By Hung Ou Yang and Chan-Chi Chang
Franchise is a commonly used transaction mode for doing business. In Taiwan, each franchisee in the same franchise would sell the same series of products at the same prices. This generally cannot be achieved by solely relying on the recommended prices from the franchisor. Does this mean that in Taiwan enterprises can legally restrain the resale prices by franchise?
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When Will A Franchise Agreement Be Illegal?
A franchise generally refers to a franchisor's licensing of trademarks or business know-hows and assistance or guidance in business operation to a franchisee based on a franchise relationship, in exchange for franchisee's payments. People might think that franchise can be distinguished from other transactions modes for the reason that stable quality and service provided by each franchisee is critical to the value and impression of the franchisor's brand. In this vein, we can easily see that all franchisees of the same franchisor sell products at the same prices in Taiwan. However, it does not mean the franchisor may legally restrain resale prices for the products or services. In practice, some cases involving restraints on resale prices under franchise contracts have been fined by the Fair Trade Commission ("FTC").
The Respondent in Skin Care Cosmetics Franchise (FTC Decision No. 096010) was a franchiser in skin care cosmetics. The franchise agreement at issue provides that "[the franchisee] agrees to maintain market stability and sales order in relation to the products concluded herein in compliance with this agreement; without prior written consent by [the franchisor], [the franchisee] may not adjust the retail prices for end consumer at its own discretion; For each violation, [the franchisee] shall be fined for NT$ 50,000 for the first time, and for the second time, [the franchisor] may forfeit the security deposit and terminate the agreement at any time." FTC found that the ownership of the goods sold to the franchisees by the franchisor has been transferred to the franchisees. Thus, the franchisees have to earn the profits through resale and bear the risk of inventories on their own under the franchise agreement. Since the franchisor apparently limits or interferes the franchisees' resale prices to third parties, the franchise agreement at issue still constituted restraints on the resale prices, which is illegal.
That being said, whenever a franchisor transfers the ownership of goods to a franchisee, the franchisee's sale of goods to a third party is a "resale". In such a situation, the franchise agreement with a clause restraining the resale price would be illegal.
How to Establish A Legal Franchise with Price Restraints?
From a Taiwanese consumer's view, when buying goods at a franchisee store, the consumer usually expects to receive same quality at whichever franchisee store and if franchisees of the same system adopt different prices, the consumer may have negative impressions. Besides, a franchisor may have operational needs such as to maintain quality consistency among franchisees through franchise agreements. Is there any way that a franchisor can maintain the same price for all franchisee stores located in Taiwan?
1. Expressly providing that the ownership of goods belongs to the franchisor
This approach is commonly seen in convenience store franchise. The most common convenience store franchise models in Taiwan can be roughly divided into "license chain" and "franchise chain". The difference between the two mainly lies in who is responsible for store rent, decoration, etc., or the proportion of said burden. However, in either scenario, the franchisor entrusts the operation and management of a store to a franchisee. Moreover, the franchise agreement would always provide that the ownership of the goods displayed in the franchisee store still belongs to the franchisor. In other words, as to the goods sold in the franchisee store, actually they would be sold to a customer directly by the franchisor as a matter of law. Therefore, the franchisee store is not reselling the goods which will be sold directly to customers by the franchisor. For this reason, even if the franchisor restrains the sale prices at the franchisee store, this will not constitute a restraint on the "resale prices" and will not violate Article 19 of the Fair Trade Act in Taiwan.
2. Changing the goods through processing
This approach is commonly seen in catering franchise. To ensure the quality of meals, franchisors in catering industry usually require in the agreements that franchisee stores must purchase from franchisors raw materials or even fixed items and the minimum quantity each time. In this situation, although the ownership of the raw materials will be transferred from franchisors to franchisees, franchisees do not resell the raw materials to consumers directly. What franchisees are selling are new products, converting from the raw materials into new products by franchisees, through a certain amount of cooking, preparation, and processing. Where the goods are no longer identical, franchisee stores' sales would not constitute "resale". Therefore, even if the franchisors impose restraints on the sales prices of franchisee stores, it will not constitute an illegal restraint on the "resale price".
We hope that our analysis can help enterprises understand arrporiate business arrangement can effectively manage quality and price control of their products and services without triggering any legal problems. Please also note that FTC will substantially review the contracts at issue, not just formailly review them, so that enterprises still have to arrange the transactions with lawyers' assistance to avoid legal risks.
AUTHOR: Hung Ou Yang
Managing Partner
Taipei
+886-2-2707-9976
[email protected]
AUTHOR: Chan-Chi Chang
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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.
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