An Introduction of the Fair Trade Law and

An Introduction of the Fair Trade Law and the Recent Enforcement Status of TFTC Hung, Hsuan Inspector, Legal Affairs Department Fair Trade Commission of Taiwan September 2, 2009 1

Agenda n n n The Organization and the duties of TFTC The Outline of the Fair Trade Law Recent Development n draft amendments 2

Law Enforcement Agency n Ø Ø n n n The Fair Trade Commission Established on January 27, 1992 Central competent Ministerial level agency Duties: Preparation and formulation of fair trade policy, laws and regulations Review of any fair trade matters related to the Fair Trade Act Investigation of the activities of enterprises and economic conditions Investigation and disposition of any case violating the Fair Trade Act Any other matters related to fair trade 3

Organization of TFTC 4

The Purpose of the Fair Trade Law n n Maintaining trading order Protecting consumers’ interests Ensuring fair competition Promoting economic stability and prosperity 5

Fair Trade Law n n First Implemented in 1992 Amended in 1999 and 2002 6

The Exception of Application n n In connection with the exercise of rights pursuant to the provisions of the Copyright Law, Trademark Law, or Patent Law Where there is any other law governing the conducts of enterprises about competition; provided that it is consistent with the legislative purposes of the Fair Trade Law 7

Fair Trade Commission Guidelines on Technology Licensing Arrangements Guidelines n relevant markets n n goods markets、technology markets、innovation markets Examples of subject matters not in violation of the Law… n non-exclusive grand back licensing Stipulations that the licensee shall, to the best of its ability, manufacture and sell goods using the licensed technology. Stipulations that the licensee may not transfer or sublicense the licensed technology 8

n Examples of subject matters may violate the Law… n n n exclusive grand back licensing Tie-in Ceilings restricting the quantity of goods that may be manufactured or sold Restrictions on research and development, manufacture, use, or sale of competing goods Restrictions on a party with respect to marketing methods, scope of use of the licensed technology, or trading counterparts 9

The Regulated Object n Enterprise n n a company a sole proprietorship or partnership, a trade association, and any other person or organization engaging in transactions through the provision of goods or services 10

Antitrust Monopolies Mergers permits the existence of monopolies, as long as they do not abuse their market power Mergers reaching certain threshold must be reported in advance Concerted actions prohibited unless prior approval Vertical restraints resale price maintenance agreements void; anti-competitive vertical restraints prohibited 11

Unfair competition Passing-off False or misleading advertising Commercial disparagement Improper multi-level sales Other deceptive or unfair practices 12 12

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Monopoly n Definition of monopoly n n n particular market share capability to exclude competition Abuse of monopolistic power case study 14

case：A company abused its monopolistic position in the aviation fueling service market to obstruct competition from other enterprises(2000) A is monopolistic in the Aircraft fueling provider market in the CKS airport Aircraft fueling provider A Aircraft fueling service B A refuse B’ request for fuel price quotation the main reason is… airlines A write to B： all airlines that provided domestic flight at CKS have entered fuel-supply agreement with A. 15

Merger n n Merger review is deemed the most profound area in competition law enforcement Procedure of merger review: n Simplified Procedure (presumption of overall economic benefits outweighed the disadvantages resulting from competition restraints) n General Procedure (examination of public interest) 16

Simplified Procedure n n Horizontal merger: market share of the merging firms in post-merger market is less than 15%. Vertical merger: combined market share of the merging firms is less than 25%. Conglomerate merger: merging firms do not have any major potential competition relations Controlling firms changes its manner of relations that does not seriously increase the market position. (1/3 -1/2, indirect merging) 17

General Procedure n n n n The merger involves major public interest. The merging firm is a holding company. Hard to define the scope of relevant market Difficulty to calculate the market shares High entry barriers High market concentration Other concerns that seriously limit competition 18

