Most Favored Price Clause Penalized by the Taiwan Fair Trade Commission

May 2023

Aaron Chen and Sally Yang

For the product distribution agreement between Pao Lien Optical Co., Ltd. (“Pao Lien”) and contact lens suppliers, which contains the most favored product supply price and promotional activity clauses, the Fair Trade Commission (the “FTC”) rendered the Gong-Chu-112006 Decision  dated February 9th, 2023, holding that this constitutes an act of restricting the business activities of contact lens suppliers, harms competition, and thus, violates Article 20, Subparagraph 5 of the Fair Trade Act. Pao Lien was ordered to desist from the illegal act immediately, and imposed a fine of NT$500,000.

Facts of this case

As a procurement supplier of contact lenses, Pao Lien purchases from its upstream contact lens suppliers before reselling it to Formosa Optical Group (hereinafter, “Formosa”).  The product distribution agreement executed between Pao Lien and a contact lens supplier contains two types of clauses:

1. Agreed-upon most favored product supply prices: The contact lens supplier guarantees that the prices of goods supplied to Pao Lien are certainly lower by a certain percentage than those charged to its competitors.

2. A restrictive clause that requires prior notification of promotional activities to the competitors: This clause stipulates that if a contact lens supplier provides any promotional activity to any competitor of Pao Lien, the supplier shall give advance notice to Pao Lien before starting the activity and obtain its consent before proceeding. Otherwise, the supplier shall provide Pao Lien, on a retroactive basis, with an additional discount by a certain percentage on the net value of the promotion.

Grounds of the FTC’s findings

1. The product market in this case was defined as the “contact lens market.” Formosa is the leading eyewear store chain in Taiwan, and its distribution channel involves Pao Lien’s procurement from suppliers before products are supplied to Formosa’s stores.  Considering Pao Lien’s procurement share of the contact lens market, the FTC believed that Pao Lien, the sanctioned party in this case, had certain market power.

2. Pao Lien’s “most favored product supply price clause” constrains the decisions of contact lens suppliers and other distributors on prices and terms of transaction, which restricts the business activities of Pao Lien’s trading counterparts. This contributes to increased purchasing costs of other contact lens distributors.

3. Under the clause that requires prior notification of promotional activities to the competitors, if a contact lens supplier intends to reduce prices to other distributors, since this requires Pao Lien’s consent, the supplier is definitely required to lower prices to Pao Lien, which is tantamount, in effect, to a constraint on price reduction acts. If a supplier fails to comply, it is required to provide an additional discount on the promotion in comparison with other distributors, which will reduce the incentives for suppliers to establish other smaller or new entrants of the distribution market for sales promotion to them.  Since this effectively results in market foreclosure, it raises an anticompetitive concern.

4. In addition, the disposition pointed out that Pao Lien also sent dedicated personnel to audit prices and notified its suppliers, based on the competitive status of the retail prices of contact lens suppliers, to request that the retail prices of other distributors shall not be lower than those of Formosa Optical Group’s stores.

Points to note in this case

1. In this case, one of the requirements for constituting a violation under Article 20, Subparagraph 5 of the Fair Trade Act is that the sanctioned party has certain market power, and it is especially impossible to cause a market foreclosure effect without market power. However, the FTC’s disposition redacted the figure of Pao Lien’s “procurement percentage in the contact lens market,” making it impossible for outsiders to understand the size of the market share that would be deemed by the FTC to confer certain market power and create a market foreclosure effect, as well as how the FTC would determine the market share of a midstream purchaser in a specific industry.  Unfortunately, the function of guiding other enterprises will also be lost.

2. In addition, since the only downstream customer of Pao Lien is Formosa and the Decision mentioned that Formosa is the market leader, this calls into question whether the market competition affected by this case was limited to Pao Lien’s level of market competition or the market competition of further downstream level.  For example, which market level was “foreclosed”? It seems that this aspect is worthy of further observation.

3. In any event, this case involves a “most-favored-customer clause” in a vertical trading relationship, the applicability of which was addressed by the Fair Trade Commission in the Foodpanda case[1] in late 2021.  It shows that the most-favored-customer clause may constitute a violation under Article 20, Subparagraph 5 of the Fair Trade Act under certain circumstances, and operators should pay attention.

[1] The Gong-Chu-110066 Disposition from the Fair Trade Commission

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