Tong Ho Development Company Limited violated the Fair Trade Law for false advertising of its "Universal Health World Village Membership Cards"
Case:
Tong Ho Development Company Limited violated the Fair Trade Law for false advertising of its "Universal Health World Village Membership Cards"
Key Words:
integration, universal health world village membership card, false advertising
Reference:
Fair trade Commission Decision of December 1, 1999 (the 421st Commissioners' Meeting); Disposition (88) Kung Chu Tzu No. 151
Industry:
Other Hotels Industry (8809)
Relevant Laws:
Articles 21 of the Fair Trade Law
Summary:
2. The ads claim that the cards "appreciate in value," have "average annual appreciation of 15% to 45%," are "useful and have investment value," and have "two proven consecutive years of appreciation." The ads stress that the cards are the best choice for an investment and financial plan. An ad on December 31, 1997 in page 20 of China Times promoted the cards as "appreciating in value - the focus of investment," "new personal investment and finance tools," "increasing in value and price in two years, the new darling of investors, and useful and having investment value." This caused consumers to believe that the cards are investment tools, and that if they bought them, they not only were entitled to use all club facilities offered, they would also be able to sell the cards for a profit.
3. When issuing the membership
cards, their prices were determined by the respondent according to "their
issuing costs, market reaction [to the products] and the prevailing prices
adopted by competitors." Accordingly, any price adjustments for membership
cards would be made to gradually reflect the cost increases resulting from
the addition of new club facilities or equipment. Thus, the term "appreciation"
referred to in the ad should not be understood as "a reselling price
that is much higher than the original buying price" as what a typical
investor would have expected. Rather, it is only a change in the list price
set directly by the respondent. The respondent claimed that the prices for
the three- and single-member gold card was NT$660,000 (NT$240,000 for enrollment
plus a deposit of NT$420,000) and NT$360,000 (NT$120,000 for enrollment
plus a deposit of NT$240,000) respectively when the cards were issued in
September 1994. The price of the three- and single-member gold cards was
NT$950,000 (NT$475,000 for enrollment plus a deposit of NT$475,000) and
NT$650,000 (NT$325,000 for enrollment plus a deposit of NT$325,000) respectively
in September 1996. The value for both cards indeed "appreciated"
with an average of NT$290,000 and this is the "proof of appreciation"
claimed by the respondent. The claims of "two consecutive years of
appreciation" and "average annual appreciation of 15% to 45%"
were also made based on this calculation.
However, the interpretation by the respondent regarding the term "appreciation"
is based on a calculation using solely the data from the price changes of
the newly issued cards. To be sure, for members already holding the cards,
they may be able to enjoy the newly added club facilities; yet, since the
number of cards supplied by the respondent is not limited, anyone who wishes
to become a member could purchase the card directly from the respondent.
There is no "aftermarket" or trading prices for the issued cards
and, as a result, they are bound to be sold below the "list price"
set by the respondent (the price of "new" cards) to attract buyers.
According to Article 7 of the Membership Agreement, when a card is resold,
the transferee must pay a processing fee (2.5% of the gold card member joining
fee for the particular period) and when deposit is increased, the transferor
must pay the additional amount for registration. This amount may be discounted
from the transaction price so the actual trading price is lower than the
so-called "company list price." Moreover, the so-called "investment
appreciation" is actually the difference between the buying and selling
price (the "positive capital gain") when the asset is disposed
by the asset holder. The interpretation of "appreciation" by the
respondent is only a reflection of the cost increase resulting from the
increase in development costs; it is not an actual increase in the trading
value of the good realized through transactions.
4. The respondent replied that the so-called "appreciation" refers not only to a price increase but also "the addition of membership rights and interests" and "the increase of the prices for membership cards." Nevertheless, while the membership rights and interests are enhanced by the addition of new club vacation spots, facilities, and franchised clubs, the ads claim that the cards are "useful and have investment value." It was emphasized in the ads that the membership card is the product for "personal investment and finance," and with its "average annual appreciation of 15% to 45%," the membership cards are more stable investments and would "far surpass the value of other investment alternatives" such as time deposits, stocks, real property, options, and mutual funds. It is also asserted in the ads that membership card investments "feature the benefits of leisure and making money." Judging from those statements, it is obvious that the term "appreciation" was used by the respondent not to denote "increase in value" but rather "increase in price." The assertion that "two proven consecutive years of appreciation," "new darling of low-risk, high-return investment," and "steadily increasing price and value," would mislead people into believing that they will get a personal investment and finance tool by purchasing one of the cards and that they would get a better return than other investment alternatives by reselling the cards later at the company list price, which is an unrealistic belief when card holders have to sell the cards at prices lower than the company list prices to attract buyers. According to a survey conducted by the Fair Trade Commission ("the Commission"), a cardholder who wishes to sell his card must sell at or below the original buying price and therefore, it would be unlikely for him to make a profit from resale. It is obvious that the respondent had the intent of misleading people through the advertisement and its arguments are unsubstantiated.
5. The Membership Agreement and the statements made by the respondent during questioning at the Commission, indicate that, apart from the company, which sells the cards, members can freely buy and sell them. However, assignment of the cards must be handled directly by and at the company with the attendance of both the member and the assignee. The company may ask the reselling price but may not make excessive inquiries or interfere with the trading price. Therefore, the respondent indeed has no actual information regarding the trading price upon which it could base to come up with the "average annual appreciation of 15% to 45%." According to the aforesaid survey, of the cards assigned, apart from those that are bought at very low prices and then resold at the list price (such as a two-person card bought for NT$400,000 and sold for NT$850,000), most of the others sustained losses between NT$200,000 and NT$499,000. The reason for this, according to those who took the survey, is that the company did not restrict the number of cards issued, and that sellers had to compete with new cards issued by the company when they wished to resell the cards. They also indicated that urgent sellers have to sell at a loss because transferees will only take a card after the seller has paid off the difference between the original and the new deposits. With respect to the ten people in the so-called "appreciation member list," the Commission found that of the four members on the list that could be contacted, all had sustained losses rather than enjoy "appreciation" as claimed by the respondent. The reason for this was basically the same as that indicated in the survey. It is evident that the so-called "cards that will appreciate" and the "average annual appreciation of 15% to 45%" claimed by the respondent are false and misleading representations and that its acts had violated Article 21(1) of the Fair Trade Law.
Summarized by Tu Hsing-feng
Supervised by Pai Yu-chuang
Appendix:
Tong Ho Development Company Limited's Uniform Invoice Number: 84708084