December 2013-I

e-Competitions National Competition Laws Bulletin

December 2013-I The Taiwan Fair Trade Commission fines electronics company for disseminating false online information to disparage competing products (Samsung) Taiwan, Unilateral practices, Investigations/Inquiries, Sanctions/Fines/Penalties, Unfair competition, Internet, Information technology Taiwan Fair Trade Commission, Gong-Chu-Tzyh, No. 102184, 31 October 2013

Andy Chen, e-Competitions | N° 61093, www.concurrences.com

Introduction On October 31, 2013, the Taiwan Fair Trade Commission (TFTC) imposed a fine of NT$10 million (US$340,000) on Samsung for hiring an independent marketing company to disseminate false online information regarding cellphones and other electronic devices produced by its competitors in Taiwan. According to the investigation by the TFTC, the marketing company used its employees, part-time Internet interns, and project bloggers to make inaccurate online product comparisons, evaluations, and comments on cellphones produced by its competitors. The marketing company also failed to disclose its business relationship with Samsung on the websites where product comments and evaluations were posted. The TFTC held that online viewers were likely to be misled into believing that the evaluation and comments were experience sharing by independent users of cellphones and electronic devices. Therefore, it constituted a deceptive and unfairly competitive business practice, which violated Article 24 of the Taiwan Fair Trade Act (TFTA). Background The case originated from a petition for investigation by a legislator alleging that Samsung had hired a marketing company to disseminate false information regarding the quality of HTC cellphones. Because the evaluation and comments were posted by users with individual e-mail accounts, the blog viewers and consumers were likely to be misled into believing that they were genuine users’ experiences. The legislator petitioned that the TFTC investigate whether this deceiving and disparaging practice violated the TFTA. After the investigation, the TFTC determined that the evaluation and comments were posted primarily on the Viral and Mobile 01 websites. The information was written by company employees, This document is protected by copyright laws and international copyright treaties. Non-authorised use of this document constitutes a violation of the publisher's rights and may be punished by up to 3 years imprisonment and up to a € 300 000 fine (Art. L 335-2 CPI). Personal use of this document is authorised within the limits of Art. L 122-5 CPI and DRM protection.

www.concurrences.com

Andy Chen | e-Competitions | N° 61093

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part-time Internet interns, and project bloggers. The part-time Internet interns posted their evaluations as individual users and were reimbursed based on the number and length of their comments. The marketing company also instructed the part-time interns to use different e-mail accounts to post comments and evaluations and to respond to questions. The purpose was to create a milieu of enthusiastic discussion on Samsung cellphones, including introducing new products, responding to negative user experiences, offering solutions to problems, and comparing competing cellphones. Similar functions were expected of cellphone project bloggers. With the exception of renowned bloggers, the marketing company reviewed all comments and evaluations made by the project bloggers before they were posted on the Mobile 01 website. The company employees responsible for the Viral website could contact Samsung directly, concerning the user experiences that were shared and circulated on the Internet. They submitted periodic reports regarding the number of users’ comments and responses to Samsung for its reference. After obtaining further instructions on future marketing strategies from Samsung, they attempted to maintain or enhance consumer interest in Samsung’s products by continuing existing discussion topics or adding new topics to the Viral and Mobile 01websites. These efforts included comparing Samsung’s products favorably with competing products. During the investigation, the marketing company asserted first that “viral marketing” is a commonly observed marketing method worldwide. It assists the businesses to collect and evaluate consumers’ reactions from using their products. The producers could thereby improve their products based on that information to provide more efficient services. In implementing the system, the company required its employees and interns not to engage in false presentations of products. However, the outsourced interns were specifically being instructed not to reveal their relationship with the company. Samsung also claimed that they were not directly involved in the implementation of the alleged viral marketing, nor had they monitored or reviewed the content of the posted comments. Upon receiving the reports from the marketing company, Samsung transferred the negative comments to its marketing department for improving their services or correcting misunderstood information. Although the business relationship between Samsung and the marketing company was not revealed on the websites, there is currently no law requiring such a disclosure. Decision of the Taiwan Fair Trade Commission Despite the assertion of the truthfulness of the posted comments and evaluations, the TFTC still found Samsung to be violating the TFTA. The TFTC relied on evidence indicating a dual role being played on the websites by employees or interns hired by the marketing company. For example, they first pretended to be potential buyers of cellphones or other electronic devices and post their questions on the websites to invite purchase advice. They would then respond to those questions with different user names and e-mail accounts. Information either endorsing Samsung or disparaging competing brands were included in their responses. The TFTC also determined that the marketing company had instructed its interns or employees to collect and use negative comments regarding new cellphones produced by Samsung’s competitors to compare with Samsung’s similar products. According to the TFTC, the information posted by the marketing company was clearly not based on real use and experience. It was posted with the primary purpose of discouraging viewers from purchasing cellphones produced by competing brands such as Sony or HTC. The applicable law in this case is Article 24 of the TFTA. It reads: “In addition to what is provided for in this Law, no enterprise shall otherwise have any deceptive or obviously unfair conduct that is able This document is protected by copyright laws and international copyright treaties. Non-authorised use of this document constitutes a violation of the publisher's rights and may be punished by up to 3 years imprisonment and up to a € 300 000 fine (Art. L 335-2 CPI). Personal use of this document is authorised within the limits of Art. L 122-5 CPI and DRM protection.



