Comprehensive regulation of antitrust and unfair competition activities was established in Taiwan when the Fair Trade Act came into effect in 1992 (as amended, the ¡§Fair Trade Act¡¨). The regulatory framework is similar to civil law systems such as those used in Germany and Japan. Over the past 12 years, the Fair Trade Act has been amended three times, the most recent amendments being made after Taiwan¡¦s accession to the World Trade Organization in 2002 and taking effect in 2003.

 The Fair Trade Act governs two broad categories of anti-competitive or counter-competitive business conduct: restrictive business practices and unfair competition. The Fair Trade Commission handles its caseload in accordance with these two broad categories, and further sub-divides them among the following subject matters:
(1) under restrictive business practices: monopolies, business combinations, concerted actions, resale price maintenance and other restrictive business practices, and
(2) under unfair competition: impediments to fair competition, counterfeit commodities or trademarks, false, untrue and misleading advertisements, damage to business reputation, improper multi-level sales (e.g., via pyramid schemes) and other deceptive or unfair business conduct. Once a case is received within the commission¡¦s jurisdiction, it is delegated to its departments according to subject matter, and decided via a committee meeting..

 Between 1992 through February, 2004, over 24,954 cases have been received by the Fair Trade Commission. Of these, approximately 16,584 are private party complaints, 125 are applications for concerted actions, 6,105 are applications for business combinations approval and 2,140 are requests for explanation. As can be expected, the number of requests for explanation has steadily decreased, and the number of complaints and requests for concerted action have stabilized. The number of applications for business combinations approval had steadily risen since 1992 and peaked in 2001, but the 2002 amendments to the Fair Trade Act has had the effect of reducing such numbers by streamlining the process.

 This paper summarizes, in five parts, publicly available information regarding the Fair Trade Act¡¦s regulation of restrictive business practices. It focuses, in particular, on the following three restrictive business practices of potential concern to cross-border legal practitioners: monopolistic practices, concerted actions and business combinations approval.

Overview of Regulatory Framework

 The Fair Trade Commission, established in early 1992, is the principal governing authority for the administration and enforcement of the Fair Trade Act. Under the Fair Trade Act, the Fair Trade Commission is empowered, among other things, to prepare and formulate fair trade policy and regulations (to the extent consistent with the Fair Trade Act), investigate activities of businesses, review any matters related to the Fair Trade Act, hear and adjudicate cases under the Fair Trade Act. The Fair Trade Commission may undertake investigations upon the filing of complaints or in an ex officio capacity.

 During the course of a private or public investigation, the Fair Trade Commission has broad powers to notify and subpoena parties to appear before it to make statements, and to produce books, records and relevant information. It can also compel inspections of facilities by its personnel. Conversely, a party subject to an investigation may request for any official materials from the Fair Trade Commission necessary for the exercise or defense of its rights, but the Fair Trade Commission may deny such requests in certain, enumerated circumstances.

 The Fair Trade Act gives the Fair Trade Commission broad powers of enforcement. Depending on the nature of the noncompliance at issue, the Fair Trade Commission could mandate corrective action or monetary fines, or both. In circumstances of repeated violations, the Fair Trade Commission could request recommend law enforcement for imprisonment of offender(s). A more detailed discussion of the effects of noncompliance is included in the separate sections below.

 In general, the Fair Trade Commission is more concerned with the behavior of domestic enterprises, except in the area of business combinations approvals.

Regulation of Monopolistic Practices

The regulation of monopolistic practices in Taiwan is similar to many other countries¡¦ regulation of the same subject matter. The wording of the relevant laws give the Fair Trade Commission wide discretion and maximum flexibility to investigate instances of possible abuse of market power.

The Fair Trade Act prohibits ¡§monopolistic enterprises¡¨ from:
(1) directly or indirectly preventing any other enterprise from competing through unfair means,
(2) improperly setting, maintaining or changing the price of goods or the remuneration for services,
(3) compelling a counterparty to give it preferential treatment without justification or
(4) otherwise abusing its market power.

 A ¡§monopolistic enterprise¡¨ is in turn defined by the Fair Trade Act to mean any enterprise (or any group of enterprises that do not in fact engage in price competition with each other) that faces no competition or has a dominant position to enable it to exclude competition in a ¡§relevant market¡¨. ¡§Relevant market¡¨ is flexibly defined as any geographic area or coverage wherein enterprises compete in respect of any goods and services and is determined on a case by case basis.

 Notwithstanding the foregoing, an enterprise may be presumed to be exempt from being monopolistic (barring other circumstances) if its relevant market can be shown to have all of the following characteristics:

(i) the market share of the enterprise in question is less than half,
(ii) the combined market share of the two largest enterprises is less than two-thirds, and
(iii) the combined market share of the three largest enterprises is less than three-quarters.

 These conditions establish a presumption that the relevant market is competitive, but such presumption can be overcome by a further showing that the relevant market is subject to substantial barriers of entry or other obstacles to competition.

