price, by some means, forms a psychological oppression, it may still constitute the restraint referred to in this article
In practice, however, it is also commonly seen that businesses have adopted the terms of recommendation or reference, but they were still deemed as a restraint referred to in this article, due to certain means adopted at the same time. The relevant cases are as follows:
(1) In the contract, there are rewards and punishments for compliance or violation of the recommended price.
Government v. SINPHAR PHARMACEUTICAL CO., LTD. (FTC Decision No. 106024)
SINPHAR PHARMACEUTICAL CO., LTD. ("SINPHAR"), the Respondent of this case, signed an "SINPHAR Counter Project" agreement with pharmacies, in which the clause "Party B (pharmacies) agreed to sell the goods at the sales price mutually stipulated or recommended by Party A (the Respondent); if Party B violates it, in order to protect the cooperation system in this project, the brand image, and the market order, Party A may terminate the agreement unilaterally and revoke % of the rebate" was stipulated.
Although the agreement adopted the term "recommended sales price" and the Respondent argued that its agreement with the pharmacies about the termination of the contract and revocation of the rebate are not penalties or similar punishment; the recommended prices are just suggestions without binding effect that they should sell at a fixed price or no discount; besides, there is no penalty for breach of the agreement, thus it is not compulsive at all, the FTC believed that this clause is likely to form psychological oppression upon downstream businesses and its interference has essentially restricted downstream businesses from determining the retail price of the goods on their own, for this reason, SINPHAR was fined.
Government v. CHISENG HONG LTD. (FTC Decision No. 105111)
CHISENG HONG LTD. ("CHISENG"), the Respondent of this case, stipulated with distributors in Article 6(1) of the sales contract that: “Party B (distributors) shall sell the goods in the market according to the recommended marketing model formulated by Party A (the Respondent) and shall neither conduct price-cutting or driving up the price, without authorization, on the market to destroy the market condition of Party A, nor go beyond the licensed areas to destroy the market order in other areas. Upon any violation, Party A may cancel the rebate of the current quarter or dissolve and terminate this contract... ”. The FTC found this as restraints on the resale prices of downstream distributors, therefore fined CHISENG for it.
Although the contract adopted the term "recommended sales price" and the Respondent argued that it only provided "suggested price list" which is not part of the contract at all so the list has no binding effect; besides, it has never enforced the punishment "cancel the rebate of the current quarter" or "dissolve and terminate this contract" as stipulated, the FTC believed that the Respondent has restricted the distributors from deciding the resale prices of the goods on their own and stipulated penalties for default, via the contract, which has formed psychological oppression upon the distributors and substantially restricted the right of downstream distributors to determine sales prices on their own, consequently, CHISENG was fined.
The two cases as above, after appealed to the administrative court, the court sustained both decisions given by the FTC and held clearly that: "The binding effect upon the distributors arising from the sales contract has already occurred since it was signed, it is not preconditioned by the fact-finding that if the Plaintiff actually enforced the punitive measures upon the distributors who have violated the provisions of this article" (see 105 Taipei High Administrative Court Judgment on Litigation No.1833) and "even if the Defendant did not find out the fact and evidence that the Plaintiff has actually enforced the punitive measures upon the pharmacies who have violated the provisions of this article, the pharmacies still have the psychological pressure, based on the binding effect of the contract, that they shall be abide by the contract and perform accordingly, to avoid unfavorable legal effects due to breach of the contract" (see 106 Taipei High Administrative Court Judgment on Litigation No.795). It can be seen from above that even the contract or price list adopts the term of suggestion or reference, if there are incentives and punishments alongside, regardless of whether they are actually enforced or not, it may be deemed to constitute restraints due to the psychological oppression they are likely to form.
(1).jpg)
(2) Means of restraints other than contract
Government v. WACOM TAIWAN INFORMATION CO., LTD. (FTC Decision No. 107023)
WACOM TAIWAN INFORMATION CO., LTD. ("WACOM"), the Respondent of this case provided its agent with purchase prices and recommended retail prices of new products while its agent in turn provided the distributors with recommended retail prices but downstream businesses have never been required to sell the new products at the recommended retail prices. Afterwards, the Respondent received a retailer's complaint that certain retailers sold the products at too low prices therefore caused other retailers to be requested by end customers to lower their prices to the same level. The Respondent then instructed the agent to notify the retailers who sold the products at low prices to stop selling the products on the market and suspend further supply to the retailers as well. The FTC determined that such behavior involved restraints on the resale prices therefore fined WACOM.
