萬國法律事務所

In view of the rapid development in franchising business in Taiwan, the Fair Trade Commission promulgated the “Guidelines Governing the Business Operation of Franchisors” (before 2011, “the Guidelines Governing Disclosure of Information by Franchisors”) to maintain the trading order of franchise market and to ensure free and fair competition in the industry. Recently, to ensure the trading order of franchise market more effectively, the Commission consulted with experts and market participants and further amended the Guidelines.
 
The main points of the amendments are regarding the timing of disclosure, the category of information to be disclosed, the ways of disclosure and the justifiable grounds for non-disclosure of information by franchisors. Details of the amendments are as follows:

1. alternative disclosure period: In addition to 10 days before the entrance of franchise relationships or pre-franchise relationships or a reasonable period as determined on a case-by-case basis, the Commission added a third timing “the period as agreed to by the parties” to decide when franchisors shall disclose material information.
2. Reduction of information to be disclosed: The Commission deleted, in accordance with the results of its consultation process, the disclosure requirements of (1) the number, addresses and the ratio of termination of contract in the same franchise system last year in every county/city, (2) estimated revenue or return or other financial forecast figures, if any, the calculation methods and the performance of existing franchisees. Moreover, considering that the content of rights, validity period of intellectual properties have already been public information, the Commission limited the information of intellectual properties to be disclosed to the names of the rights, the scope of authorization and limitations to franchisees.  
3. The inclusion of alternative ways to disclose the information other than by hard copy: The franchisors can disclose material information by hard copy, email, electronic storage device, social media, instant messaging or others. However, the franchisors shall bear the burden of proof that the information was disclosed. 
4. Enumeration of justifications: The franchisors can justify their non-disclosure based on the following grounds:
   (1)Where it is the case of the extension or continuance of existing franchise relationships
   (2)Where the franchisors objectively lack such information;
   (3)Where there is no information asymmetry between franchisors and franchisees.
5. Removal from the guidelines of restrictions on post-contracting activities of restraining competition: Because there were no relevant cases in the past, and the activities to restrain competition can still trigger Article 20 of the Fair Trade Act, the Commission removed this requirement to avoid redundancy.    

 
In general, the amendments are in favor of franchisors in that they not only entail more flexibility but also impose less requirements than before regarding the disclosure of material information by franchisors to franchisees. However, from the viewpoint of a practitioner, some of the amendments need to be examined more closely:

1. The information about the number of franchisees, addresses, the ratio of contract termination in the same franchise system, and other estimated financial forecast figures seems crucial to potential franchisees when deciding to contract with the franchisors or not. The relaxation of the requirements mentioned above may increase information asymmetry in franchise relationships.

2. Regarding the justification for non-disclosure: (a) “The extension or continuance of existing franchise relationships “should not serve as an outright justification for non-disclosure of material information. Factors such as whether there is any altered or updated information should be taken into consideration. The amendments overgeneralize the grounds of the justification. (b) In general, the information asymmetry between franchisors and franchisees exists; it is exceptional that there is no such asymmetry. Therefore, the definition and examples of “no information asymmetry” should be given, and the franchisors shall prove the non-existence of information asymmetry.

3. Given the general inequality of bargaining power between franchisors and franchisees, the “period as agreed to by the parties” may be reduced to franchisors’ sole decision on the timing of disclosing material information. As a result, the franchisees may be deprived of the right to review documents and information in advance of a reasonable period.
4. Not all of the contents and validity periods of intellectual properties are public information. In particular, within the franchising industry, the non-registered/registrable know-how and trade secrets play an important rule, of which the contents and validity period are not public information. The Commission limited information of intellectual properties to be disclosed to the names of the rights, the scope of authorization and limitations to franchisees seems not enough for franchisees to evaluate the franchisors’ intellectual properties and to decide whether to join the franchise or not.