October 2023
Oli Wong and Elesha Wang
On September 1, 2023, the Taiwan Fair Trade Commission (hereafter, the “TFTC”) issued the Gong-Chu-Zi-112067 Disposition of September 1, 2023, holding that Taiwan Chicken Food Co., Ltd. (hereinafter, “Taiwan Chicken Co.”) violated Article 25 of the Fair Trade Act (hereinafter, the “FTA”) for its failure to provide crucial franchise information when conducting brand franchise recruitment. As a result, the TFTC imposed a fine of NT$150,000 on the company. This case is briefly introduced below.
Grounds of the TFTC’s findings
The TFTC found, after its investigation, that the Company and its franchisees had entered into the Danshui Taiwan Chicken Shop Health-preserving Medicinal Meal Collaboration Franchise Agreement (hereinafter, the “Franchise Agreement”), clearly specifying the rights and obligations related to the licensed trademark. However, during the initial recruitment phase, Taiwan Chicken Co. only verbally disclosed information such as the franchise fee and store equipment and decoration costs, but failed to provide any written or electronic documentation. It was only after confirming the franchisee’s intention to join the franchise that Taiwan Chicken Co. finally provided the Franchise Agreement in a hardcopy format. In addition, no additional franchise-related information other than the Franchise Agreement was given to the franchisees before contracting.
Regarding whether Taiwan Chicken Co. disclosed important franchise information and whether the disclosure was sufficient and complete, the TFTC found, after reviewing the Franchise Agreement, that Taiwan Chicken Co. had failed to adequately and completely disclose four crucial pieces of franchise information, namely: (1) “the amount or estimated amount of goods, raw materials, and capital equipment to be purchased before operations begin,” (2) “the amount or estimated amount of goods or raw material to be purchased during the franchise operation period,” (3) “the brands and specifications of the goods and raw materials that should be purchased from the franchise owner or its designated persons, and (4) “the capital equipment that should be purchased from the franchise owner and the specifications of the required purchase during the term of the Franchise Agreement.” This constituted an obviously unfair conduct.
Investigation revealed that Taiwan Chicken Co. failed to disclose to franchisees the important facts that when beginning to recruit franchisees in 2017, Taiwan Chicken Co. had not obtained the trademark right for “Danshui Taiwan Chicken Shop Health-preserving Medicinal Meal” and that the trademark rights had been disputed. It was not until the approval of the “Taiwan G Soup” new trademark by the competent authority on June 1, 2021 that Taiwan Chicken Co. gradually changed its signages and franchise agreements with franchisees. Such conducts of Taiwan Chicken Co. are tantamount to franchise recruitment by deceptive or misleading means or by concealing information regarding “the rights content of the licensed trademark” to the extent that caused the trading counterparts to be mistaken. Such conducts were engaged to win transactions through asymmetrical information and constituted deceptive and obviously unfair conducts under Article 25 of the FTA.
Lastly, the TFTC considered that Taiwan Chicken Co. continued to post franchise recruitment information on its website, and the violations had not ceased. In addition, the establishment of franchise relationships is exclusive and can result in competitors losing opportunities to contract, thus creating unfair competition effects and undermining trading order. Therefore, the TFTC concluded that Taiwan Chicken Co. had violated Article 25 of the FTA and imposed the corresponding penalty.
Brief Analysis
The franchise industry is one of the main channels for entrepreneurship investment in Taiwan. Whether franchise owners provide important information that influences the decisions of prospective franchisees to join (such as business information on the amounts, estimated amounts, brands, and specifications of goods, raw materials, or capital equipment amounts that should be purchased from the franchise owners or their designated persons before the establishment of the franchised stores or during the franchise operation) is of utmost importance. This is also a key focus of the TFTC’s ongoing investigations.[1]
During the recruitment process, franchise owners are legally obligated to fully and completely provide important information in their possession and provide relevant proof concerning the availability of such information. Therefore, crucial franchise information should not be conveyed solely through oral communication, and such information should still be provided, through hardcopy materials, emails, electronic storage devices, social media, communication software, etc., to parties seeking to join the franchise.[2] Franchise owners should be mindful of this requirement.
[1] The case involving the Longxianju Soup in the TFTC’s Gong-Chu-Zi-112038 Disposition of June 8, 2023 is a similar example.
[2] The case involving ZHAO Brunch in the TFTC’s Gong-Chu-Zi-111088 Disposition of December 15, 2022 and the case involving the RAMBLE CAFÉ in the TFTC’s Gong-Chu-Zi-111083 Disposition of November 10, 2022 are similar examples.
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