2018.12.7
Oli Wong
The primary regulation on restrictions on non-price vertical restraints of enterprises under the Fair Trade Law (hereinafter, the “FTL”) is Article 20 of the FTL. The acts of enterprises are subject to the provisions of the subparagraphs of Article 20 of the FTL only when they are likely to restrain competition. Under Articles 26 through 28 of the Enforcement Rules (hereinafter, the “Enforcement Rules) of the Fair Trade Law, when a determination is made concerning whether the act of an enterprise is likely to restrain competition, it is necessary to make a determination by generally considering factors such as intent, objectives, market position, the structure of the affiliated market, and characteristics of the goods or services or the implementation status of goods or services (or performance status) of the party (i.e., such enterprise) as well as its impact on market competition (see Articles 26, Paragraph 2; Article 27, Paragraph 2; and Article 28, Paragraph 2 of the Enforcement Rules).
Is the “likelihood of restraining competition” under Article 20 of the FTL the market share threshold for the relevant markets?
As previously stated, the Enforcement Rules specifically stipulate that the “likelihood of restraining restriction” requires various relevant factors to be generally determined in individual cases. However, by how much the market share exceeds the threshold for a relevant market is more likely to cause the likelihood of a “market position” to constitute competition restraint? Conversely, is it true that a market position is less likely to constitute “likelihood of restraining competition” if the market share is lower than such market share threshold?
According to relevant cases handled by the Fair Trade Commission (hereinafter, the “FTC”), with respect to the calculation of the market share threshold for the relevant markets in competition cases involving non-price vertical restraints, it was held that if the market shares of an enterprise engaging in an act in question in the relevant markets both exceed ten percent, such enterprise enjoys a significant market power and is more likely to restrain competition in the relevant markets and to violate Article 20 of the FTL(e.g., the Gong-Chu-Zi 103020 and Gong-Chu-Zi 101063 Dispositions).
The FTC has adjust the finding of an enterprise’s market power threshold for the relevant markets in recent years by raising the threshold of 10% market share in the relevant markets to 15%. If the market shares in the relevant markets are less than 15%, the determination is facilitated by whether the trading counterparts have sufficient expectable likelihood of departure from (i.e., reliance on) such enterprise. Therefore, if such enterprise’s market share in the relevant markets exceeds 15% or if the trading counterparts have no sufficient and expectable likelihood of departure from such enterprise (which means such trading counterparts are highly reliant on the goods or services of such enterprise) even though such market share does not reach 15%, such enterprise should be deemed to have market power or relative market advantages, which are more likely to constitute a likelihood of restraining competition and violation of Article 20 of the FTL, and its competition restraining acts should be regulated under Article 20 of the FTL (see the meeting minutes of the 1266th and 1267th Commissioners’ Meetings of the FTC).
Is it true that having significant market power may constitute the “likelihood of restraining competition” under Article 20 of the FTL?
When an enterprise engaging in an act in question is subject to investigation, Articles 26 through 28 of the Enforcement Rules provide that, when the likelihood of the act of an enterprise to restraining competition is examined, it is necessary to consider factors such as the intent, objectives, market position, structure of the affiliated market, characteristics of goods or services or implementation status (or performance status) of the party and its impact on market competition to determine if such enterprise engaging in the act in question is likely to restrain competition in the relevant markets and to conclude if such enterprise violates Article 20 of the FTL on such basis. Therefore, the FTC cannot conclude that the act of such enterprise violates Article 20 simply because it has significant market power.
However, how does the FTC determine if the act of such enterprise is likely to restrain competition?