 If a monopolistic enterprise is found to have abused its power, the Fair Trade Commission can order the offending enterprise to cease its offending conduct and/or to take corrective actions. If such actions are not undertaken within the timeframe prescribed by the Fair Trade Commission, the responsible individual(s) of the offending enterprise may be punished by imprisonment of up to three years and/or fined up to NT$ 100 million. Administrative penalties may also be assessed. Finally, to the extent that grievances have been filed by injured enterprises, a court may award actual damages as well as punitive damages of up to three times the actual damages.

 Despite some recent, prominent cases in this area, which are separately discussed below, there have been relatively few cases and decisions concerning monopolistic behavior since 1992.

Regulation of Concerted Actions (Collusion)

In addition to the regulation of monopolistic practices, the Fair Trade Act also regulates ¡§concerted actions¡¨. ¡§Concerted actions¡¨ are defined as the conduct of any enterprise, by means of any form of mutual understanding with any other competing enterprise, to jointly determine the price of goods or services (horizontal price fixing), or any other business terms. Such conduct would effectively and artificially reduce the level of competition among enterprises, to the detriment of consumers.

 The historical development of the Taiwanese economy has a noticeable effect on its regulation of concerted actions. Unlike some countries, Taiwan does not outlaw collusion among businesses outright, even as to horizontal price fixing. In addition, because Taiwanese nterprises have historically functioned as oem¡¦s of major multinationals, the Fair Trade Act permits some forms of cooperation among nterprises, for a limited period of time, to strengthen their collective bargaining position vis-à-vis such foreign parties.

 Under the Fair Trade Act, concerted actions are prohibited unless approved by the Fair Trade Commission and where such actions are beneficial to the economy and in the public interest. Seven varieties of permissible concerted actions are enumerated, where such actions have the effect of:

(1) unifying the specifications of models of goods for purpose of reducing costs, improving quality or increasing efficiency (in the arketplace),
(2) combining research and development on goods or markets for the purposes of upgrading,
(3) each enterprise developing a separate and specialized area for the purpose of rationalizing their operations,
(4) securing or promoting exports to foreign markets,
(5) cooperating with regards to the importation of foreign goods for the purposes of strengthening trade,
(6) regulating production while in an economic downturn to meet demand in an orderly manner
without overproduction or
(7) cooperating for the purposes of improving operational efficiency or strengthening the competitiveness of small and medium sized enterprises.

While the above enumerated concerted actions are permissible, enterprises which seek to enter into a cooperative arrangement must apply to the Fair Trade Commission for approval. After receipt of an application, the Fair Trade Commission has three months to approve or reject such application, but such period may be extended if necessary. If the Fair Trade Commission approves of a concerted action, such approval may only be granted for a limited period of time (not to exceed an initial period of three years, followed by a renewal of up to three additional years). In addition, the Fair Trade Commission may require the relevant enterprises to agree to any undertakings or conditions to its approval.

Enterprises engaging in unauthorized concerted actions face the same penalties as monopolistic enterprises found to be engaged in anti-competitive conduct. In short, the Fair Trade Commission can order the offending enterprise to cease its offending conduct and/or to take corrective actions. If such actions are not undertaken within the timeframe prescribed by the Fair Trade Commission, the responsible individual(s) of the offending enterprise may be punished by imprisonment of up to three years and/or fined up to NT$ 100 million. Administrative penalties may also be assessed. Finally, a court may award actual damages as well as punitive damages of up to three times the actual damages to injured parties.

From 1992 through February 2004, the Fair Trade Commission has received approximately 125 concerted action applications and has approved, in whole or in part, approximately 97 such cases, with most effective periods ending between 2005 and 2006.

Regulation of Mergers

Like most of its counterpart governmental bodies in other countries, the Fair Trade Commission, by necessity, also oversees the approval of ¡§mergers¡¨ to prevent any market from becoming too concentrated.

A ¡§merger¡¨ under the Fair Trade Act includes any situation where:
(i) an enterprise merges with another via a legal or statutory merger,
(ii) an enterprise acquires at least one-third of the shares or capital contributions of another enterprise,
(iii) an enterprise acquires by lease or assignment the major businesses or properties of another enterprise,
(iv) an enterprise operates jointly with another enterprise on a regular basis or is entrusted by the other enterprise to operate such other enterprise¡¦s businesses or
(v) an enterprise directly or indirectly controls the business operation or the appointment or discharge of personnel of another enterprise.

In general, any merger involving at least one Taiwanese enterprise that gives rise to one of the following three situations may not be completed without prior approval of the Fair Trade Commission:
(1) where, as a result of the transaction, the relevant enterprises will have at least one third of the relevant market share,
(2) where at least one of the relevant enterprises has one fourth of the relevant market share, or (3) where the sales for the preceding fiscal year of the relevant enterprises exceeds a periodically adjusted official threshold.

The current sales volume threshold for the merger of non-financial enterprises is NT$ 10 billion (approximately US$ 285 million) for one party and NT$1 billion (approximately US$28 million) for another party to the merger. The current sales volume threshold for the merger of financial enterprises is NT$ 20 billion (approximately US$ 570 million) for one party and NT$1 billion (approximately US$ 28 million) for another party to the merger.

