Newsletter
Restrictions on Distributors Violate the Fair Trade Act
At its 973rd meeting on June 30, 2010, the Fair Trade Commission (the "Commission") determined that Hong-Yin Multimedia Technology Corporation ("Hong-Yin") and Rui-Ying Corporation ("Rui-Ying") violated Article 19, Item 6 of the Fair Trade Act (the "Act") by prohibiting their distributors from carrying or dealing in other brand's MIDI karaoke machines, and by controlling the prices that distributors may charge for subletting the machines. Such conduct, the Commission determined, constituted "limiting trading counterparts' business activity improperly by means of the requirements of business engagement." Pursuant to this finding, the Commission issued an injunctive order and fined Hong-Yin and Rui-Ying, respectively, NT$ 700,000 and NT$ 1,000,000.
The Commission found that Hong-Yin and Rui-Ying, which together account for roughly 80% of the market in MIDI karaoke machines, have considerable market power. In September 2008, the two companies informed their distributors at a distributor meeting that they will terminate their relationship with a distributor if it carries or deal in other brands' MIDI machines. The two companies also communicated this restriction to their distributors in writing, and began including the same restrictive provision in contracts with regional contractors. The Commission found that such restriction has a materially adverse impact on market competition because it will prevent the companies' competitors from expanding or obtaining new sales channels.
In addition, the Commission found that Hong-Yin and Rui-Ying contractually restricted, at the pain of termination, the price that their regional contractors may charge for subletting MIDI karaoke machines. The Commission also found that when the regional contractors enter into an agreement to sublet the two companies' MIDI karaoke machines, they first pay a deposit, which is calculated based on the sublet price and the number of units agreed upon. The regional contractors will then deduct this deposit from actual subletting revenues. In other words, the regional contractors have assumed all of the business risks. Based on these facts, the Commission determined that such conduct prevented the regional contractors from exercising their independent business judgment, and constituted improperly limiting the business activity of counterparties. Moreover, this price control has the effect of harmonizing prices in the market and therefore hampering competition.
The Commission concluded that the two companies' conduct limited competition in the market of MIDI karaoke machines, in violation of Article 19, Item 6 of the Fair Trade Act. Pursuant to Article 41 of the Act, the Commission issued an injunctive order and fined Hong-Yin and Rui-Ying, respectively, NT$ 700,000 and NT$ 1,000,000.