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Exclusive Rights

Exclusivity

Frequently, distributors, wholesalers, sales representatives and others in the product distribution chain will request an "exclusive" territory or "exclusive distributorship" from a manufacturer or supplier. In this type of arrangement, the manufacturer or seller agrees not to appoint or sell to another dealer in the same area. This greatly assists the distributor or sales representative because it need not then worry about competition in the sale of the same products.

Exclusive Distributorships

In Hong Kong, the grant of an exclusive distributorship is generally permissible. Although these arrangements could result in a "refusal to deal" by the manufacturer with other distributors, they are not prohibited by the laws as Hong Kong does not have any anti-trust or anti-competition legislations. The Consumer Council has been strongly advocating to outlaw certain restrictive trade practices but the Hong Kong Government is not responsive on that; nor the business enterprises in Hong Kong would like to witness that to happen.

Exclusive Dealings

The term "exclusive dealing" is generally used to refer to the agreement between a supplier or manufacturer and its customer ( such as a distributor or wholesaler) where the customer is restrained from dealing with any of the supplier's competitors. The term generally includes express agreements, and also arrangements that the have the same exclusionary effect on competitors. For example, some manufacturers use "tie-ins", a requirement that a customer purchase all its needs from the manufacturer, forcing the customer to purchase the manufacturer's "full line." Competitors of the manufacturer then may be foreclosed from selling the customer all of the "tied-in" products.

Arrangements Restricting Competition

There is no general law in Hong Kong outlawing anti-competition practices. There are legislations or regulations restricting anti-competition measures. The best example is the telecommunication services in Hong Kong. The regulating body, the Telecommunication Authority regulates restrictive trade practices of telecommunication licencees through the powers given to him under the Telecommunications Ordinance and also through licensing conditions.

Refusing to Sell

The law does not outright condemn a supplier's refusal to sell or lease a product. This subject area is governed by the market rather than through the law. Henceforth, exclusive purchase right of a party can legitimately happen by virtue of a exclusive right provision under a contract. But care must be given to specific industry like telecommunication services.

Franchise

Franchising is a system of distributing a product or delivering a service in return for a fee. The company that manufactures the product or originally developed the service and that appoints others to use its name and sell the products or service is called the "franchisor". The person that contracts with the franchisor and is granted the right to market the goods or services, according to the franchisor's established practices and upon paying franchise fees, is called the "franchisee".

Franchising can be an attractive alternative if you are interested in starting a business. If you are a small business owner interested in expanding your distribution, franchising may also be a valuable option. There are advantages and disadvantages for both franchisors and franchisees using this system.

Advantages and Disadvantages of Franchises

For franchisors, the advantage is gaining additional outlets for the distribution of products and services without many costs associated in establishing new facilities, such as hiring employees and acquiring facilities and equipment. Also, a franchisor may require the payment of an up front franchise fee, providing immediate revenue. The disadvantages for the franchisor include compliance with complex and time consuming federal and state regulations. To establish a franchise operation, it is important to seek out a lawyer who is familiar with this area. Most importantly, the franchisor must disclose much historical and financial information about the franchise business.

There are many benefits for franchisees. Buying a franchise allows you to acquire an interest in an established business, usually with a recognised name and the benefit of national or local advertising. Franchisors usually provide training and purchasing benefits not normally available to independent small businesses. Often, the franchisor will grant the franchisee the right to use a recognized trademark and will advertise it nationally or locally. On the other hand, a franchise business takes a high degree of personal involvement by the franchisee. The franchisee is also restricted in many ways because he will be subject to the dictates of the franchisor in terms of many facets of the operation of the business. The franchisee may define opening and closing times, product standards, service standards, warranty standards and place restrictions on the franchisee's territory and ability to sell the business. While success will depend in large part upon the abilities of the franchisee, the most important factor is usually the size of the market or value of the service developed by the franchisor.

Considerations for Franchisees

If you are considering buying a franchise, use great caution. Make sure that you carefully read the circular provided by the franchisor. Also, carefully review the proposed franchise agreement.

Are you provided a territory exclusively so that new franchises can't take your business?

Must you participate actively in the business or can you be an "absentee owner"?

Can you transfer the franchise to someone else?

What are the conditions for terminating and renewing the agreement?

Does the franchisor have a recognised, protected trademark that you can use?

Talk to other franchisees about the pros and cons of the business and what it is like to deal with the franchisor. Be particularly wary of promises of great earnings.

Product Marketing

Product marketing is to establish and maintain the most cost effective, efficient and profitable method of distributing products to customers. Determining the best channel of distribution for a product involves an analysis of start-up costs, size of the potential customer base, potential sales volume, cost of shipping and size of the geographic territory. Finding the best method may involve a process of trial and error, or modeling the method of distribution after an industry leader.

