JAPAN: A new case law on franchising.

Souichirou Kozuka | JAPAN | 2010-01-18

Souichirou Kozuka

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Under the franchise agreement of Seven-Eleven Japan, franchisees are free to determine the sales price of the goods sold in their stores. The franchisor merely notifies to the franchisees the suggested price, which in fact are adopted by the franchisee in most cases. Further, with regard to the perishable food and drinks, the franchisor requires the franchisee to stop selling the goods and dispose of them after a certain date (selling limit), earlier than the expiry date determined by the manufacturer. In such a case, the cost for the disposed goods is not only burdened by the franchisee but also deducted from the gross sales as the basis for calculating the amount of royalty. According to the selective survey by the JFTC, the average amount of annual costs for such disposed goods reached 5.3 million yen (ca. 53 thousand US dollar).
After finding that the franchisor urges the franchisee not to sell the food and drinks at a discounted price when the selling limit approaches, instead of maintain the price and dispose of the unsold goods, the JFTC held that such acts of the franchisor deprives the franchisee of the possibility to reduce the cost at its own discretion.

On the other hand, the JFTC found that the franchisor was in a dominant position against its franchisees because:

  1. it operates the largest convenience store network in Japan, both in its gross sales and number of outlets;
  2. its franchise agreement is for the term of fifteen years and imposes the non-competition obligation on the franchisee for one year after termination, unless renewal is agreed upon;
  3. almost all the goods sold in the franchised outlets are the ‘recommended goods,’ because of they are easy to order, purchase and pay for franchisees; and
  4. the operations of the franchises units are subject to the instructions and advice of the supervisors dispatched by the franchisor.

Based on these finding, the JFTC concluded that the abovementioned acts of the franchisor prohibiting the franchisee from selling the perishable food and drinks constitutes the abuse of the dominant position and breaches the Antimonopoly Act. Seven-Eleven Japan did not dispute the order and has allowed the discounted sales by the franchisee to some degree.

Souichirou Kozuka, IDI agency, distribution & franchising Country Expert for Japan

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