Ch'ien Wei Network Information Co., Ltd. violated the Supervisory Regulations Governing Multi-Level Sales by engaging in multi-level sales without reporting them in advance and failing to inform participants of matters prescribed by law when they joined
Case:
Ch'ien Wei Network Information Co., Ltd. violated the Supervisory Regulations Governing Multi-Level Sales by engaging in multi-level sales without reporting them in advance and failing to inform participants of matters prescribed by law when they joined
Key Words:
multi-level sales, reporting, participating stores
Reference:
Fair Trade Commission Decision of April 19, 2000 (the 441st Commissioners' Meeting); Letter (89) Kong T'san Tzu No. 8808265-003, Disposition (89) Kung Ch'u Tzu No. 061
Industry:
Information provision services (7503)
Relevant Laws:
Article 23-4 of the Fair Trade Law, pre-amended Article 3 of the Supervisory Regulations Governing Multi-Level Sales; amended Articles 11(1) and 12 of the Supervisory Regulations Governing Multi-Level Sales
Summary:
1. Ch'ien Wei Network Information Co., Ltd. (Ch'i en Wei Network Information Co., Ltd. ) failed to report its multi-level sales activities to the Fair Trade Commission (the Commission). The Commission received complaints from members of the public indicating that Ch'ien Wei Network Information Co., Ltd. was engaged in multi-level sales, that Ch'ien Wei Network Information Co., Ltd. operated website franchising operations, and that Ch'ien Wei Network Information Co., Ltd. delayed and refused to return funds in violation of the Fair Trade law (the Law) after participants rescinded their contracts. The Commission thereupon initiated the investigation. 2. The Commission personnel visited Ch'en Wei's place of business. Documents retrieved included a brochure entitled "Founding an Operations Site, " a "Website Operation Handbook," and a "Designated Store Contract." These documents indicated that Ch'ien Wei Network Information Co., Ltd. began planning a "Joint Operations of Sundry Goods and Consumer Recycling Plan" and recruiting "websites" in Fe bruary 1999. Ch'ien Wei Network Information Co., Ltd. acknowledged these facts. The business plan consisted of four parts: "business offices," "websites," "memberships," and "participating stores." (1) Business offices To operate a business office, participants were required to make a payment of NT$180,000 and execute an "Allocation Contract." Ch'ien Wei Network Information Co., Ltd. provided computers, an Internet Goods Information System, and a back office system. Ch'ien Wei Network Information Co., Ltd. also donated one Gold Membership Card. Business offices were primarily engaged in promoting "website" franchising. Each time a website joined the franchise via a business office solicitation, the business office could receive NT$15,000 as a commission. Business offices could also receive NT$1500 from the monthly "system service fee" of NT$ 4,000 paid by the solicited website. (2) Websites Websites joined before 10 May 1999 were required to pay NT$30,000 or NT$40 ,000 for operating rights and execute a "Designated Store Contract." Ch'ien Wei Network Information Co., Ltd. would then loan the website a desktop PC or a notebook computer. If participants paid the monthly system service fee of NT$4000 for 12 months, they would own the computer. After 10 May 1999, participants were required to make a payment of NT$30,000 but Ch'ien Wei Network Information Co., Ltd. no longer provided a computer. If the participant made a payment of NT$50,000 or NT$60,000, Ch'ien Wei Network Information Co., Ltd. would provide a desktop or notebook computer. Websites were primarily engaged in the promotion of membership cards, website development, and the solicitation of participating stores. When websites executed franchise agreements, Ch'ien Wei Network Information Co., Ltd. donated one gold membership card and 50 regular membership cards. If a website renewed and paid the monthly "system service fee" of NT$4,000 for 12 months, it was to receive 50 regular membership cards. The website c ould then give or sell membership cards to the public. (3) Members Members were divided into two classes: gold card members and regular members. In addition to those being donated to business centers and websites, each gold membership card was also sold for NT$3,000. Regular membership cards were given away by websites and could also be purchased at the price of NT$100 each. However, most gold and regular membership cards were given away. Members enjoyed discounts on online goods, shopping at participating stores, and rebates. Business centers or websites were gold card members. These members were entitled to rebates on the purchases made by themselves and the 11 levels of members below the gold card member. Regular members were entitled to rebates on the purchases made by themselves and members one level below. Gold card and regular members were also required to sign a "Ch'ien Wei Network Information Co., Ltd. (Gold) Membership Application and Agreement." (4) Participating Stores Participating stores were to provide the aforementioned discounts to members. Ch'ien Wei Network Information Co., Ltd. provided participating stores with a modem and one year of advertising on Ch'ien Wei Network Information Co., Ltd.'s website. 