Sales Force

The simplest method for selling products to customers is to employ a sales force that deals directly with the ultimate customer, and then to ship the goods and bill directly to that customer. Unfortunately, this method involves a substantial investment in a direct sales force. If there are many potential customers, the large geographic area and/or broad product lines, a direct sales force may not be possible. When involving in direct marketing , the relevant provisions namely S.34 under the Personal Data (Privacy) Ordinance has to be observed.

Distributors and Independent Sales Representatives

Many small businesses instead elect to market their products through independent firms. These independent firms can roughly be divided into two groups: A distributor is an individual or company that purchases goods from a manufacturer and then resells them to another company in the chain of distribution, such as a dealer or retailer. The other channel is through an independent sales representative (sometimes called a sales agent or manufacturer's representative). Unlike the distributor, the sales representative does not purchase the manufacturer's product. Instead, the sales representative calls on customers, solicits orders, and is paid a commission when the sale is completed.

Because a distributor actually purchases the goods from the manufacturer and carries an inventory, the credit worthiness of the distributor is extremely important. An independent representative, on the other hand, does not purchase the goods or maintain an inventory. Because the sales representative simply solicits the orders from the ultimate customer, the customer's ability to pay becomes more important than the sales representative's.

There are many variations on these two basic methods of product marketing. Most commonly, there are often additional parties involved in the chain of distribution. Many manufacturers of consumer goods sell to distributors, who in turn sell to dealers or retailers. In some cases, particularly with high tech hardware and software products, a distributor may modify or enhance the product before resale. Dealings with these "value-added resellers" can become complicated, as issues of protection of intellectual property and responsibility for defective products come into play.

Restrictions on Resale of Goods

Restricting Distributors

Frequently, a manufacturer or supplier desires to place restrictions on its distributor's ability to freely resell the manufacturer's or supplier's goods. For example, a manufacturer may insist that a distributor sell or not sell to certain customers, in certain areas, at certain locations, or in a "primary area of responsibility". These restrictions can be enforced by the manufacturer through cutting off supplies of goods, terminating the distributor or dealing more favourably with other distributors.

Like exclusive distributorships, the law generally permits restrictions on the distributor's ability to resell the products.

Resale Price Maintenance is not Prohibited

"Resale price maintenance" is not unlawful in Hong Kong. Resale price maintenance involves the direct or indirect requirement by a manufacturer that its distributor or dealer resell the goods at a minimum set price or price level.

Restrictive Trade Practices in General

The management of whatever scale and nature of business has to be minded about the legal aspects in respect of the operation of the business.

Several legal concepts are particularly relevant to technology oriented enterprises, such as Internet platform solutions providers, supplier of proprietary contents. A valuable part of the business of a technology enterprise is based on its intellectual capital. Intellectual capital is characterised by its intangible nature. Protection of such intellectual capital requires a clear understanding of various trade or business protection concepts. These concepts are like exclusive dealings, exclusive rights underlying exclusivity and matters on business arrangement like franchising.

Enquiries and Complaints to Equal Opportunities Commission

The Equal Opportunities Commission (EOC) is a statutory body established under the Equal Opportunities Ordinance.

Its operation is funded by the Government. Businesses are entitled to seek advice and consultation with the EOC regarding matters arising from observance or compliance of the discriminatory legislations. 'Prevention is better than Medication' is the best motto when handling discrimination legislations. Looking for advice from the EOC is not subject to any payment of a fee.

Sexual Harassment

Sexual Harassment

Sexual harassment in workplace is governed by the Sex Discrimination Ordinance (SDO).

Harassment

In addition to sexual harassment, other types of harassment have also been found to violate the law. Employees who are harassed because of their disabilities may have a claim under the Disability Discrimination Ordinance.

Types of Sexual Harassment

Employers have an affirmative duty to maintain a workplace free of harassment, including sexual harassment, but are not strictly liable for harassment. Liability depends on what the employer has done to prevent harassment and the remedial measures taken after harassment occurs. An employer's liability will depend upon the facts and circumstances surrounding each claim. The concept of sexual harassment gives rise to two types of unlawful sexual harassment:

When an employee risks losing or not receiving some tangible job benefit based on whether the employee accepts unwelcome sexual advances.

When the working environment is oppressive to an employee because of the actions of coworkers, supervisors or customers.

The SDO has its own definition of sexual harassment. The SDO definition includes unwelcome sexual advances, requests for sexual favors and other verbal or physical conduct of a sexual nature.

Duties of Employers

Employers have a duty to take all necessary steps to prevent sexual harassment and other forms of illegal harassment. This includes affirmatively raising the subject of sexual harassment with management and employees, expressing strong disapproval of it, developing appropriate sanctions for it, informing employees of their rights under the law and sensitizing employees to the problem of harassment. The mere fact that an employer has a policy against harassment in the workplace is not enough. The policy must be communicated to employees, and then management must act to eliminate the harassment when it occurs. When sexual harassment is discovered, effective corrective action must be taken swiftly and decisively by the employer. Effective corrective action restores the victim to a "non-harassed" state, and prevents the misconduct from recurring.