The regulations on merger (cont’d) n n Notification Thresholds Market Share n n n A+B>1/3 A or B>1/4 Turnover n n financial enterprises: A>NT$20 billion(≒ USD$303 million) & B>NT$1 billion (≒ USD$30 million) non-financial enterprises: A>NT$10 billion (≒ USD$152 million)& B>NT$1 billion (≒ USD$30 million) 19

The regulations on merger (cont’d) Objectives of Substantive Tests n Substantial lessening of competition test Dominance test n Public interest test n n § 12：TFTC shall not prohibit the merging firms if the overall economic benefits of the merger outweighs the disadvantages resulting from competition restraints. ( prohibit the merger if competition restraints > overall economic benefits) overall economic benefit disadvantages resulting from competition restraint 20

The regulations on merger (cont’d)－ Horizontal Mergers (1) Variables affecting competition restraints n n n Unilateral Effects: the ability to raise price in post-merger market. Coordinated Interaction: the ability of merging firm and its competitors jointly to reduce competition. Entry Barrier Countervailing Power Other factors affecting the result of competition restraints. 21

The regulations on merger (cont’d)－ Horizontal Mergers (2) n Merger that has obvious competition restraints should further examine the overall economic benefits n n n The market share of the merging firms reaches 50%. The market share of the two largest firms reaches 2/3, and the market share of the merging firms is over 15%. The market share of the three largest firms reaches 3/4 and the market share of the merging firms is over 15%. 22

The regulations on merger (cont’d)－ Vertical Mergers Variables affecting competition restraints n n n The probability of other competitors selects their trading counterparts in post-merger market. The degree of difficulty for a firm enters the post-merger market. The possibility of merging firm abuses its market power in post-merger market. Other factors that may result market foreclosure. 23

The regulations on merger (cont’d)－ Conglomerate Mergers Variables affecting competition restraints n n n The above mentioned variables stated in reviewing horizontal and vertical merger. The impact of deregulation on the merging firm’s cross-industry operation. The probability of cross-industry operation by the merging firm due to technology advancement. The original cross-industry development plan of the merging firm besides the merger. Other factors that affect the likelihood of material potential competition. 24

The regulations on merger (cont’d)－ Overall Economic Benefits n n Merger has obvious competition restraints Variable of overall economic benefits n n Consumer interests. The merging firms are originally at the weaker position in the trading. Failing firm defense. Other factors ( such as economy of scale, economies of scope, technical efficiency, innovation, allocative / productive efficiency, vertical economy etc. ) 25

Statistics on Merger Cases Notifications for Merger Received Cases Closed Year & Month Merger Not Prohibited Merger Prohibited Terminatio n of Review Total 411 410 228 6 176 2002 42 42 24 1 17 2003 50 50 31 - 19 2004 31 31 18 - 13 2005 54 54 34 - 20 2006 77 76 34 - 42 2007 67 67 37 1 29 2008 65 65 36 2 27 2009(1 -7) 25 25 14 2 9 26

Merger Case n KTV Merger（2008）: Holiday Entertainment Co. & Cashbox Partyworld Co. Acquiring company Acquired company 27

Market definition n n Product market： market of audiovisual and singing service Geographical market： individual counties/cities with planned short-range communication network or their adjacent counties/cities Notification threshold： n market share： A+B = 51. 24%(nation) > 90% (Taipei County and Taipei City) 28

n Competition Restraint the other competitors<1%; n Unilateral Effects Lack of an affective market competition mechanism n n n Countervailing power n n Entry barrier Consumers’ right intellectual capital Upstream karaoke tape agencies or music production will lower bargaining power No substitutes; No ability to restrain monopolistic power Overall Economic Benefits TFTC’s Decision Overall economic benefit of the merger will not outweigh the disadvantages resulted from competition restraint. TFTC prohibited the merger in accordance with Article 12 of the Fair Trade Act. 29