3. Ch'ien Wei Network Information Co., Ltd. distributed two kinds of bonuses depending on the amount of purchases made by members. Ch'ien Wei Network Information Co., Ltd. set two corresponding bonuses for each product sold. The first bonus was distributed to the website that had recruited the members who purchased the products. Ch'ien Wei Network Information Co., Ltd. then totaled the second bonus for all products sold that month and distributed the total amount to different levels based on the percentage of bonuses received from each level. Each level then distributed the bonus equally according to the number of members in good standing. Ch'ien Wei Network Information Co., Ltd. divided levels by calculating each member's purchases that m onth and the total amount of purchases by the 11 levels below that member. Higher totals qualified members to share in more levels of bonuses. For instance, if a gold card member and the 11 levels below him purchased NT$1 million, that member would share in bonuses from the first to the sixth level. 4. As of August 1999, Ch'ien Wei Network Information Co., Ltd. had three business centers, 125 websites, 1500 members, and monthly revenue of approximately NT$1 million. 5. The Commission found that under Ch'ien Wei Network Information Co., Ltd.'s bonus system, participants had to become business centers, websites or make a payment of NT$3,000 to secure the gold membership. They then could solicit new participants to the organization. An "organization rebate" bonus was calculated on the basis of total purchases made by the member and the 11 levels below that level. This type of organization may be classified as a "consumer alliance," and as such is a type of multi-level sales org anization under Article 8 of the Fair Trade Law (the Law). Its practices are thus subject to the governance by the Law pertaining to multi-level sales. Ch'ien Wei Network Information Co., Ltd. claimed that it was not a multi-level sales organization because its sales system did not involve dealers, did not distribute discriminatory bonuses, did not have a product point system, and had "various types of products that changed often." The Commission rejected these claims because none of these claims are constituent elements of the definition of multi-level sales organizations pursuant to Article 8 of the Law.6. The amended version of the Supervisory Regulations Governing Multi-Level Sales (Supervisory Regulations) took effect on 1 July 1999. According to Article 3(1) of the pre-amended Supervisory Regulations, a multi-level sales enterprise shall file a written report with the central competent authority that truthfully records particulars including the enterprise's sales organization and opera tion plan. By recruiting websites and issuing membership cards from the end of February 1999, Ch'ien Wei Network Information Co., Ltd. was in effect engaged in multi-level sales; its failure to report these sales to the Commission had therefore violated Article 3(1) of the pre-amended Supervisory Regulations.7. According to Articles 11(1) and 12 of the amended Supervisory Regulations, a multi-level sales organization shall inform the participant of particulars including conditions of withdrawal by a participant from the organization or plan, and rights and obligations arising from the withdrawal as stipulated in Article 11(1)(viii) of the amended Supervisory Regulations. These particulars must be recorded in the participation contract. The Commission found that Ch'ien Wei Network Information Co., Ltd. had obviously violated Articles 1 and 12 of the Supervisory Regulations by failing to inform or record the conditions of withdrawal by a participant from the organization or plan, and rights and obligations arising from the withdrawal in its "Website Operation Handbook" or other documentation. Since the multi-level sales initiated by Ch'ien Wei Network Information Co., Ltd. in late February 1999 continued to exist after the amended provisions of Supervisory Regulations took effect, the amended Supervisory Regulations should govern.8. According to Article 23-1 and 23-2 of the Fair Trade Law, participants have the right to rescind or terminate the participation contract subject to the contractual period in force. Within a period of thirty days after the rescission takes effect, the multi-level sales enterprise shall accept applications from participants for the returning of goods or refunds. When participants indicated to Ch'ien Wei Network Information Co., Ltd. that they wished to rescind their contracts, Ch'ien Wei Network Information Co., Ltd. ignored them. Ch'ien Wei Network Information Co., Ltd. also acknowledged that it failed to handle the requests by the websites to rescind or t erminate their contracts and to refund. This failure constituted a violation of Articles 23-1 and 23-2 of the Law. 9. Ch'ien Wei Network Information Co., Ltd. violated Article 3(1) of the pre-amended Supervisory Regulations, Articles 11 and 12 of the amended Supervisory Regulations, and Articles 23-1 and 23-2 of the Law. After considering the circumstances prescribed in Article 33 of the Enforcement Rules of the Fair Trade Law, the Commission disposed pursuant to Articles 42(3), the fore part of Article 41, and Article 42(2) of the Law by imposing a fine NT$500,000 and ordering Ch'ien Wei Network Information Co., Ltd. to return payments made by the participants.Appendix:Ch'ien Wei Network Information Co., Ltd.'s Uniform Invoice Number: 16551681Summarized by Chou Pai-Wei; Supervised by Lin Ching-Tarng