Regulation of Multi-level Marketing Firms" Handling of the Return of Unsold Goods – Theory and Practice

  1. Purpose of the Study

    It is now more than 17 years since the scope of application of Chinese Taipei’s Fair Trade Law was expanded to include multi-level marketing. During this time, various principles for the practical regulation of multi-level marketing have been developed, in light of the provisions of the Fair Trade Law and based on the accumulation of experience by the Fair Trade Commission (FTC). Over the years, the main focus of the activities undertaken by the FTC to ensure effective implementation of the law with respect to multi-level marketing has been with respect to the return of unsold goods, an issue that is of great concern to participants in multi-level marketing schemes. Given the need to handle a wide range of different cases relating to multi-level marketing return of unsold goods on the basis of a limited number of rather broad statutes, although there are precedents that can be followed, the ongoing process of change in the market and the introduction of new product types has led to the emergence of new issues relating to the return of unsold goods, making it necessary for the regulatory authorities to interpret and apply the law in new ways.
    Articles 23-1, 23-2 and 23-3 of the Fair Trade Law specify compulsory provisions regarding the handling of the return of unsold goods in the event of revocation or termination of multi-level marketing participant agreements. These provisions were added in the 1999 revision of the Fair Trade Law; prior to that date, this issue was handled in accordance with Paragraph 1 of Article 5 of the February 28, 1992 version of the Supervisory Regulations Governing Multi-level Sales. The explanatory notes for the relevant items of these provisions read as follows: “… 3. The fact that a participant in a multi-level marketing scheme has not exercised their right to withdraw from the scheme during the cooling-off period cannot be taken to mean that the participant wishes to remain a participant in the scheme for ever. Multilevel marketing businesses often impose restrictions on participants that make it difficult for them to withdraw from the scheme. It is for this reason that Article 4 of the Regulations stipulates that multi-level marketing participant contracts must state clearly that the participant has the right to withdraw from the scheme at any time; this provision is based on similar stipulations contained in British regulations to combat pyramid schemes, and in laws enacted in states such as Massachusetts, Wyoming, Louisiana and Florida in the U.S. 4. The obligation imposed on multi-level marketing firms to repurchase all unsold goods currently in the hands of the participant when a participant withdraws from the scheme is intended to discourage multi-level marketing firms from forcing participants to accept large quantities of goods, thereby preventing multi-level marketing schemes from mutating into illicit forms of economic activity. The prices paid by the multi-level marketing firm in such cases of repurchase should be reasonable, otherwise participants will be tempted to engaged in inventory loading (with the intention of then forcing the firm to buy the goods back again); on the other hand, if the prices are too low, then the participant will lose their investment, and the law will have failed in its original aim of protecting participants. Hence the requirement in Article 5 of the Regulations that contracts should clearly state that the multi-level marketing firm is required to buy back unsold goods at 90% of the original price paid for the goods by the participant, which is intended to prevent disputes. Similar provisions can be found in British regulations to combat pyramid schemes, and in laws enacted in states such as Massachusetts, Wyoming, Louisiana and Florida in the U.S.
    It can be seen from the explanation cited above that these regulations were intended to ensure that participants in multi-level marketing schemes can withdraw from the scheme at any time. At the same time, the requirement that multi-level marketing firms must buy back unsold inventory from participants who wish to leave the scheme serves to protect participants’ rights while also helping to prevent multi-level marketing schemes from degenerating into pyramid schemes (see Article 23 of the Fair Trade Law). It would therefore seem reasonable to describe the three clauses of the Fair Trade Law cited above as playing a key role in the regulation of multi-level marketing enterprises.
    The present study uses scenario-based modeling and exploration to examine the laws and regulations that currently govern the return of unsold goods by participants in multi-level marketing schemes, in terms of both theory and practice. The study also considers potential issues relating multi-level marketing purchase returns (issues that have not yet arisen but which might arise in the future), with the aim of providing a useful reference for enterprises, participants and government personnel when dealing with such cases in the future.