A review of the actual dispositions rendered by the FTC after Article 20 of the FTL was amended on February 4, 2015 shows that the criterion for the “likelihood of restraining competition” under Article 20 of the FTL means that “the criterion is satisfied when an act has a tendency to restrain competition or the impairment to competition can be reasonably expected if such an act is allowed to continue; and the criterion is not that the competition restraining effect which has actually taken place” (see the Gong-Chu-Zi 106085 Disposition). To wit, it only takes an objectively dangerous probability for restraining competition to meet such criterion, and whether the act of such enterprise will impair any relevant market is a moot point (e.g., the Gong-Chu-Zi 105119 Disposition and the Gong-Chu-Zi 106066 Disposition). Administrative courts also practically hold the same view (e.g., the100-Hang-Gong-Su-Zi 2 Administrative Decision of the Intellectual Property Court, the 92-Su-Zi 02011 Decision of the Taipei High Administrative Court, and the 106-Su-Zi 1439 Decision of the Taipei High Administrative Court).
Two dispositions rendered after the FTL was amended are cited as examples to observe how the FTC’s determined the dangerous probability of the “likelihood of restraining competition”:
(1) Case involving differential treatments of licensing terms by a channel distributor (the Gong-Chu-Zi 105119 Disposition)
In this case, the FTC penalized Best News Entertainment Corp (hereinafter, “Best News”) for unjustified differential treatments in violation of Article 20, Paragraph 2 of the FTL when it provided different trading terms to new and cross-district cable television system operators and other competitors with respect to the licensing of the channels distributed by Best News.
When determining if Best News’s act of providing differential trading terms is likely to restrain competition, the FTC separately considered (1) the market shares of the penalized party, (2) the structure of its affiliated markets, and (3) the impact of the implementation status of the act in question (or the status of performance) on market competition before arriving at the following conclusion: “the penalized party distributed the largest number of channels and enjoyed the highest market shares in this country; the act of differential treatments has inappropriately increased the operating costs of the above-mentioned system operators and reduced the room for providing relatively favorable trading terms such as prices, quality and services to the trading counterparts, and if such practice is not timely suppressed, the enterprise will continue or repeat such act, which may result in the suppression or weakening of market competition and market foreclosure when other system operators intending to access the market and compete will balk. As a result, the competition between and among downstream cable television system operators in the broadcast districts will be affected. Therefore, such act of providing unjustified differential treatments to other enterprises by the penalized party is apparently likely to restrain competition.”
(2) Case involving differential treatments of purchase prices by a network switch manufacturer (the Gong-Chu-Zi 106085 Disposition)
In this case, the Taiwan branch of Extreme Networks Limited (hereinafter, “Extreme Networks”) provided a project price support to only one specific company among the companies participating in the same procurement project in order to secure the bid-winning opportunity of such company. The FTC penalized Extreme Networks for unjustified differential treatments in violation of Article 20, Paragraph 2 of the FTL.
When determining if Extreme Networks’ act of providing differential trading terms is likely to restrain competition, the FTC separately considered (1) the market shares of the penalized party, (2) the objectives of implementing the differential treatments at issue, (3) the characteristics of goods or services, and (4) the impact of the implementation status of the act in question (or the status of performance) on market competition before arriving at the following conclusion: “…The penalized party protected a distributor which had completed project submission from competitive pressure from other distributors in their participation in the procurement tender process and eliminated or weakened competition within the brand by providing differential project prices to distributors participating in the same procurement project. The act of providing the differential treatments by the penalized party not only hurt the competitors of the same level as the distributor who received a project discount but also hampered the operation of a normal bidding process, thus undermining market competition and the interest of the end customers. …In the short run, such distribution method distorts the original normal process of market competition where ‘more favorable prices or trading terms prices or trading terms are used to win trading opportunities,’ replaces the demander’s room of decision-making in the selection of a supplier, and deprives end customers of the benefits they would have otherwise obtained from price competition between and among suppliers participating in the tender. In the long run, market access for new suppliers or systems integration suppliers will be hampered with additional entry barriers (since they cannot be supported by project prices for a lack of a ‘long-term collaboration relationship’ with end customers. In addition, distributors are required to make submissions before a tender is conducted and whether a project price will be granted is decided by the time sequence of the submissions and the existence of long-term collaboration relationship. This may also contribute to the danger of horizontal collusion among downstream distributors through rotational bidding or market partitioning. Since the act of the penalized party to provide differential treatments has a tendency for restraining competition, and if the act is allowed to continue unchecked, it can be reasonably expected to impair competition, the differential treatments are likely to restrain competition.”