Steps to Prevent Claims

To help ensure your company is not subjected to a claim of sexual harassment, the following steps are recommended:

Establish a clear non-discrimination policy that makes all forms of harassment, including sexual harassment, unacceptable in the workplace. This policy should be regularly reviewed and updated, and disseminated to all current and newly hired employees

Establish a grievance procedure so that employees understand how to bring complaints of harassment to the surface. Make sure than anyone who is alleged to have directly or indirectly participated in the harassment is not involved in the grievance procedure.

The grievance procedure should protect the confidentiality of both the alleged victim and the harasser. It may also be appropriate to provide for a process of appealing the decision of the initial grievance mechanism to some higher management authority.

Fully investigate any allegation of sexual harassment, or any situation where you believe harassment may have occurred. Document the steps taken in your investigation and conclusions that no harassment occurred.

If no disciplinary action is deemed appropriate after the investigation, at a minimum, reestablish a policy against harassment and demonstrate disapproval.

If corrective action is deemed necessary, make sure that it is full and complete and ends the misconduct. Follow-up on the results of the corrective action should be continued until it is clear that the misconduct has been eliminated.

The law on all forms of harassment is sure to evolve over time. Consult your lawyer to make sure that your company manuals, policies, guidelines and practices are adequate to avoid claims of harassment.

Remember that it is not enough just to have these policies, they must be vigorously enforced by management to be meaningful under the law.

Mandatory Provident Fund Schemes (MPF Schemes)

The Mandatory Provident Schemes Ordinance is now effective. An Employer is required to arrange all his relevant employees to join a registered MPF scheme. Please note the legal significance on complying the laws. In some cases, failure to comply is a crimimal offence. Please read the relevant news .

Responsibilities

An Employer is required to make arrangements for relevant employees aged between 18 and 65, who have been employed for 60 days or more, to join a registered MPF scheme (except those who have attained age 64 at the commencement of the exemption provision in the Ordinance).

Employees employed under one employment contract for 60 days or more, whether working full-time or part-time, will be covered by the Ordinance.

An Employer may select one or more MPF schemes available in the market and make arrangements for relevant employees to become scheme members. An Employer is required to display the participation certificate issued by the MPFA.

An Employer is required to calculate individual employee's income and amount of contribution for each contribution period, deduct the relevant mandatory contribution from the employee's relevant income, and pay the employer's contribution, from the Employer's own funds, for the employee's benefit.

An Employer must provide each employee with a monthly pay-record showing the employee's relevant income and the amount of contribution. However, if an Employer is the employer of a casual employee participating in an industry scheme, the Employer does not need to comply with this requirement.

An Employer must pay the total mandatory contributions to the trustee of the scheme on or before the contribution day which is the 10th calendar day after the last day of the relevant contribution period. To put it simply, if an Employer pay monthly wages or salaries to employees on the last day of each month, the contribution day falls on the 10th calendar day following the pay day.

When remitting the payment, An Employer must provide the trustee with a remittance statement showing the relevant income and amount of contribution of each relevant employee.

If an Employer are the employer of a casual employee and an Employer has enrolled the casual employee in an industry scheme, the Employer must pay the total mandatory contributions to the trustee of the scheme on or before the contribution day, i.e., either :

the 10th calendar day after the last day of the relevant contribution period; or

the day on which the relevant income for the relevant contribution period is paid to the casual employee. In other words, the contributions should be paid to the scheme trustee on the pay day. However, when remitting the payment, the Employer does not need to provide the trustee with a remittance statement.

Tax Concession

An Employer MPF contributions are profits tax deductible, provided that the deduction does not exceed 15% of employees' total emolument. Visit the link of Related Tax Implications to know more details.

Cessation of Employment

When an employee ceases employment, an Employer should assist the employee to complete an election form in transferring the accrued benefits derived from mandatory contributions in the MPF scheme to another MPF scheme, or to another account in the same scheme.

An Employer cannot claw back any benefits accrued from the mandatory contributions previously made by an Employer for the employee's benefit.

Offsetting of Severance and Long Service Payments

An Employer can offset the long service payment or severance payment as required under the Employment Ordinance out of the accrued benefits derived from the contribution an Employer have made to the employee in the MPF scheme. An Employer can apply to the trustee to deduct a relevant amount for this purpose for payment to a leaving employee.

For example, if the benefit accrued from the employer's contribution is $55,000 and the amount of long service payment is $80,000, then an Employer can apply to withdraw $55,000 from the employee's MPF account for (partial) payment, and pay $25,000, from an Employer own funds, to the leaving employee.

As a further example, if the long service payment is only $40,000, an Employer can only request the trustee to pay $40,000 to the leaving employee. The remaining accrued benefits, viz., the balance of $15,000 derived from the employer's contributions, together with those derived from the total contribution made by the employee, have to be transferred to the MPF account designated by the employee and preserved until the employee retires.

Please note that in offsetting long service payment or severance payment, an Employer will need to follow other requirements set out in the Employment Ordinance concerning such payments.