An introductory Note of Franchise in Taiwan

A franchise usually consists of licensing of trademarks, service marks, trade names and, in some situations, patent rights, in the establishment or development of a business network. The provisions of Trademark Law or Patent Law with respect to registration and license filing need to be considered and complied with to guarantee a smooth and successful operation of the franchise. Otherwise, no specific law or regulation governs franchising in Taiwan and therefore the rights and obligations of the franchisers and the franchisees are regulated by the franchise agreements. An application for Government approval or inspection is not involved.

The Regulation of Fair Trade Act over Franchising

As far as the validity and enforcement of a franchise agreement are concerned, the 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 franchisees. In principle, inspection or restriction of the business operation of franchisees under a contractual arrangement is allowed by the Act. If, however, by entering a franchising arrangement, a franchiser sill obtains a monopoly power in the market, then an application for approval should be filed with the Fair Trade Commission (FTC) for its approval in advance.

The Duty of Disclosure under the FTC Guidelines

As explained in the preceding paragraph 1, the parties are not required to file an application for government approval in advance, and a franchiser 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 Franchisers” (“Guidelines”) for the purpose of ensuring fair com- petition in franchise business and avoiding concealment by franchisers of important information during recruitment of franchisees.

According to Article 4 of the Guidelines, A franchiser shall provide written information on the following items ten (10) days prior to entry into contracts with trading counterparts:
- The name of the franchiser's enterprise, its operating capital, place of business, business items, date of establishment and date on which it began franchising operations.
- The names of the responsible person and the chief management personnel of the franchiser, and information on their relevant business experience.
- The franchise fees and other charges collected by the franchiser 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.
- The intellectual property rights including trademarks, patents, copy- rights, etc. that the franchiser intends to authorize the franchisee to use, the time when such intellectual property rights were filed or granted, the content and duration of the rights, and the scope and restriction of usage by the franchisee.
- The content and methods of management assistance, training guidance and so forth to be provided by the franchiser to the franchisee.
- The franchiser's management program concerning the areas of operation as between the franchisee, other franchisees, or its directly operated stores.
- The names and business addresses of all other franchisees in the operation area of the franchiser, as well as the statistic data of the franchisees that joined and terminated franchising contracts with the franchiser nationwide and in the specific operation area of the franchisee during the preceding accounting year.
- The restrictions of the business relationship between the franchiser and franchisee in their operations of business during the effective period of the franchise contract.
- Conditions and methods for the modification, termination and/or rescission of the franchise contract.

It is further regulated in the Article 5 of the Guidelines that a franchiser, before entering into a written agreement involving the franchise relationship, shall allow its trading counterparts a period of no less than 5 days to review the contract.

The Legal Consequence of Non- compliance

A franchiser 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 capable of affecting the trading order.

In case of a 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 (US$1,600) yet not more than NT$25,000,000 (US$794,000). If the violating enterprise fails to comply with the Commission order, the FTC may successively impose an administrative penalty of not less than NT$100,000 (US$3,200) yet not more than NT$50,000,000 (US$1,587,000) upon the violating enterprise for each occasion until it has ceased or rectified its conduct or has taken necessary corrective measures. (§41 of the Act).

On the other hand, one whose rights or legal interest has been infringed because of violation of the Act is entitled to bring a civil lawsuit to request removal of infringement, to prevent future infringe ment, 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. (§30 – §32 of the Act)

A Summary Conclusion

Strictly speaking the Act does not request a franchiser to disclose relevant information to the prospective franchi- sees before consummation of the franchise contract. The franchiser should evaluate, at its own risk, the necessity and the scope of performing such disclosure under the Guidelines so as to avoid the application of Article 24 of the Act later when a dispute eventually develops between the parties. The FTC determines the compliance or violation of the Guidelines at its own discretion and on a case by case basis.

The Guidelines, and hence Article 24 of the Act, are enforced by tailored administrative sanctions, although a party who has suffered due to a violation is free to file a direct civil action for injunction and damages should he thinks such action is proper.

(Author: Perkin LIAW has an LL.B. degree and an LL.M. degree in IP Law. He acted as the Chief of the Trademark Group at Tai E for a number of years before taking his current role as Manager of International Services. He specializes in trademark law, international IP litigation, technology licensing, corporate and commercial law, as well as other international agreements.)