Rakuten faces Japanese vendors' protest as they form union

Japanese vendors at the nation’s largest online mall Rakuten have formed a union in an attempt to gain better negotiating power, breaking the tradition in Japan of docile business partners of large companies, as the competition regulator tightens scrutiny over abusive dealings by big digital platforms with smaller business partners.

While US and European businesses and consumers may take their complaints against big tech companies over exploitative practices to courts and regulatory authorities, Japanese businesses have typically remained quiet about such grievances, perhaps out of fear of retaliation from large corporate partners. But the situation may be changing.

Vendors at Rakuten mall organized a voluntary group called Rakuten Union in October, which now has 276 members. Key members of the group are preparing to upgrade this to a cooperative for small businesses to gain negotiating ability with Rakuten.

Yuki Katsumata, Rakuten Union’s leader, said he had endured Rakuten’s frequent, one-sided changes of terms of business for five years, because he relies on the platform for 80 percent of his revenues. But his patience has run out.

“I can no longer remain quiet because (Rakuten’s) poor treatment of vendors is escalating,” Katsumata told MLex. “The worst one is its penalty system.”

Mentioned in the JFTC’s recent report on digital platforms, without identifying the company name, Rakuten’s penalty system imposes on its vendors points for violations such as selling fake items, mislabeling and other practices, and vendors face penalties such as downgrading on search results, restriction of some functions, fines to be deducted from their payments for sales and even termination of their contracts with Rakuten.

Katsumata recently received an email from Rakuten saying that an image of a product he sells on Rakuten may violate the manufacturer’s copyright. It turned out that Rakuten contacted the manufacturer to ask whether Katsumata is its distributor, and the manufacturer said no, because Katsumata procured the goods from a wholesaler.

A violation of copyright means perpetators receive 35 points in Rakuten's penalty system, Katsumata said, and if a vendor’s violations reach 100 points, it will be kicked out of Rakuten mall and have to pay a penalty of 3 million yen ($27,500).

“Rakuten is making the penalty system a business,” Katsumata said.

Rakuten Union is collecting signatures to demand Rakuten scrap its penalty system, and to cancel its plan to start a free shipping service for shoppers who purchase 3,980 yen ($36) or more, with the cost shouldered by vendors. Other demands include cancelling a fee for putting banner advertisements — set at 2 to 8 percent of sales — and payment through Rakuten’s cashless payment system, for which vendors must pay a fee of up to 3.5 percent of sales.  

Rakuten Union has collected more than 2,300 signatures so far, out of nearly 48,000 vendors. The group is planning to submit the signatures to Rakuten early next year, as well as to the competition enforcer, the Japan Fair Trade Commission, or JFTC, possibly with a lawyer’s opinion.

“We want to move the JFTC, although the hurdle is high,” Katsumata said.

He said the JFTC didn’t take action when someone brought a complaint about Rakuten with documentary evidence. The enforcer cited the difficulty of determining that the company's behavior was a violation of competition law, he said.

Yoshihito Kawakami, a lawyer advising Rakuten Union, told MLex that there’s a question whether a contract between a big platform like Rakuten and a small vendor can be seen as a true agreement through the voluntary will of both parties. “It’s close to a legal fiction,” he said.

To close the gap in bargaining power, establishing a cooperative under the Small- and Medium-sized Enterprise Law would be one way, said Kawakami, who also helps contractors of Uber Eats, a food delivery service.

“One-sided changes of terms and the penalty system can be an antitrust violation, as abuse of superior bargaining position, if they’re done in a way to cause unfair disadvantage to the parties in the weaker position,” said Kawakami, a partner at Waseda Legal Commons law firm.

Rakuten told MLex the company considers various aspects when it introduces new measures for innovations and takes care to comply with laws and regulations.

Constant innovations are necessary to keep up with competition from other online malls, Rakuten’s direct online sales and traditional retailers, said the Tokyo-based company. The diversity of the Rakuten marketplace — including the characteristics of individual vendors — which used to be its strength, could be a weakness when it’s seen by shoppers as insufficient consistency.

“In the short term, some measures may create burdens for our vendors, but in the long term, we believe they can also reap bigger benefits from our increased shoppers. We will continue dialogues with our vendors and listen to their views,” the company said in an email.

Competition is getting fiercer in the Japanese e-commerce market, which grew 41 percent to 18 trillion yen ($165 billion) over the five-year period to 2018, according to the industry ministry. Rakuten had the top market share, at 26.8 percent, closely followed by Amazon Japan’s 26.6 percent, and Yahoo Shopping's 7.9 percent, according to a Japanese private research firm Fuji Keizai.

Besides archrival Amazon, Rakuten will face a new challenge from Yahoo Japan, which recently acquired online fashion retailer Zozo and is planning to bring messaging app LINE into its group.

According the JFTC’s interim report on digital platforms published in April, more online mall sellers have complained about Rakuten’s one-sided changes of terms than about Amazon's —- 93.2 percent versus 72.8 percent — and about disadvantageous changes, with 93.5 percent for Rakuten and 69.3 percent for Amazon.

Rakuten union members feel the JFTC was swift in acting against Amazon, whose award-point system was quickly scrapped earlier this year, after the JFTC stepped in.

Satoshi Takashima, a vendor who received a 100,000 yen fine last year for a problem with a product’s image on Rakuten, said the JFTC seems swifter to act against a non-Japanese platform operator than a Japanese one.

Amid some speculation that political considerations to nurture domestic platforms may be at work, the JFTC will be tested over how to respond to the rising voices of Rakuten merchants. Some members of the Rakuten Union have taken to using the Twitter hashtag, #HelpMeJFTC.

Kawakami said Rakuten Union will seek to have the JFTC investigate Rakuten and issue cease-and-desist orders.

Meanwhile, Rakuten Union says on its website: “We may be ants for Rakuten, but ants have their own way of fighting. Why don’t you raise your voice with us?”