The 2002 amendments implemented several changes designed to decrease the mounting workload by implementing several exemptions. These exemptions deal mainly with internal reorganizations, such as where one of the relevant enterprises owns at least 50% of the other enterprise or where the acquirer is a company newly established by the transferor or an affiliated of the transferor (i.e., a spin-off situation). In addition, any redemptions of shares that would otherwise trigger the merger controls of the Fair Trader Act are also exempt.

The current Fair Trade Act represents a transition from the prior ¡§pre-merger approval¡¨ system to the present ¡§pre-merger notification¡¨ system. Under the prior system, a merger triggering the aforementioned thresholds must receive the affirmative approval by Fair Trade Commission before the parties can proceed with the consummation of the merger transactions. The present system requires, conversely, the Fair Trade Commission to affirmative reject an pplication or request an extension of its review period ¡V if it does neither within 30 days of an application, the parties may proceed to close the merger transactions.

To start the 30 day statutory period, an application must conform to the requirements of Article 11 of the enforcement rules to the Fair Trade Act. Once the application is filed, the Fair Trade Commission may shorten the waiting period by accepting the merger, reject the application or extend its review period, but in the case of an extension, the extension may not exceed 30 days. In approving a merger transaction, the Fair Trade Commission could, however, require the parties to agree to various undertakings or conditions to its approval.

Violations of the merger approval process could result in a number of consequences. First, the relevant transaction(s) could be nullified, and the parties¡¦ existing business operations could even be suspended or terminated. In addition, administrative penalties may be assessed, up to NT$ 50 million, and administrative penalties may be successively issued for similar amounts until the parties have undertaken corrective action. Finally, the Fair Trade Commission also has the power to remove decision-making authority from the relevant enterprise(s).

From 1992 through February 2004, approximately 5,960 transactions have been approved (or not prohibited by virtue of the lapse of the applicable waiting period), out of 6,105 applications. However, more than 70% of the applications and approvals occurred between 1998 and 2002, and the effect of the 2002 amendments have greatly reduced the workload of the commission.

Recent Cases and Developments

One recent and well-publicized case concerns the combination of the two largest KTV enterprises, Holiday and Cashbox in 2003. The form of business combination was a merger.

According to published data, as of 2003, Holiday KTV had 21% market share and Cashbox had 20% market share in a highly fragmented industry (where 43% and 28% of the market are held by enterprises with less than fifty and ten employees, respectively). Nonetheless, the Fair Trade Commission granted conditional approval to the merger primarily based on the lack of barriers to entry and the moderate effect on upstream industries. The parties¡¦ stated business goal of exporting this industry to other East Asian countries (China, in particular) also appeared to have some influence. The approval was widely criticized by industry and legal experts at the time.

However, the Fair Trade Commission approval was subject to various post-combination restrictions, including several broad, general prohibitions on preferential treatment to affiliated entities. Ultimately, the parties decided to call off the combination transaction.

Another recent development is, of course, the 2003 settlement between the Fair Trade Commission and Microsoft (Taiwan), which resulted in, among other things, price reductions for home and professional Windows XP and Office products. Though the settlement establishes a solid legal precedent, the long term effect of the settlement is likely to be minimal, and various industry and legal experts have criticized the Fair Trade Commission for not achieving enough in its settlement. Additionally, while the framework of settlement negotiations was intended to implement and track Microsoft¡¦s existing agreements and consent decrees in the United States, the ultimate terms had to be adapted to local competitive conditions that are different than the competitive environment in the United States. Nonetheless, the settlement represents a breakthrough for cross-border antitrust practice, as Taiwan was the first country outside of the United States to reach a settlement with Microsoft.

Conclusion

In conclusion, while there will be criticisms of the Fair Trade Commission¡¦s decisions, the Fair Trade Act has largely been accepted by the business and legal communities of Taiwan. The Fair Trade Act provides a solid, understandable foundation for resolving disputes, as well as sufficient enforcement powers for the Fair Trade Commission to govern and regulate anti-competitive and counter-competitive behavior. The history of the Fair Trade Act also shows a willingness by the Fair Trade Commission and the Taiwanese government to be pragmatic in their administration of this fundamental area of business law ¡V the 2002 amendments concerning the merger approval process being only one example.

At present, the most common inefficiencies in the system appear to be the integration of the Fair Trade Act into the day to day practice among private parties in the civil courts. Anecdotal evidence suggests that some judges are slow to decide cases based on the Fair Trade Act due to a lack of familiarity of its precedents and methods of analyzing what constituted ¡§relevant markets¡¨ for the various industries. This is to be expected, since the Fair Trade Act is still relatively new to a significant portion of the judges presiding over such cases, but perhaps the integration process can be accelerated further by additional training. As Taiwan¡¦s competitive environment is rapidly evolving, it is important to establish a process of educating its judges so that they can be fair and effective in administering justice.