In this decision, the FTC further explained that the "restraints" referred to in Article 19 of the Fair Trade Act are not limited to contracts or agreements, but also include means other than contracts or agreements, which are actually sufficient for downstream businesses to comply with the resale prices prescribed, such as revocation of distributor's rights or franchise rights, increase of purchase prices, shortening of the payment terms, and, most commonly seen, cutting off the supply (e.g., request to stop selling, stop shipping), etc., for downstream businesses who do not comply with resale prices prescribed.
3.3 If upstream and downstream businesses jointly concluded the end sales prices, even without any sanctions among them, it may still be illegal
The above cases regarding recommended resale prices were all deemed illegal due to the sanctions involved. However, in some cases, even without any sanctions, it may still be illegal, which are as follows:
Government v. 3M TAIWAN LTD. (86 FTC Decision No. 207)
3M TAIWAN LTD. (3M), the Respondent of this case, invited three downstream distributors to hold a performance review meeting. During that meeting, three distributors respectively expressed that the situation of low-price competition to lure customers was too serious, so in order to stabilize the market price, reasonable end sales price of the products in question should be set. The Respondent agreed to such a claim. As a result, four parties to that meeting negotiated and at last unanimously agreed to set a retail price of the products in question for the purpose of stabilizing the market price and sustaining the distributors' willingness to sell the products. The Respondent also issued a written retail price list to the three distributors for further issuance to their customers respectively.
Although the Respondent argued that the price list only reflected reference prices and they have never established any sanctions for distributors who have refused to sell the products according to the price list, the FTC still determined that it constituted a restraint on resale prices therefore 3M shall be fined. The FTC's holding is that, since the date the price list took effect, the situation various distributors engaged in price competition to lure customers has greatly diminished, evidently the Respondent's issuance of the price list actually produced an effect of vertical price restraint on its distributors; besides, the Respondent is the sole importer and licensor of the products in question and its distributors have sold the Respondent's products in question for a very long term; considering the disparity in economic power and long-term economic dependence between the Respondent and its distributors, the FTC found that the Respondent's issuance of the price list actually affected the sales price of the products offered by its distributors and suppressed the function of price competition among the distributors.
It is also worth noting that, the formation of the price in this case was negotiated by the three distributors and the upstream supplier to reach a price agreement. This kind of gathering and negotiation to reach a price consensus may also constitute an illegal concerted action. In this case, although the FTC considered that it was not sufficient to distort the supply and demand in the market because of low market share and the Respondent and its distributors were not fined for as a concerted action, at the same time the FTC determined that the three distributors and the upstream supplier have jointly violated the provision "businesses may not engage in an apparently unfair conduct which could affect the market order" as regulated by Article 24 of the Fair Trade Act, based on the high degree of accountability of the pricing conspiracy between upstream and downstream businesses (see 86 FTC Decision No. 207).
Conclusion
Through analysing the above administrative interpretations and actual cases, we hope that we will help businesses understand which action may constitute a "restraint" on the resale prices, as well as the borderline of the legality of "recommended prices". The legal recommended price may function as a reference benchmark adopted by distributors or consumers to evaluate the sales prices of products, therefore it has a certain degree of influence on the sales prices through psychological anchoring effects. If upstream businesses wish to have a higher degree of control over the end sales prices, they may ponder the aspect of "not a resale" and other aspects for the arrangements, which will be further explained in our next article: Business Arrangement: How Does Franchise Operate in Taiwan?
AUTHOR: Hung Ou Yang
Managing Partner
Taipei
+886-2-2707-9976
[email protected]
AUTHOR: Chan-Chi Chang
.png)
Taipei
+886-2-2707-9976
[email protected]
Copyright Brain Trust International Law Firm
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.
撥打電話