Franchise, a business model, is normally conducted in the form of an agreement between a company (a franchisor) and another party (a franchisee) in which the company provides the other party with the right to use the company's name and to sell or rent its products. The sale of franchise rights is a method of expanding a business rapidly with a minimum of capital.
There is no specific law or regulation governing franchise activities in Taiwan, and therefore the rights and obligations of the franchisors and the franchisees are regulated by the franchise agreements themselves. As far as the validity and enforcement of a franchise agreement are concerned, the Taiwan Fair Trade Act (the “Act”) is the most relevant code that deals with, among other matters, such issues as restriction on the resale price, discriminating treatments, or other unjustified restrictions on the business activities of the franchisees. In principle, inspection or restriction by the franchisor of the business operations of the franchisees under a contractual arrangement is allowed by the Fair Trade Act.
Since certain issues dealt with in the franchise agreement may substantially affect the rights and interests as well as goodwill and reputation of the franchisor, it is worth the franchisor to pay particular attention to such issues and supervise the franchisee’s performance of its obligations under the franchise agreement:
A. Fair Trade Order
a. Monopoly
If, by entering into the franchising agreement, the franchisor will obtain a monopoly power in the market of Taiwan, then an application shall be filed with the Fair Trade Commission (“FTC”) for its approval in advance. FTC may also intervene if it holds that there is an improper restriction of the business activity by one party on the other party. An enterprise may be deemed a monopolistic enterprise if any of the following circumstances exists:
1.the market share of the enterprise in a relevant market reaches one-half of the market;
2.the combined market share of two enterprises in a relevant market reaches two-thirds of the market; and
3.the combined market share of three enterprises in a relevant market reaches three-fourths of the market.
Under any of the circumstances set forth above, where the market share of any individual enterprise does not reach one-tenth of the relevant market or where its total sales in the preceding fiscal year are less than one billion New Taiwan Dollars, such enterprise shall not be deemed as a monopolistic enterprise.
However, an enterprise exempted from being deemed as a monopolistic enterprise by any of the preceding two paragraphs may still be deemed a monopolistic enterprise by the Central Competent Authority if the establishment of such enterprise or any of the goods or services supplied by such enterprise to a relevant market are subject to legal or technological restraints, or there exists any other circumstance under which the supply and demand of the market are affected and the ability of others to compete is impeded.
b. Improper Combination
The term “combination” means a situation where an enterprise operates jointly with another enterprise on a regular basis or is entrusted by another enterprise to operate the latter's business; or where an enterprise directly or indirectly controls the business operation or the appointment or discharge of personnel of another enterprise. If such combination results in the fact such as that the enterprise has one third of the market share in Taiwan, then an application shall be filed with the FTC for its approval in advance.
c. Improper Restriction on Resale Price or Business Activity
The essence of the Act is to preserve fair trade order in Taiwan, therefore, an enterprise shall not abuse its market power, for instance, to improperly set or change the price for goods, or limit its trading counterparts' business activity improperly by means of the requirements of business engagement as that is likely to lessen competition or to impede fair competition.
d. Duty of Disclosure under the FTC Guidelines
A franchisor is not under a legal duty of filing any disclosure document to the governmental agent for prior inspection. However, the FTC in 1999 promulgated a “Guidelines on the Disclosure of Information by Franchisors” (“Guidelines”) for the purpose of ensuring fair competition in franchise business and avoiding concealment by franchisors of important information during recruitment of franchisees.
1. According to Article 4 of the Guidelines, a franchisor shall provide written information on the following items ten (10) days prior to entry into contracts with trading counterparts:
(1) The name of the franchisor's enterprise, its operating capital, place of business, business items, date of establishment and date on which it began franchising operations.
(2) The names of the responsible person and the chief management personnel of the franchisor, and information on their relevant business experience.
(3) The franchise fees and other charges collected by the franchisor before the entry into the franchising contracts and duration of the franchising contracts, including their types of fees, amounts, methods of collection, and conditions for refunds.
(4) The intellectual property rights including trademarks, patents, copyrights, etc. that the franchisor intends to authorize the franchisee, the time when such intellectual property rights are filed for examination or granted, the content and duration of the rights, and the scope and restriction of usage by the franchisee.
(5) The content and methods of management assistance, training guidance and so forth to be provided by the franchisor to the franchisee.
(6) The franchisor's management program concerning the areas of operation as between the franchisee, other franchisees, or its directly operated stores.
(7) The names and business addresses of all other franchisees in the operation area of the franchisor, as well as the statistic data of the franchisees that joined and terminated franchising contracts with the franchisor nationwide and in the specific operation area of the franchisee during the preceding accounting year.