Concerted actions n n Concerted action is prohibited without permission exception：seven types of approval 1. 2. 3. 4. 5. 6. 7. n unifying the specifications or models of goods joint research and development engage in specialized areas of business the competition in overseas markets importation of foreign goods in economic recession the small-medium enterprises case study 30

Drug suppliers fined for collusion（2008） “Manufacturers Association” （upstream: Advertised drug(by radio) suppliers） “Yung-Chien Association” （downstream：Advertised drug pharmacies） 31

“Yung-Chien Association” members： 53 drug retail enterprises n areas：Kaohsiung County, Kaohsiung City, Pingtung County n restrain members’ business activities： －not compete in terms of prices －not distribute goods without authorization －not recommend to consumers drugs of other brands n TFTC’s Decision administrative fine from NT$100, 000~650, 000 (combined fine NT$18. 95 million) n 32

“manufactures Association” members： 16 drug suppliers n areas：Kaohsiung County, Kaohsiung City, Pingtung County n concerted actions： n exchange trading information n address and execute its resolutions through “Yung. Chien Association” （not to compete in prices…） n restrain the retail prices (of members of the “Yung -Chien Association”) n TFTC’s Decision administrative fine from NT$5~6. 5 million (combined fine NT$83 million) n 33

Vertical restraints § Regulation & Enforcement Approaches § Vertical Price Restraint Case Studies n n n Price-Specific Resale Price Maintenance Minimum Resale Price Maintenance Non-Price Vertical Restraint Case Studies n n Exclusive Territory Bundling (Tie-ins) 34

Regulation: Vertical Price Restraint n n Article 18: Resale Price Maintenance Where an enterprise supplies goods to its trading counterpart for resale to a third party or such third party makes further resale, the trading counterpart and the third party shall be allowed to decide their sale prices freely; any agreement contrary to this provision shall be void. 35

Regulation: Non-Price Vertical Restraint n n Article 19 (6): No enterprise shall have any of the following acts which is likely to lessen competition or to impede fair competition: Limiting its trading counterparts' business activity improperly by means of the requirements of business engagement. It refers to tie-ins (bundling), exclusive dealing, exclusive territory, customer allocation etc. 36

Enforcement Approaches n n The Pros : Improve interbrand competition by enhancing distribution efficiency. The Cons: Potential to facilitate collusive behavior and protect the inefficient retailers from competing within the same distribution system. RPM: Per Se Rule Approach § Prevent the downstream firms from setting price freely and inappropriate to the market. § Elimination of Intra-brand Price Competition Non-Price Vertical Restraints: Rule of Reason Approach n Consideration: the intent, purposes, market share (market position), market structure, nature of the product, and the impact. 37

Case 1: Price-Specific RPM (2007) n n n Company A produced baby milk powder. Distributors were instructed by Company A to sell the baby milk powder at a certain price(Company A called it a recommended price); otherwise Company A shall have the right to suspend the delivery and terminate contract. Company A also deterred its distributors from giving any price cut, gifts or promotions. 38

Case 1: Price-Specific RPM (2007) n n Defense n Company A simply recommended the retailers to sell at a specific price, thus the retailers can still freely set a price. n Baby milk powder market was very competitive, thus Company A had no motivation to maintain a resale price or penalize any retailers against RPM. Company A was fined NT$ 2. 5 million n Retailers against RPM were bound to penalty. n Market price is consistent nationwide with no exception even holing a promotion. 39

Case 2: Minimum RPM (2009) § Company B manufactures “Xantia” cosmetics. § Company B stipulated all “Xantia” products shall sell no less than 80% of the market price. In other words, if the market price is NT$ 100, the distributors shall sell at or above NT$ 80. § Punishment: suspension of delivery and recall of the unsold products § Company B was fined NT$ 100, 000. § Distributors cannot set price freely. § Exclusion of Intrabrand Price Competition. 40

