Can Foreign Enterprises Restrict Dealers' Repair and Warranty Services in Taiwan?
Under Taiwan's competition law regime, disputes concerning repair and warranty services largely arise from restrictions imposed by original manufacturers on their dealers. We are to examine this issue from approaches used by Taiwan Fair Trade Commission's ("FTC") under Taiwan Fair Trade Act.
Can safety considerations justify restrictions on repair and warranty services?
The answer is YES, Taiwan FTC may allow safety considerations to justify restrictions on repair and warranty services, but it is not a universal rule to be applied in every industry.
Imposing restrictions on dealers for repair and warranty services may most likely incur review under Article 20 (5) of Taiwan Fair Trade Act, which provides that "[n]o enterprise shall engage in any of the following acts that is likely to restrain competition…(5) imposing improper restrictions on its trading counterparts' business activity as part of the requirements for trade engagement." More than that, Paragraph 7(1) of the "Guidelines for Handling Automobile Parts and Components Trading Cases" provides that "[w]here automobile manufacturers or agents engage in any of the following conduct that is likely to restrict competition, such conduct shall be prohibited: (1) Improperly restricting dealers from selling genuine parts or components to independent repairers or automobile parts dealers (including traders)."
It is evident that the legitimacy of the restriction constitutes a key factor in determining whether a restriction at issue is unlawful. As to when a restriction may be considered legitimate, Taiwan FTC indicated that public safety would be a good reason when manufacturers require dealers to use only original parts for providing after-sales services under Taiwan Fair Trade Act. See Administrative Interpretation Gong-Yan-Shi-Zi (公研釋字) No. 057.
Taiwan FTC stated that: "[w]here manufacturers of products related to public safety require their dealers to use only original parts when providing after-sales services, and where the upstream enterprises can present impartial and objective evidence demonstrating that the use of non-original parts by downstream enterprises in repair or maintenance services would endanger public safety, such restriction may be deemed to have a legitimate justification. [However], whether such restriction violates [Article 20(5) of Taiwan Fair Trade Act] shall still be determined on a case-by-case basis." Id.
We noted two important points in this interpretation for foreign enterprises' reference.
First, with respect to the scope of products, the interpretation applies specifically to "products related to public safety" and does not extend to all categories of products. For products not related to public safety, the legality of the restriction must be assessed pursuant to the Partial Amendments to the Enforcement Rules of Taiwan Fair Trade Act, taking into account factors such as the intent and purpose of the parties, market position, market structure, characteristics of the goods or services, and the actual impact on market competition.
Second, regarding burden of proof, the interpretation requires the original manufacturer to provide impartial and objective evidence. Such evidence must establish a causal relationship, namely, that the downstream enterprise's failure to use original parts in repair or maintenance services would result in a risk to public safety. Where these conditions are satisfied, a restriction requiring dealers to use only original parts may be considered to have a legitimate justification and thus may not constitute a violation of Taiwan Fair Trade Act.
Enterprises have been frequently penalized for using warranty denial as a means of restricting competition in Taiwan
1. Denying repair and warranty services to restrict resale prices
HOME MARK CO., LTD. ("HOME MARK") primarily engages in the manufacture and sale of water heaters. It entered into "Online Authorized Dealer Agreements" with online distributors. Clause 3 of the agreement provided that "products sold by non-authorized dealers shall not be entitled to repair or warranty services during the warranty period." Clause 2 (3) further stipulated that "[w]hen a dealer sells or auctions HOME MARK's products on any type of website or through direct sales channels, the minimum price shall, in principle, be no less than 90% of the 'suggested retail price' indicated by HOME MARK. Any special pricing must obtain HOME MARK's prior consent. If any sale below the stipulated price is discovered, HOME MARK will be entitled to immediately terminate the authorization and require the dealer to remove all registered information from the internet.”
Taiwan FTC found that under these contractual provisions, if an online dealer failed to comply with the stipulated 90% pricing requirement, it could face termination of online authorization and, consequently, losing warranty repair services. Such measures exerted psychological pressure on dealers and effectively constrained their freedom to set resale prices. Taiwan FTC determined that these disadvantageous sanctions restricted dealers' pricing autonomy, suppressed competition among different distribution channels, and impaired price competition mechanisms in the market. Taiwan FTC's investigation revealed that 9 of interviewed 13 dealers confirmed that resale price restrictions were indeed imposed. Accordingly, Taiwan FTC imposed administrative penalties on HOME MARK.
2. Denying repair and warranty services to restrict online sales
MERIDA INDUSTRY CO., LTD. ("MERIDA"), a well-known Taiwan bicycle manufacturer, was reported by its dealers for prohibiting the posting of advertisements and sales of its products online, under threats of calling off dealership status. Dealers received formal letters and were officially stripped of their dealership rights. Merida further announced on its official website that it had never authorized dealers to conduct online sales and declared that products purchased online would not be covered by Merida's original manufacturer warranty.
Taiwan FTC's investigation revealed that all dealers listed by Merida were able to register warranty repairs for its products. However, once a dealer was removed from the authorized list, it lost access to credentials for warranty registration. To avoid losing consumer trust and the ability to provide original manufacturer warranty services, most dealers complied with Merida's restrictions on online sales.
Dealers whose authorization was revoked reported that although they could continue selling remaining inventory, they were unable to register warranty information for consumers, resulting in doubts regarding warranty coverage, consumer inconvenience, and drastically reduced sales volumes. Taiwan FTC concluded that Merida's conduct was illegal, constituting trading with counterparties by imposing improper restrictions on their business activities, and therefore imposed penalties.
Employing denial of repair or warranty services as means to suppress dealers' competitive activities will usually get you trouble
In light of the foregoing regulatory framework and enforcement cases, when original manufacturers impose restrictions on dealers concerning repair and warranty services, the legitimacy of such restrictions constitutes the core issue in competition law analysis. In practice, most penalized cases do not involve restrictions justified by safety considerations. Rather, enterprises often employ denial of repair or warranty services as coercive or punitive measures to suppress dealers' competitive behaviors.
Such practices are deemed to have anti-competitive effects and are unlikely to withstand scrutiny under Taiwan Fair Trade Act. Accordingly, enterprises are advised to exercise particular caution when negotiating or implementing repair and warranty-related arrangements with dealers.
