Yi Fu International's conduct of multi-level marketing business in violation of the Fair Trade Law
Case:
Yi Fu International's conduct of multi-level marketing business in violation of the Fair Trade Law
Key Words:
multi-level marketing, Hsi Fu card
Reference:
Fair Trade Commission Decision of March 22, 2001 (the 489th Commissioners' Meeting); Disposition (90) Kung Ch'u Tzu No. 052
Industry:
Transport Support Industry (H570)
Relevant Law:
23-2(2) of the Fair Trade Law
Summary:
1. A member of the public stated that at the end of 1999 he or she paid NT$23,000 (all amounts in New Taiwan dollars) to Yi Fu International (Yi Fu) to purchase a "Hsi Fu Card," thus becoming a member of Yi Fu's multi-level marketing business. In August of 2000, the complainant expressed to Yi Fu the desire to terminate membership and return all merchandise. The respondent informed the complainant that the management and distribution expenses for the membership of the organization are spread out over a period of one year based upon an assumed merchandise depreciation of NT$1,917 products per month. Yi Fu also allegedly unlawfully deducted bonus money the complainant had received through membership in the organization. Bonus monies and commissions previously paid to upstream members based on the complainant's performance were also deducted from those members. Yi Fu's actions constitute a violation of regulations contained in Article 23(2) of the Fair Trade Law. 2. Findings by the Fair Trade Commission were as follows: Yi Fu stated that members wishing to terminate their contracts and return merchandise must first fill out a "Termination of Marketing Rights Application" form. After calculating the monthly deduction for product purchases and ensuring the accuracy of the amount of bonus to be returned, the organization then first refunds a portion of the original membership fee. The organization then has a limited time to recover the bonus monies paid to upstream members. In the event the money is not recovered within the specified period of time, Yi Fu still conducts a second refund of the remaining portion of the account to protect member rights. If the amount to be deducted exceeds the amount to be refunded, a negative balance, it has no effect on member rights because Yi Fu had never sought to recover the balance from any member yet. Regarding the depreciation on the Hsi Fu card, Yi Fu maintains that expenses for related services (such as the negotiated rate for towing services) are budgeted out over the period of a year throughout a member's first year. Beginning with the second year, members must pay annual dues of just NT$1,000 to continue to receive services associated with the card. 3. The complainant became a member of the respondent's multi-level marketing organization on 30 December 1999. On 11 August 2000, the complainant initiated procedures for termination of membership in the organization. According to the Fair Trade Law, Yi Fu is required to buy back all unsold merchandise for 90 percent of its original cost. The organization may, however, deduct any bonuses that have been paid out based upon merchandise sales and depreciation on the merchandise. Upon joining the organization, the complainant made an initial outlay of NT$23,000 for the Hsi Fu card. According to the Fair Trade Law, if after 14 days the complainant seeks to terminate their contract, the respondent must refund 90 percent of the initial membership fee, or NT$21,700 (23,000 x 90%). The complainant also received an NT$5,000 recommendation bonus and NT$350 in profit sharing. Since this bonus and profit sharing are not directly related to merchandise sales, it should not be subject to deduction by the responden t. With regard to merchandise depreciation, based on a calculated depreciation of NT$1,917 per month over a seven month period, total depreciation should amount to NT$13,419, thus leaving NT$7,281 to be refunded to the complainant. Although Yi Fu initially handled the application to terminate membership according to the regulations, in its accounting of the refund amount, the company improperly deducted bonuses unrelated to sales performance that were awarded to the complainant (NT$5,350) and related bonuses awarded to upstream members (NT$7,700), causing the complainant's account balance into negative figures. Consequently, Yi Fu's handling of the termination of contract and return of merchandise application violated regulations contained in Article 23-2 of the Fair Trade Law. With regard to the Hsi Fu card, it is based upon a lifetime membership system, with the first year's membership fee costing NT$23,000 and subsequent annual dues of NT$1,000. With regard to the disparity between the two figures, the NT $1,000 annual dues is accepted as covering annual administrative and miscellaneous expenses. The vast majority of the costs of commercial products and services available to cardholders are accepted as being covered by the initial membership fee. As a lifetime membership system, Yi Fu is liable for not able to consider and calculate either the length of the period of use of the card or actual eventual costs. Thus Yi Fu's pro-rating the initial membership costs out over the period of one year was improper. 4. The decision of the 489th Commissioners' Meeting ruled that Yi Fu's handling of the complainant's application to terminate membership, deduction of non-sales commissions and bonuses from the refunded amount, and pro-rating the lifetime membership fee for the Hsi Fu card over the course of just one year constituted a violation of the provisions of Article 23-2(2) of the Fair Trade Law. Appendix: Yi Fu International Corp.'s Uniform Invoice Number: 16367501 Summarized by Hsu, Hung-Jen; Supervised by Lin, Ching-Tarng