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Franchising has become a common business model in Taiwan. Despite the prevalence of this approach, Taiwan lacks specific legislation to regulate franchising. The relationship between franchisors and franchisees is defined through a contract. Any violations related to franchise transactions or fair competition will be determined under the provisions of the Taiwan Fair Trade Act.

This article provides an overview of the legal framework governing franchising in Taiwan, focusing on key aspects regulated under the Fair Trade Act. The act addresses franchise agreements in three main categories: disclosure of important franchise information; improper restrictions on competition; and false advertising.

Disclosure of franchise information

Taiwan¡¯s Fair Trade Commission has established the Fair Trade Commission Disposal Directions on the Business Practices of Franchisors (the guidelines) to ensure transparency and fairness in franchise relationships. The guidelines, last amended on 1 August 2018, aim to address the imbalance of information between franchisors and franchisees, and prevent misuse of unequal bargaining positions.

According to the guidelines, franchisors must provide franchisees with specific and essential information at least 10 days before a franchise business relationship is established. Such information includes:

1. 1. Startup costs, such as the costs or estimated fees paid to the franchisor for merchandise purchases and raw materials;
   2. Operating expenses, such as the costs and estimated fees to be paid to the franchisor for management guidance and marketing and promotion expenses;
   3. Contents, periods of validity, extent of authorisation, and corresponding restrictions of trademark rights, patents and copyrights involved;
   4. Contents and methods of operational assistance, training and guidance;
   5. Plans for setting up other franchisees of the same franchise system in a franchisee¡¯s existing area of operation;
   6. Restrictions that apply to the franchise relationship during the contract period, such as the supply of merchandise or raw materials, or capital equipment from the franchisor or the supplier designated by the franchisor, and designated brands and specifications; and
   7. Conditions for and ways of handling the alteration, termination and cancellation of a franchise contract.

Failure to disclose such information is a common cause of franchisors incurring penalties, with fines for violation potentially reaching NTD1 million (USD30,300) or more.

Additionally, franchisors shall allow at least five days or a reasonable period for counterparties to conduct contract review before signing, and franchisors shall provide the counterparties with the contract within 30 days after the signing date, unless delayed for reasons not attributable to the franchisor.

Two recent cases involved franchisees of major convenience store chains being sanctioned by the Fair Trade Commission in Taiwan. These cases highlight the importance of transparency and fairness in franchise agreements, as governed by the Fair Trade Act.

In a case involving a convenience store chain, the franchisor was fined NTD3 million by the Fair Trade Commission for a violation of article 25 of the Fair Trade Act (which prohibits deceptive or obviously unfair conduct) by failing to disclose critical information to the franchisee before establishing the franchise relationship.

Specifically, the franchisor did not provide written details regarding minimum recommended order quantities and the sales-to-purchase ratio restriction. The latter restriction required franchisees to maintain a certain ratio of sales to purchases, necessitating the ordering of safety stock to avoid stockouts.

Failure to comply with such restriction incurs severe consequences to the franchisee, including termination of the franchise and demands for punitive liquidated damages.

The Taiwan Administrative Court upheld the Fair Trade Commission¡¯s original sanction, emphasising the franchisor¡¯s duty to disclose essential franchise information.

In a case involving another convenience store chain, the Fair Trade Commission also imposed penalties under similar circumstances. However, the Taiwan Administrative Court dismissed the original sanction. The court determined that such business supervision measures, such as issuing warnings and conducting performance evaluations, only slightly interfered with the franchisees¡¯ autonomy in ordering goods. These measures did not reach a level of unfairness that warranted sanctions.

In the above-mentioned cases, the court assessed whether the franchisor violated its obligation to disclose important information by evaluating the strength of the contract¡¯s binding terms, rather than merely checking to determine whether the information was disclosed, to determine if an unfair situation existed.

Improper restrictions on competition

The Fair Trade Act prohibits businesses from treating other enterprises unfairly without justifiable reasons, especially if such actions could interfere with competition. Franchisors cannot apply unequal treatment of different franchisees or businesses at the same competitive level regarding pricing or transaction terms without justification.

The Fair Trade Commission clarifies that this rule does not mean a business must offer the same price to all its partners. Instead, it means that if a business has the power to influence market transactions, any unfair treatment of different parties must be justified; otherwise, it is considered to constitute a restraint against competition.

The Fair Trade Act prohibits businesses from conducting transactions with counterparties if such transactions impose improper restrictions on the counterparties¡¯ business activities. For instance, real estate brokerage firms operating under a franchise model could face scrutiny if they impose specific service fees on franchisees, as this may be considered an improper restriction on business activities, violating the Fair Trade Act, and could lead to fines.

False advertising

Franchisors shall be mindful of article 21 of the Fair Trade Act when advertising ¡°guaranteed¡± profit rates for franchises. This includes when the franchisor discloses sales data or compares directly operated stores with new franchisees.

Advertisements containing exaggerations, falsehoods or misleading information, or lacking objective data support may lead to administrative penalties. Importantly, having objective data does not automatically make an advertisement legal.

For instance, a well-known dessert franchise was penalised for false advertising claiming a ¡°net profit rate of about 20-35%¡± based on the performance of their four best-performing directly operated stores (selective data), while excluding the net profit data from their other 12 directly operated stores.

The Fair Trade Commission noted that even though the advertisement¡¯s calculations were based on actual data, using only the best-performing store, or a single month¡¯s data from all directly operated stores, does not accurately reflect the average business performance of the entire brand system, including both directly operated stores and franchisees. Consequently, an administrative penalty was imposed.

Conclusion

In Taiwan, the Fair Trade Commission may impose fines ranging from NTD50,000 to NTD25 million for failure to disclose essential franchise information or for engaging in false advertising, in accordance with the Fair Trade Act.

In cases of improper restrictions on competition, fines may range from NTD100,000 to NTD50 million, with potential imprisonment for up to two years, or a concurrent fine of up to NTD50 million. Additionally, civil courts often evaluate franchisor conduct by examining violations of the Fair Trade Act when addressing private law disputes concerning franchise agreements.

Understanding the legal framework and obligations under the Fair Trade Act is crucial for both franchisors and franchisees to ensure compliance and maintain fair business practices when engaging in franchising activities in Taiwan.

LEE AND LI ATTORNEYS-AT-LAW
8F, No 555, Sec 4, Zhongxiao E Rd,Taipei 11072, Taiwan, ROC
Tel: +886 2 2763 8000
Email: attorneys@leeandli.com