Case 3: Exclusive Territory (2002) n n Department Store C (29. 54%) renewed contract with 96. 48% branded product suppliers and required them not to supply products to its competitors within 2 km sphere of its store when a new competitor entered the market. Department Store C was fined NT$ 2. 5 million. n limit the supplier’s choice of optimal outlet location n Entry barrier to prevent potential competitors . . …………………. . <2 km………………. 41

Case 4: Tie-ins (2006) § § Tobacco health tax was increased in March 2005. Following an anticipation of a price rise and hoarding, Company. D ( the largest firm, 43. 2% ) commenced a Quantity Control Measure and Bonus Purchase Measure in relation to “Long Life Tobacco” ( the best seller product, 11. 5% ). Quantity Control Measure applied as each time its distributors and consumers could only buy a certain amount of “Long Life Tobacco”. Bonus Purchase Measure implemented as only the customers who bought a new tobacco product have the priority to purchase “Long Life Tobacco”. 42

Case 4: Tie-ins (2006) § Defense: § Quantity Control Measure was temporary. “Long Life Tobacco” increased production 50% was still in short supply. The measure ensured buyers have a basic purchase quota. § Bonus Purchase Measure was only a promotion. §Quantity Control Measure did not violate FTA: Balanced the supply and demand of “Long Life Tobacco” and it was a temporary measure; at the same time it also allowed small retailers and consumers have a basic quota of purchase. 43

Case 4: Tie-ins (2006) § Company D was Fined NT$ 3. 01 million § Bonus Purchase Measure tied new tobacco products with the “Long Life Tobacco” resulted in market distortion ( allocative inefficiency) following that consumers were also bound to quantity purchase control; thus Company D leveraged its market power to limit consumer choice and caused market foreclosure. 44

Unfair competition Passing-off（§ 20） False or misleading advertising（§ 21） Commercial disparagement Improper multi-level sales Other deceptive or unfair practices（§ 24） 45 45

Passing-off（counterfeiting） FTA to IPR protection n Prevention abuse of IPR: restraint and unfair competition n Supplementary to IPR protection: historical legislative concerns, harmonization is necessary (Article 20), Plans for amendment of the FTA 46

IP Acts n n n n Trademark (Trademark Act 2003) Patent (Patent Act): Invention, re-invention, design Copyright Act Know-how --Integrated Circuit Layout Protection Act --Trade Secrets Act --Optical Disk Act 47

Harmonization of FTA and TM n n n Cases regarding registered TM are referred to IPO Cases regarding unregistered TM or other symbols, trade-dress are referred to FTC Cases regarding IP Acts- recommend to file IP petitions 48

Symbols under Article 20: No enterprise shall have any of the following acts with respect to the goods or services it supplies: 1. using in the same or similar manner, the personal name, business or corporate name, or trademark of another, or container, packaging, or appearance of another's goods, or any other symbol that represents such person's goods, commonly known to relevant enterprises or consumers, so as to cause confusion with such person's goods; or selling, transporting, exporting, or importing goods bearing such representation; … A symbol : identify the sources of goods or services (not goods or services itself) n n n distinctiveness as listed in Article 20 of FTA second meaning : long and continuous use , ex. trade dress 49

Types of violations regarding Article 20 n n n Personal name Business or corporate name Trademark Container, packaging or appearance of another’s goods (trade dress) Megatag Unregistered well-known foreign trade mark 50

Conditions to constitue a violation of Article 20 § § Symbols or representations Commonly known to the relevant enterprises or consumers (marketing status and records) similar or identical use (usually alleged by the complainant) Cause confusion Article 20(1)(iii): un-registered well known foreign trademark Article 20 can be applied across categories of goods or services (trademark is applied to the same category of goods) 51

伯朗咖啡 vs. 伊朗咖啡 52

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蠻牛 強牛 狂牛 猛牛 61

False or misleading advertisements n Share jurisdiction with other agencies n n n Supplementary education→eduation authorities Employment→Council Of Labor Affairs Securities and insurance→Financial Supervisory Commission Wine and spirits→National Treasury Agency Food and pharmceutical, cosmetics (weight loss)→Department of Health, Executive Yuan The main workload of TFTC 62