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to affect trading order.” By “deceptive,” it refers to the use of misleading methods such as cheating or concealing material facts to cause transacting counterparts not to deal with competitors. In reaching its decision, the TFTC first indicated the importance of users’ experiences in influencing potential buyers’ purchase decisions in today’s business world. This is evidenced by a survey cited by the TFTC, indicating that the expenses devoted to advertisement in viral marketing in Taiwan has increased 18% in the past 5 years. The TFTC also mentioned a study conducted by Harvard Business School that reported 5% to 9% revenue increases for restaurants with an increase of one-star rating. [1] The study suggested that online consumer reviews gradually substitute for more traditional forms of reputation. Therefore, comments and experience sharing are treated as material information by the TFTC. Based on this premise, the TFTC further asserted that the concealment of the commercial interest existing between Samsung and the marketing company reduced potential buyers’ awareness of the information provided through viral marketing as being business-oriented, which, in turn, increased the reliability of the comments made on the websites. Anonymous postings also tend to prevent competing brands from verifying whether Samsung and its affiliates had made the disparaging comments regarding their products and appraising the possibility of seeking redress through judicial or administrative actions. The competitors might have been particularly hesitant to post rebuttals in such circumstances, partially because of respect for freedom of expression and partially to avoid offending or embarrassing consumers who had shared their negative experiences on the websites. Relying on this observation, the TFTC inferred that the practice substantially affected the trading order in the relevant market. In particular, the TFTC referred to a survey by AC Nielson on the global reliability of advertisement, indicating that the most trusted form of advertisement to online consumers in Taiwan is free endorsements by third parties. Among them, 72% of those being surveyed trust media contain online user experiences, next to word-of-mouth recommendations by family members and friends. Conclusion The Samsung decision attests to how technological advancement can assist businesses in improving their distribution efficiency. However, it can also raise competitive concerns when improperly used. In the case of viral marketing, the concealment of user identity and their business interests in the product brand they are endorsing might falsely enhance online viewers’ trust in the posted comments and lead them to make suboptimal purchase decisions. Evidently, the TFTC has in this case relied on a conduct-based provision aiming to regulate unfair-competition disputes to reach its decision of violation. However, a pertinent question to ask is how the competitive concerns revealed in this case could be factored into the traditional effect-based framework for antitrust evaluation. Because Samsung holds more than a 27% market share in the Taiwanese cellphone market, [2] it is plausible for the TFTC to review the existing and potential market impacts from the alleged disparaging practice. For example, if anonymity in viral websites can substantially increase the costs of clarifying false negative comments and mislead online viewers to favor Samsung products, such a phenomenon could be evaluated using the conventional entry-barrier hypothesis in antitrust analysis. The “affect trading order” requirement could also be more convincingly established if the TFTC could demonstrate that the lost business opportunities resulting from the disparaging practice had rendered the competing brands to be competitively disadvantaged due to the failure to realize scale economies.

This document is protected by copyright laws and international copyright treaties. Non-authorised use of this document constitutes a violation of the publisher's rights and may be punished by up to 3 years imprisonment and up to a € 300 000 fine (Art. L 335-2 CPI). Personal use of this document is authorised within the limits of Art. L 122-5 CPI and DRM protection.



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[1] Michael Luca, Reviews, Reputation, and Revenue: The Case of Yelp.Com (September 16, 2011). Harvard Business School NOM Unit Working Paper No. 12-016, available at SSRN: http://ssrn.com/abstract=1928601 [2] Sony Cellphones in Taiwan: Marching into Second Place, Commercial Times, November 21, 2013, available at http://news.chinatimes.com/tech/171....

Andy Chen | Chung Yuan Christian University (Taiwan) | [email protected]

This document is protected by copyright laws and international copyright treaties. Non-authorised use of this document constitutes a violation of the publisher's rights and may be punished by up to 3 years imprisonment and up to a € 300 000 fine (Art. L 335-2 CPI). Personal use of this document is authorised within the limits of Art. L 122-5 CPI and DRM protection.



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