Yuan Hsin Motor Co. Ltd. violated the Fair Trade Law and the Supervisory Regulations Governing Multi-level Sales by promoting "future-delivery vehicles" through its multi-level sales scheme
Case:
Yuan Hsin Motor Co. Ltd. violated the Fair Trade Law and the Supervisory Regulations Governing Multi-level Sales by promoting "future-delivery vehicles" through its multi-level sales scheme
Key Words:
motor vehicle, multi-level sales
Reference:
Fair Trade Commission Decision of January 26, 2000 (429th Commissioners' Meeting); Disposition (89) Kung Ch'u Tzu No. 015
Industry:
General merchandise wholesale industry (5110)
Relevant Laws:
Article 23 of the Fair Trade Law; Article 23(2) of the pre-amendment Fair Trade Law; Article 3(2) of the pre-amendment Supervisory Regulations Governing Multi-Level Sales
Summary:
1. Yuan Hsin Motor Co. ("Yuan Hsin") registered its multi-level sales plan with the Fair Trade Commission (the Commission) in September of 1998, and claimed that motor vehicles were the products to be sold. Under the plan, called "Cruising With Dignity," members pay NT$19,200 toward "future-delivery vehicles" or "vehicle subscription rights." They must also purchase NT$2,800 monthly in auto parts, health foods, or other products. After joining, members can establish their own downstream sales organizations by promoting "vehicle subscriptions" to prospective new members. 2. Yuan Hsin members earn income from four sources, as follows: First, members receive a NT$5,200 "recruitment bonus" for each "vehicle subscription" they sell, i.e. for each downstream member they recruit. Second, members accumulate "vehicle purchase points" based on the number of "vehicle subscriptions" they sell, i.e. the number of their downstream members. When a member decides to purchase a car, he or she can trade the accumulated points to receive a "vehicle down-payment" toward an ordinary purchase of a vehicle from a conventional car dealer, with Yuan Hsin acting as broker. Third, once members have received a "vehicle down-payment," they cease to accumulate "vehicle purchase points" and begin collecting an "organizational bonus" calculated by the number of "vehicle subscriptions" sold monthly by them or their subordinate members. Finally, members can claim a "monthly stipend" of NT$200 whenever a subordinate member makes the requisite monthly purchase of additional products. 3. Despite Yuan Hsin's claims that motor vehicles are its principal products, the "vehicle down-payment" - in terms of the conditions for its receipt and the method of its calculation - more closely resembles the Commission or bonus paid in regular multi-level sales plans. Although Yuan Hsin expects members to apply the "vehicle down-payment" to the purchase of a car, this practice cannot be equated with selling goods or services. Although Yuan Hsin's members continuously promote "vehicle subscriptions" to prospective members, they never actually close deals involving cars, nor do they contract or pre-contract for actual car purchases. The "vehicle subscription" plan at most can be viewed as a vehicle buying opportunity. To realize this opportunity, members must continuously recruit new members by selling the "vehicle subscriptions," a practice unrelated to products or services promoted by Yuan Hsin. At one point, Yuan Hsin even directly disbursed "vehicle down-payment funds" to a portion of its mem bers in a practice it called "down-payment advances" without requiring the members to purchase cars - reducing the practice to little more than a money game. 4. During the period from September 1998 to the first half of 1999, Yuan Hsin disbursed to its members commissions and bonuses totaling NT$48.96 million, of which "vehicle down-payments," "organizational bonuses," and "recruitment bonuses" accounted for 36.02%, 26.73%, and 21.00% respectively. Disbursements in these three categories should be regarded as income for recruitment of new members, as they are based on performance in selling "vehicle subscriptions." As these three categories amounted to 83.75% of the total commissions and bonuses disbursed, it was established that the members derived their earnings primarily from recruiting new members. The Commission therefore found that Yuan Hsin violated article 23 of the Fair Trade Law (FTL), and fined it NT$1 million pursuant to article 41 of the same law. Due to the seriousness of the offense, it furthermore ordered it to cease operation pursuant to Article 42. 5. Yuan Hsin also failed to include the practice of disbursing "cash advances" in its September 1998 report to the Commission on its multi-level sales plan. According to the company's bonus disbursement records, however, it began accepting applications from members for "cash advances" from October 1998 onward, straying from the practices it had registered with the Commission. The Commission therefore found Yuan Hsin also in violation of Article 3(2) of the pre-amendment Supervisory Regulations Governing Multi-Level Sales adopted pursuant to Article 23(2) of the pre-amendment FTL, and fined Yuan Hsin NT$100,000 under Article 41 of the pre-amendment FTL. Appendix: Yuan Hsin Motor Company, Ltd.'s Uniform Invoice Number: 16655341 Summarized by Chou Pai-wei; Supervised by Hsu Shu-hsing