Criminal judgment against Wan Kuo International Development Co., Ltd. for violation of the Fair Trade Law.
Case:
Criminal judgment against Wan Kuo International Development Co., Ltd. for violation of the Fair Trade Law.
Key Words:
Multi-level sales,
Reference:
Taipei District Court Criminal Judgement (87) Tu Yi Tzu No. 2460
Industry:
Import Trade Industry (5601)
Relevant Laws:
Summary:
1. Cheng Tien, responsible person of Wan Kuo International Development Co., Ltd. ("Wan Kuo International") and Chou Fang-wei, Wan Kuo International's General Manager reported to the Fair Trade Commission that Wan Kuo International would operate an "unbalanced, two-way" multi-level sales scheme. Fully aware that participants in multi-level sales organizations must earn commission, bonuses, or other form of economic benefit by promoting or selling products at a reasonable market price and not by merely introducing other participants but with joint intent to violate the law, Cheng and Chou stated in the "Wan Kuo International Operation Handbook" (Handbook) that if a distributor purchased 5000 points (around NT$6,500) and persuaded two new distributors to join (at membership fees of NT$1,500) and purchase 5000 points, the first distributor would accumulate points and win bonuses. Thereafter, points would accumulate in four stages as more participants joined. Based on a complex system of points accumulation by participants on the same levels, participants could win a total of NT$50,000 in four stages. After completing the four stages, participants could win the bonuses again as they received points from lower levels. A feature of this system was that participants needed to introduce only two other participants to win bonuses. Moreover, the number of levels was not restricted, nor were there time limits, discounts, or limits on the number of points that a participant could accumulate. Bonuses were distributed on a weekly basis. The scheme also included a "line" system whereby higher-level distributors assisted lower level distributors develop new business. Through mutual assistance up and down lines, distributors could quickly accumulate bonuses without having to sell any products. This sales scheme functioned by allowing participant to draw income primarily from the introduction of new participants rather than from reasonable market prices charged for products or services that they promoted or sold. Under this scheme, Chang Chao-sen, Hung Hui-wen, Cheng Yi-feng, and Wang Yu-hui, and some three thousand other participants took part with the intention of winning bonuses by introducing new participants. Of these, 400 participants had qualified for and received bonuses. Bonuses distributed totaled NT$23,827,500 or 44 percent of gross operating revenues of NT$54,429,758. 2. Reply by the defendants as follows: Wan Kuo International replied that its sales scheme was a multi-level sales organization. Wan Kuo banned lines in a public announcement dated 5 May 1997 but no marketing company would be willing or able to restrict or interfere with lines because participants, not the companies, control lines. If a participant did not work hard to help participants at lower levels develop new business, that participant would not be able to "kick back and enjoy fat bonuses every week." The company also noted that the system calculated points for bonuses from zero each week. Therefore, the company argued, its system rewarded ability, not seniority. By resetting points to zero each week and issuing bonuses based on point calculation, defendants claimed, the Wan Kuo International sales scheme and traditional marketing schemes were completely identical. Points, moreover, were decided by costs. The costs of "inter-industry alliance" products were relatively high while the points earned by selling them were correspondingly low. Furthermore, suppliers set the suggested sales prices for these products and then gave participants a discount. The sales price was thus a "completely fair market price." Wan Kuo International also claimed that distributors abandoned their "right to return goods" of their own accord when they placed orders by adding a statement to that effect on the bottom of the company's "Distributor Order Form." Participants retained the right to choose whether they would purchase goods. 3. The original judgment of the Taipei District Court as follows: At Wan Kuo International sales meetings, Defendant Chou Fang-wei primarily focused on how to recruit members and win bonuses; products were rarely mentioned by him. Hung Yi-wen testified that she purchased Wan Kuo International products for NT$19,500 to obtain operating rights but that she never received the goods nor was she given a note authorizing her to obtain the goods. Hung added that the only documentation of the purchase she had was a "Distributor's Order Form." When she tried to withdraw from the scheme, Wan Kuo International's administrative staff demanded that she complete a "Notice of Contract Termination" but did not return her money. The Court found this testimony sufficient to support the conclusion that Wan Kuo International's purpose was to persuade participants to recruit lower level participants to obtain bonuses. It was also the conclusion of the Court that Wan Kuo International did not issue bonuses, distribute goods, and return payments in good faith. Wan Kuo International's sales scheme differed from traditional marketing schemes because in traditional marketing schemes, lower level participants can disassociate themselves from the level above them and establish new organizations. Wan Kuo International's sales scheme, however, allowed participants to invest once and then collect bonuses without selling products as long as new participants continue to join. In other words, early participants enjoyed a permanent advantage. This scheme thus differed significantly from legitimate multi-level sales schemes. According to the testimony of Lin Chin-shu, Chou retained Lin, who worked as an accountant at Cathay Life, to review the impact of the sales scheme in question on Wan Kuo International's finances. Lin found that the bonuses described in Handbook accounted for more than 70% of Wan Kuo International's costs. According to Chou, however, only 400, or about 13 percent, of the more than 3000 participants were eligible to receive bonuses. These 400 participants, moreover, had received bonuses equivalent to 44 percent of the company's operating revenue. This clearly demonstrates that Wan Kuo International distributors derived most of their income from introducing new participants rather than promoting or selling products or services at reasonable market prices. The Court finds that Defendants violated Article 23(1) of the Fair Trade Law (the Law). Defendants Cheng and Chou shall be sentenced pursuant to Article 35 of the Law while Wan Kuo International shall be fined in the amount prescribed in Article 35 of the Law pursuant to Article 38 of the Law. Appendix: Wan Kuo International Development Co., Ltd.'s Uniform Invoice Number: 97107541 Summarized by Jen Han Ying; Supervised by Hsu Jau In