(8) The restrictions of the business relationship between the franchisor and franchisee in their operations of business during the effective period of the franchise contract.
(9) Conditions and methods for the modification, termination and/or rescission of the franchise contract.
2. It is further regulated in the Article 5 of the Guidelines that a franchisor, before entering into a written agreement involving the franchise relationship, shall allow its trading counterparts a period of no less than five days to review the contract.
3. The Legal Consequence of Noncompliance:
A franchisor who has violated the regulation of Article 4 and Article 5 of the Guidelines during the recruitment of franchising operations, resulting in a concealment or delay in disclosure of important trade information, is likely to be considered as violating Article 24 of the Act if such violation is clearly unfair to the trading counterparts and is sufficient to affect the trading order of the franchising operations. Article 24 of the Act prohibits an enterprise from committing any deceptive or obviously unfair conduct that is apt to affect trading order.
In the case of violation of the provisions of the Act, the FTC may order the violating enterprise to cease or to rectify its conduct, or to take necessary corrective measures within a prescribed period, and may additionally impose upon such enterprise an administrative penalty of not less than NT$50,000 yet not more than NT$25,000,000. If the violating enterprise fails to comply with the Commission’s order, the FTC may successively impose an administrative penalty of not less than NT$100,000 yet not more than NT$50,000,000 for each occasion upon the violating enterprise until it has ceased or rectified its conducts or has taken necessary corrective measures. (Article 41 of the Act)
On the other hand, one whose rights or legal interests have been infringed because of violation of the Act is entitled to bring a civil lawsuit to request removal of infringement, to prevent future infringement, or to request compensation of damages. If the infringement is intentional, the court may award damages more than the actual damages up to three times of the amount of damages proven. (Article 30 ~ 32 of the Act)
B. Employment of Staff
a. In order to hire local people in Taiwan for operating the franchise business, the franchisor shall set up a new company or a branch office in Taiwan. Accordingly, the franchisor must obtain prior approval from the Investment Commission (“I.C.”) of the Ministry of Economic Affairs of its investment in Taiwan, whether by way of the incorporation of a new company or a branch office.
b. A brief of some major points provided by Taiwanese Labor Standards Act as well as relevant administrative decrees includes the following:
1. Minimum wage of NT$ 17,280 per month or NT$ 95 per hour (from 2007 to the present; it may be adjusted by the competent authority from time to time).
2. An employee shall not be under the age of sixteen (16).
3. An employee shall not have regular working time in excess of eight (8) hours a day, and eighty-four (84) hours every two weeks.
4. Employer’s Right to Terminate the Employment Contracts;
5. According to Article 11 of Labor Standards Act, an employer shall not, even by advance notice to a worker, terminate a labor contract unless any of the following situations arises:
a. The business ceases to operate or has been transferred.
b. The business suffers an operating loss or contraction.
c. Business suspension for more than one month is necessitated by force majeure.
d. A change in business nature requires a reduction of workers and the particular workers cannot be assigned to another suitable position.
e. A particular worker is clearly not able to perform satisfactorily the duties required of the position held.
6. Employer’s Duty to Deliver an Advance Notice of Termination
Where an employer terminates a labor contract pursuant to Article 11 of the Labor Standards Act, the stipulations described below shall govern the minimum period of advance notice (Article 16 of the Labor Standards Act):
Where a worker has worked continuously for more than three months but less than one year, the notice shall be given ten days in advance.
Where a worker has worked continuously for more than one year but less than three years, the notice shall be given twenty days in advance.
Where a worker has worked continuously for more than three years, the notice shall be given thirty days in advance.
7. The Amount of Severance Payment Payable by Employee upon Termination
According to Article 12 of the Labor Pension Act, when a labor contract is terminated under Article 11 of the Labor Standards Act, the employer shall make severance payment which is calculated at half the current monthly average wage for every year of completed service after the enforcement of the Labor Pension Act. The severance payment for a period of service of less than one year shall be calculated proportionately. The total severance payment shall not exceed six months worth of current average wages.
(Author: Nicole M. LIN received her LL.B. Degree at National Taiwan University (NTU) and was admitted to the Taipei Bar in 2000. She specializes in general patent & trademark advisory, patent & trademark litigation, resolution of domain name dispute, drafting and negotiation of commercial agreements & contracts, and joint ventures. She now engages in foreign legal affairs for the Dispute Resolution Group and Corporate/ Commercial Law Group in Tai E, and is the author of some English and Chinese articles on IP subjects in Tai E’s periodicals.)
