Constraining resale prices of downstream distributors without justification is an illegal unfair competitive act (Taiwan)

Sean Liu

The Taipei High Administrative Court rendered the 106-Su-336 Decision of August 2, 2017 (hereinafter, the “Decision”), holding that constraining resale prices of downstream distributors without justification is an illegal act of unfair competition.

According to the facts underlying this Decision, the general distribution agreement executed between the Plaintiff and its general distributors contained a covenant that restricted resale prices as well as penal provisions without justification. Therefore, the Defendant held that the Plaintiff had restricted the resale prices of its downstream distributors after January 1, 2015 in violation of Article 19, Paragraph 1 of the Fair Trade Law; and the Plaintiff was fined NT$1.2 million and was ordered to desist from the illegal act immediately under the original disposition. Dissatisfied, the Plaintiff brought this administrative action.

Article 19, Paragraph 1 of the Fair Trade Law provides: “An enterprise shall not impose restrictions on resale prices of the goods supplied to its trading counterpart for resale to a third party or to such third party for making further resale. However, those with justifiable reasons are not subject to this limitation.” According to the Decision, this article seeks to prevent upstream enterprises from restricting resale prices of downstream enterprises. If an enterprise sets a resale price on goods provided to its trading counterparts or if a trading counterpart imposes, after the goods are sold to third parties, any indirect restriction on the resale prices of goods sold by the third parties by imposing accommodating measures to compel compliance by the trading counterparts to an extent that distributors are unable to set their selling prices based on their respective competitive conditions and cost structures, the outcome is that price competition among different distribution channels or retailers within the same brands is weakened. Therefore, this is prohibited in principle. Only when restricting resale prices perhaps has more procompetitive effects can its justification be asserted pursuant to the proviso of such article on an exceptional basis.

It was further pointed out in this Decision that the Plaintiff’s general distributors in various districts were obligated to sell the Plaintiff’s products based on the pricing principles agreed with the Plaintiff pursuant to the above agreement. Therefore, even if the Plaintiff has not yet penalized the general distributors in such districts that violated such requirement, this should not be relied on to infer that the Plaintiff was not able to contractually bind the general distributors in various districts and exert psychological pressure upon them to compel compliance with such requirement and avoid subsequent negative legal effects for breach of contract.

It was further pointed out in the Decision that price is the most important deciding factor in market competition and is critical to trading decisions. The Plaintiff’s restriction on resale prices of products sold by general distributors in different districts would keep the products sold by the general distributors at the same price level. This impaired the rights and interests of the consumers. In addition, since the business scale, region, business model and management and distribution costs of each general distributor were different, the resale price restriction constrained the pricing decisions of the general distributors, weakened the price competition among different distribution channels within the brands and could lead to rigid pricing. Moreover, since the Plaintiff did not submit any concrete evidence to support any justification, the Defendant’s conclusion that the Plaintiff’s above resale price restriction did not have any justification under the proviso of Article 19 of the Fair Trade Law and its disposition were not unlawful.

In conclusion, based on the foregoing reasons, this Decision rejected the Plaintiff’s complaint and was rendered against the Plaintiff.