Advertising materials n disseminate to the unspecified public Fliers, DM, catalogue TV commercial n. Internet publicized information n. Publicized information to unknown public: ex name cards n 63

Advertiser n n n First meaning: pay the advertising or marketing fee Second meaning: audit the content of advertisements and have the right to decide the content Third meaning: with impression to the public as an advertiser, share the profit or earning from advertising 64

Conditions to constitue a violation of Article 21 n n n n Differences from the reality Trading information to make a false purchase decision Effects on competitors and trading counterparts Article 24: comparative advertising 65

Guidelines n n n Guidelines to process cases regarding Article 21 Fair Trade Commission Guidelines on Cases of Real Estate in Advertising Fair Trade Commission Guidelines on Cases of Weight Loss and Body Care Activities Fair Trade Commission Guidelines on Advertising Electrical Appliances Fair Trade Commission Guidelines on Banking Industry Advertising 66

Cases more focused… n n n Shopping channel (advertisers) Debt negotiation and credit counseling Internet shopping (internet auction –NO) Telecommunication advertising Banking advertising 3 C commodity 67

Types of misleading advertising n n Promotion Guarantee n n n “lowest price guarantee” “No. one guarantee” “refund guarantee” Free gift with restriction Comparative advertising Limitation 68

Case 1 “On-the-spot Price Watch Daily” “We conduct investigations on everyday products in each large hypermart chain every day and when we discover that there are price differences, we guarantee to adjust and cut the prices of our products and services immediately. We get the lowest prices of products and any moment and Fined NT$ services atour products and guarantee that services are cheaper every day. ”� 4. 44 million “You buy cheap goods and services every day” 69

Case 2 Fined NT$ 1. 8 million ASUS 64 Bits Dual Core: The Empire Strikes Back G USB 2. 0＋IEEE 1394 70

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Liability n n Three times of the amount of damages Administrative fine NT$50, 000~25, 000(≒US$1, 500 ~750, 000） n A further administrative penalty NT$100, 000~50, 000（≒US$3, 000~1, 500, 000） n A further criminal punishment ( imprisonment for not more than 3 years or by a fine of not more than NT$100, 000, or by both) 73

Recent Development －Draft Amendments n n n Globalization and liberalization of Taiwan economy Policy options recommended in OECD peer review final report in 2006 Draft Amendments 1. Introduce leniency program 2. Employ search power 3. Review merger report threshold 4. Differentiate administrative penalties for various violations 74

Introduce Leniency program n n n Concerted actions are carried out in a more subtle and sophisticated manner Other countries’ successful experiences. Participants who report voluntarily before the launch of an investigation or cooperate in the investigation may benefit from exempted or reduced administrative penalties. 75

Employ search power n Current investigative techniques ： n n notify the parties and any related third party to make statements notify relevant agencies or person to submit documents, financial books or any other necessary materials dispatch personnel for any necessary on-site inspections Most competition authorities use searches in cartel investigations to secure the evidence 76

Thresholds for merger report The turnover NT$ 10 billion The market share a) 1/4 of the market share for a party to a proposed merger, or b) 1/3 of the market share after the merger 77 77

n n In response to the recommendation of the OECD, TFTC has deliberated upon whether to delete market share as the merger report criterion. This deliberation considered the following proposals: n n Proposal A： keep market share as the report threshold Proposal B： delete market share as the report threshold 78

Administrative Penalties n Administrative fine NT$50, 000~25, 000 (≒US$1, 500 ~750, 000) 79 79

Differentiate Administrative Penalty for Various Violations n Proposed Amendment： n Differentiate administrative fines for anti-trust and unfair competition. n Raise fines for anti-competitive behaviors 80

http: //www. ftc. gov. tw/internet/english/index. aspx 81

Thank You 82