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Franchising in Taiwan: Fair Trade Act and disclosure obligations

by Gregory Buxton, Bryan Tan and Yi-Kai Chen

In our four previous articles we discussed issues related to general intellectual property protection, due diligence on potential franchisees, and the drafting (governing law) and enforcement (preliminary injunctions) of franchise agreements. In this, our final article on franchises in Taiwan, we briefly outline the franchise disclosure requirements under Taiwan’s Fair Trade Act (公平交易法, the “FTA”) and the Disposal Directions (Guidelines) on the Business Practices of Franchisors (公平交易委員會對於加盟業主經營行為案件之處理原則, the “Guidelines”) promulgated by the Fair Trade Commission (公平交易委員會, the “FTC”).

Similar to the United States and Europe, Taiwan requires disclosure by the franchisor of certain franchise information to the franchisee prior to the establishment of a franchise arrangement between them. The Guidelines set forth required disclosure content, including:

  1. Initial Costs – the initial costs and fees which the franchisee will incur prior to opening the franchise (e.g., marketing fee contributions and training fees);
  2. Recurring Costs – the recurring and continuing costs and fees which the franchisee may expect to incur in connection with operating the franchise (e.g., royalty fees);
  3. Intellectual Property – details and restrictions about franchisor’s intellectual property rights, such as trademarks and patents, licensed to the franchisee;
  4. Operational Assistance – the content and method of operational assistance which the franchisee can expect to receive from the franchisor;
  5. Other Franchise Locations – any plans of the franchisor to establish additional franchise locations (under the same system) in the franchisee’s area of operation;
  6. Other Restrictions – any other restrictions which will be placed on the franchisee; and
  7. Termination/Amendments – any terms related to the amendment or termination of the franchise contract.

The disclosure document must be written. It can be delivered as a hard copy or in electronic form. Regardless of the form in which the disclosure document is delivered, we recommend obtaining a delivery receipt or some other proof of delivery. While the Guidelines do not mandate a particular language be used with respect to the disclosure document, we are of the view that such disclosure documents should be written in a language well understood by the franchisee. In Taiwan, if in doubt about the English (or other foreign language) capabilities of a potential franchisee, we recommend translating the relevant disclosure document into Traditional Mandarin Chinese. Unless otherwise agreed with the franchisee, the disclosure document should be delivered ten (10) days (or such other amount of time reasonably necessary for the franchisee to read and understand the content of the disclosure document) prior to the signing of any franchise agreement.

Failure to comply with the franchise information disclosure requirements under the Guidelines may violate the FTA if such failure were to be found “sufficient to affect the trading order”. The FTC has a rather opaque, multi-pronged test for determining whether failure to deliver a franchise disclosure document rises to the level of being sufficient to affect the trading order. While we will not go into detail as to the FTC’s analysis in this area, it is worth noting that recent FTC decisions indicate a trend towards finding that disclosure failures are sufficient to affect the trading order and thus result in a violation of the FTA.  Such violations could result in penalties ranging from NT$50,000 (approx. US$1,790) to NT$25,000,000 (approx. US$900,000).

In short, we encourage all franchisors to prepare and deliver a franchise disclosure document which complies with the Guidelines.

If you have any questions in connection with the preparation of such a disclosure document, please contact Greg Buxton at gbuxton@winklerpartners.com.

 

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