In the above two cases, the FTC ultimately reached the conclusion that the acts in question of the enterprises were indeed likely to restrain competition respectively on the ground that “if such illegal act is not suppressed in time…, market competitive order will be impaired” (as indicated in the case involving differential treatments concerning licensing terms for channel distributors) and “the act has a tendency for restraining competition, and if such act (contract) is allowed to continue unchecked…, it can be reasonably expected to undermine competition” (as indicated in the case involving differential treatments for the purchase prices for network switch manufacturers). However, the “danger and likelihood of restraining competition” in the above two cases did not require the acts of the enterprises to have actually resulted in any competition-restraining effect. In addition, it seems that in the cases the FTC did not explain how it had obtained relevant evidence for the “dangerous probability” of restraining competition in the future after considering the market shares, objectives of differential treatments at issue, and characteristics of goods or services of the penalized parties, as well as the impact of the acts in question (or performance status) on market competition.
How can the “dangerous probability of restraining competition” be determined?
Under Articles 26 through 28 of the Enforcement Rules, the FTC shall, in addition to examining if an enterprise has engaged in any specific illegal act, scrutinize the dangerous state of the “likelihood of restraining competition” by generally considering the party’s intent, objectives, and market position, as well as the structure of its affiliated market, the characteristics of goods or services and the impact of the performance status on market competition and reach an conclusion on whether a dangerous state has occurred before concluding if an enterprise’s act has violated Article 20 of the FTL. Otherwise, the provision about the “likelihood of restraining competition” under Article 20 of the FTL would be futile.
In fact, a careful observation of relevant practical dispositions rendered by the FTC shows that when determining the “likelihood of restraining competition,” the FTC has probably examined market position, the structure of the affiliated market and the characteristics of goods or services first during the “definition of the relevant markets.” In addition, not only the party’s intent and objectives have also been reviewed along with the consideration of whether there is any justification for the engagement of the act in question, but also “the objective dangerous probability of restraining competition after the act is engaged” is used as a basis for the determination about such enterprise. In fact, the “dangerous probability” was interpreted and applied without any evidence that “confirms the occurrence of danger” and with a concept close to the “offender of abstract danger” under the Criminal Code.
In practice, the “likelihood of restraining competition” under Article 20 of the FTL is very difficult for an enterprise in violation to challenge. In most cases, regardless of whether actual harm has occurred, the FTC neither specifically indicates how its conviction on the probability of restraining competition is formed nor explains about whether a dangerous state has emerged and about the required severity of the competition-restraining effect for it to be found “likely to restrain competition.” In actuality, the fundamental issue lies in whether the “likelihood of restraining competition” is similar in concept to the “offender of abstract danger” under the Criminal Code.
As the competent authority for the Fair Trade Law, the FTC is obligated to conduct thorough investigation for its dispositions and to render dispositions and decisions based on evidence as investigated. The FTC should never determine if an enterprise’s act or measure has a dangerous probability of restraining competition merely in manners similar to “conjecture” or “hypothesis.” Otherwise, all market competition measures taken by an absolute majority of enterprises with significant market power can easily satisfy the constituting criterion for the “likelihood of restraining competition,” and the competitive measures taken by such enterprises can further be found to violate Article 20 of the FTL. Finally, Article 20 of the FTL will be reduced into a weapon welded by existing competitors and new operators against specific competitors, and the FTC will conversely become a contributor to an unfair competitive environment when it “safeguards competitors, protects new operators but suppresses specific competitive enterprises.”
Therefore, the FTC should strive to base the finding of the “likelihood of restraining competition” under Article 20 of the FTL on signs indicating such enterprise’s act has restrained competition or the emergence of a dangerous state of restraining competition. The FTC should also come up with relevant evidence confirming that the dangerous state of restraining competition has occurred or a competition-restraining act has taken place to facilitate the answers provided by penalized enterprises and review and trial by the court in order to achieve the outcome of rendering a disposition without any wrongful charge and erroneous acquittal in the best interest of fair market competition.