  2. Conclusions and Recommendations

    The conclusions presented in the present study are based on analysis of cases involving return of unsold goods by participants in multi-level marketing schemes that have already occurred or may be expected to occur in the future. While the issues addressed may not always correspond exactly to current practice or the current regulatory framework in this area, it is anticipated that the conclusions will still constitute a useful reference for the regulatory authorities when drawing up (or revising) legislation in this area in the future. The main conclusions reached in the study are as follows:
    1. Currently, the law stipulates that the calculation of the cooling-off period for multi-level marketing participant contracts should commence on the date on which the participant contract is signed, rather than on the date on which the participant first orders goods from the multi-level marketing firm. Bearing in mind the way in which multi-level marketing operates, it might be advisable to consider adjusting the date on which cooling-off period is calculated as commencing, so that the cooling-off period provision can function more effectively.
    2. With regard to deadlines for completion of the return of unsold goods, where a multi-level marketing participant contract is revoked, the multi-level marketing firm should be required to complete the following three actions within 30 days of receiving a written request to do so from the participant: (1) Take receipt of the participant’s request to return unsold goods. (2) Collect the unsold goods or allow the participant to deliver them. (3) Refund the payment made by the participant for all goods that remain unsold at the time when the contract is revoked, along with all other payments made by the participant at the time of joining the scheme. If the firm fails to perform these actions, they may be deemed to be in violation of the Fair Trade Law. With regard to the return of unsold goods on the termination of a contract, the requirements need not be quite so rigorous; even so, the multi-level marketing firm should be required to begin the return of goods procedures within 30 days; for example, the firm should be required to complete the calculation of the sum that will be repaid to the participant within 30 days.
    3. With regard to the handling of return of goods after the participant contract has ceased to be valid, regardless of whether the contract has been revoked or terminated, the matter in question is how the multi-level marketing firm should handle the return of unsold goods after the contractual relationship between the firm and the participant has ceased to exist. Given this fact, multi-level marketing firms should handle requests to return unsold goods in line with the same regulations that govern the return of unsold goods following contract termination, mutatis mutandis. Where a firm requires payment of a contract extension fee, the firm should be allowed to deduct the contract extension fee when calculating the sum that must be refunded to the participant.
    4. Regarding the determination of the original purchase price of unsold goods, since this constitutes a step in the processing of the return of unsold goods, for these purposes the “original purchase price” does not refer to the price of all of the goods purchased by the participant, but only those unsold goods that the participant wishes to return; a clear distinction should be drawn between the two.
    5. As regards impairments to the value of unsold goods, in the case of tangible goods an objective assessment can be made of the extent of impairment, by determining whether the packaging is complete, whether the goods have been used, how long a period has elapsed since the date of purchase, how close the goods are to the expiry of their validity period, etc. However, in the case of intangible goods, if the goods’ utility (from the point of view of the multi-level marketing firm) remains unchanged, then it is difficult to see how the firm can claim that impairment has taken place. With regard to the multi-level marketing firm’s management and sales expenses, these are fixed costs that should be absorbed by the firm; there is no direct relationship between these expenses and the impairment of unsold goods, so multi-level marketing firms should not be allowed to use the existence of these expenses as grounds for making impairment charges.
    6. With regard to the drawing up of value impairment tables by multi-level marketing firms, while Article 5 of the Supervisory Regulations Governing Multi-level Sales does not include such tables as one of the items that multi-level marketing firms are required to submit to the regulatory authorities, if a multi-level marketing firm includes a value impairment table in the firm’s business manual (as a basis for handling the return of unsold goods), then the table should be deemed to constitute part of the participant contract, and as such should be submitted to the FTC; participants should also be informed of the contents of the table when joining the multi-level marketing scheme.
    7. Regarding the claiming back of royalties paid to up-line supervisors when implementing purchase returns, this issue affects not only multi-level marketing firms but also large numbers of individual participants. Both the standard contract terms and the Civil Law provisions relating to improper rewards provide legal basis for claiming back royalties; the question is, if the multi-level marketing firm implements the claiming back of royalties at the same time as product value impairments, how should any resulting surplus be distributed? The present study suggests that any such surplus should go to the participant who is returning unsold goods.
      In addition, the following practical suggestions are put forward for the reference of the relevant authorities: