2nd Report of the Market Access Ombudsman Council (March 14, 1995)

6-(2) Review of regulation on premium offers

1. Complainant: American Chamber of Commerce in Japan

2. Ministry concerned: Fair Trade Commission

3. Complaint:

The intent of regulation on premium offers is to ensure that there are no impediments to fair competition through escalation of competition by means of premiums, which causes the means of competition to shift from price and quality to provision of fancy premiums and distorts appropriate selection of goods by consumers. To this end, the following regulations are in effect, in accordance with the Anti-monopoly Act and its special law, the Premiums and Representations Act, and various notices based on these laws:

(1) At the regulations based on the Premiums and Representations Act

At the Premiums and Representations Act (Act Against Unjustifiable Premiums and Misleading Representations, 1962), "premiums" are defined as the "economic benefit" of objects used as "a means of inducing customers," "provided in connection with a transaction concerning commodity or service which the firm supplies." "Price reduction", "after-sales service" and "attached equipment" are excluded from premiums.

1) Closed lotteries
The maximum amount and total amount of premiums offered by lotteries (closed lotteries) (drawings, etc.) is set according to the "Notification Concerning Restriction on Lotteries on Prize Competitions (Notice No. 3, 1977)."
2) Premiums offered to general consumers not by lotteries
The maximum amount of premiums offered to general consumers not by lotteries is set according to the "Notification Concerning Restriction on Premium Offered to General Consumers (Notice No.5, 1977)."
3) Restrictions by separate industry
Notices are in effect which set restrictions on premiums in 29 individual industries, based on conditions in the industries concerned.
4) Fair Competition Codes
Regarding premiums or representations, businesses or trade associations may, with the authorization of the Fair Trade Commission, set fair competition codes, to prevent unjustifiable inducing customers and to ensure fair competition. Some regulations by Notification on Premium Offered to General Consumers and some of notification restricting premiums by separate industry have regulations such as "within the scope of normal business practices". If fair competition codes pertaining to premiums are set out, the content of the codes must be taken into consideration.

(2) Premium restrictions based on the Anti-monopoly Act

1) Regulations on department stores
In principle, department stores (large-scale retailers) are forbidden to offer premiums conditional to the purchase of their goods (Notification No. 7, 1954).
2) Open lotteries
The maximum amount for provision of economic benefit through drawings using advertisements and other methods without connection with transactions (open lotteries) is set at 1 million yen (Notice No. 34, 1971).

The complainant asked for a review of regulations, believing that, compared to mass media advertising, offering premiums is a useful means for foreign companies and small firms to compete against large firms because it is a low-cost method that makes varied sales promotions aimed at specific targets possible, and that liberalization or relaxation of regulation on premium offers will, therefore, stimulate competition and bring many benefits to consumers, producers and retailers.

The following specific issues were mentioned.

(1) Since the definition of "premiums ","open lotteries" and "closed lotteries" is complicated, these restrictions lack transparency. These should not be linked by expressions like "actions in connection with to a transaction" or "a means of inducing customers" but should be linked to the presence or absence of "proof of purchase."

(2) Maximum limits on premiums were quite restrictive even at the time they were originally set. Considering subsequent inflation and other factors, in actual terms these limits are even more restrictive in the light of current economic conditions, and the maximum premium amount should be increased ten-fold and the percentage value of maximum premiums increased two- or three-fold.

(3) The fair competition codes set out by firms or trade associations deprive companies newly entering the market of a useful competitive tool. It should be made clear that associations have no authority to impose the codes on non-member companies. Alternatively, the fair competition codes should be abolished or their content raised to the level of general regulations.

(4) Attaching lists of requirements for entry to products or displaying them in-store should be permitted as means of open lotteries, and means for consumer participation in the most effective in-store sales promotion activities should be diversified.

(5) The following measures are needed to liberalize other sales promotion activities:

1) Rules should be amended to facilitate joint sales promotion activities by more than one company from different industries.
2) Sales campaign with premium offers by department stores, currently prohibited in principle, should be liberalized.
3) Offering of "fantasy prize" premiums of very large sums should be allowed occasionally.
4) Because of various fair competition codes, samples and other trial products are restricted to small items. However, firms should be allowed to provide products themselves as samples, without having to produce sample products especially for that purpose.

4. Results of deliberation:

Offering of premiums (including open lotteries. Ditto throughout) is an effective sales promotion method which makes it possible to promote new products to specific targets at low cost, compared to mass media advertising, and is a useful means of stimulating competition among companies.

The Fair Trade Commission will review of its Notifications concerning premiums offers by department stores, and the maximum limit on amounts of premiums in each category during FY1995 according to the conclusions that will be presented a study group of academic experts at the end of March 1995 concerning review and clarification of regulations on premiums.

When doing so, considering the changes in socioeconomic conditions since specific restrictions were established, a basic reevaluation of the need for regulation will be undertaken, with the aim of promoting fair competition. Specific contents of the review should be indicated, with a view to making regulation clear and keeping restrictions to a minimum, within the scope of necessity, and should be implemented as soon as possible during FY1995.

In connection with the issues raised in this complaint, the following specific measures are necessary:

(1) The definition and interpretation of premiums, including the distinction between open and closed lotteries, should be clarified and regulations made more transparent.

(2) As considerable time has passed since many of the specific regulations on maximum limits to premiums were set, these limits should be reviewed, taking intervening changes in socioeconomic conditions into consideration.

(3) In addition to clarifying that industry association cannot extend the fair competition codes to companies which do not participate in the codes, the content and application of fair competition codes should be reviewed.

(4) Sales campaign with premium offers by department stores should be liberalized and the offering of premiums within the scope of general regulations allowed.

The question of undertaking a review of the other items mentioned in this complaint should also be studied.

Government decision (March 28, 1995)

6-(2) Review of regulation on premium offers

The Fair Trade Commission is attempting to review regulation on premium offers, considering the conclusion of the study group concerning the review and clarification of regulation on premium offers consisting of academics at the end of March, 1995, as to abolish the notification of the Commission concerning premium offers by department stores(subsection 8 of the Specific Unfair Trade Practices in the Department Store Industry) and one concerning premium offers to entrepreneurs, and to increase the upper limit of premiums set up by notification concerning prize without connection with transactions, one concerning premiums offered by lotteries, and one concerning premiums offered to general consumers not by lotteries, as well as to clarify the regulation including the scope of regulation during FY1995. Then the Commission will also attempt to review, as appropriately, regulation on premium offers applied to specific industry by notifications or the fair competition codes.

Follow-up (May 27,1996)

6-(2) Review of regulation on premium offers

Based on the conclusions of the report by a study group of academic experts presented on March 28, 1995, the fair trade Commission announced the outline of revisions intended to review and clarify restrictions on premiums on June 29 and invited comments and requests concerning this. Hearings were held on December, 13 and 18, when a specific proposal for amendments was presented. After careful consideration of the opinions of academic experts, consumers, and concerned businesses, revisions to the general regulations on premium offers revised application guidelines were on February 16, 1996.

The contents of the revision are as follows (unless special mention is made, revisions were implemented on April 1, 1996):

(1) The scope of restrictions on open lotteries held by manufacturers was narrowed and clarified, including the fact that in principle, there is no problem if manufacturers place premium application forms on the premises of retailers they deal with.

(2) The maximum limit on premiums offered to general consumers not by lottery was abolished, the maximum limits on open lottery prizes and those related to the Notification Concerning Restriction on Lotteries on Prize Competitions were raised, and prizes offered by businesses were abolished (see reference).

(3) The Commission instructed industry associations (on February 16, 1996) to review fair competition codes at an early date. After studying the issue of reviewing fair competition codes in the auto industry, the content of these codes was made identical to that of the newly revised general regulations (hearings were held on April 22, and the revised codes were approved by the Commission on May 9 and implemented on May 10. A study of reviewing the codes in other industries is currently being undertaken.)

(4) Item 8 of Notice #7 of the Fair Trade Commission, (1954), relating to specific unfair transaction methods of department stores, was abolished.

In addition, the scope of restrictions on premiums offered to general consumers not by lottery was narrowed and clarified, and sales of products in sets, common discount coupons, and others no longer come under this designation.

Further Follow-up (May 12, 1997)

6-(2) Review of regulation on premium offers

The Fair Trade Commission made the following changes to the notification and application standards for the general regulations concerning premiums from April 1, 1996: the maximum limit on amounts of lotteries or prize competition was raised; the limit on the value of premiums offered to general consumers was eliminated; Notification on premium offers to entrepreneur was abolished; Clause 8 of the Special Designation on Department Stores was removed; the upper limit on premiums for open lotteries was raised and restrictions on the scope of such premiums was reduced and clarified. Following this review and clarification of the general regulations, industry-specific notifications on restrictions on premiums were abolished in 27 industries' of 29 industries. In addition, together with elimination of Notifications by industry, 24 of 51 fair competition codes concerning premium offers were reviewed to conform to the general regulations.