Power Mesh International Co., Ltd.'s multi-level sales practices violated the Fair Trade Law.
Case:
Power Mesh International Co., Ltd.'s multi-level sales practices violated the Fair Trade Law.
Key Words:
multi-level sales, reporting, participation contract
Reference:
Fair Trade Commission Decision of May 24, 2001 (the 498th Commissioners' Meeting); Disposition (90) Kung Ch'u Tzu No. 073
Industry:
Direct Marketing (4812)
Relevant Laws:
Article 23-3(1) of the Fair Trade Law; Articles 7(1) and 12 of the Supervisory Regulations Governing Multi-level Sales
Summary:
1. The Fair Trade Commission (FTC) received a letter in April 2000 from the complainant stating that after joining Power Mesh International Co., Ltd. (Power Mesh) and purchasing goods, they went to the Power Mesh offices for the return of the goods. At that time, the complainant discovered that the content of Power Mesh's participation contract did not contain "Rules of Handling Returned and Exchanged Goods" as rules governing the calculation on the value of returned merchandise. Additionally, the FTC received another letter in August 2000 from another complainant stating that after joining Power Mesh's sales organization and later seeking to terminate the participation contract and return goods, Power Mesh and KG Telecom each deducted an NT$600 breach of contract penalty from the refund value. 2. The FTC's investigation on Power Mesh's operations showed that at the end of November 1999, Power Mesh began offering, in contracted partnership with KG Telecommunications Co., Ltd., "free cellular phone number" products with no security deposit or set up fees. According to the terms of the contract between Power Mesh and KG Telecom, if a participant in the Power Mesh sales organization rescinds or terminates their contract, and returns all goods within two years of receiving their "free cellular phone number" products, Power Mesh is obligated to pay a breach of contract penalty of NT$600 to KG Telecom. Thus Power Mesh's "free cellular phone number" product promotion could potentially lead to additional operating expenses. Consequently, in the participation contract Power Mesh entered into with its participants, a provision was added that would make the participants liable to pay the breach of contract penalty to KG Telecom in the event of early withdrawal from the sales organization. Further investigation revealed that Power Mesh had failed to report to the FTC the changes in its business plan, as required by the Supervisory Regulations Governing Multi-level Sales, prior to the promotion of "free cellular phone" products in November 1999. Finally, when participants went to Power Mesh's office to return goods, Power Mesh used the company's "Rules for Handling Returned and Exchanged Goods" to calculate the value of the returned goods. This set of "Rules for Handling Returned and Exchanged Goods" was posted on a bulletin board in the Power Mesh place of business from August 1999 through October 1999, but was not included as an addendum to the participation contract or inserted in the business handbook. 3. Grounds for disposition (1) According to the provisions of the Fair Trade Law and the Supervisory Regulations Governing Multi-level Sales, multi-level sales enterprises may not seek compensation or breach of contract penalties for losses when participants rescind or terminate their contracts; any changes to the content of the original business plan must be reported to the FTC prior to the changes taking effect; and the participation contract of the multi-level enterprises enter into with their participants shall clearly state the rights and obligations of the participants in the event of withdrawal from the organization. Power Mesh's actions constituted a violation of the provisions of Article 23-3(1) of the Fair Trade Law; and Articles 12 and 7(1) of the Supervisory Regulations Governing Multi-level Sales. (2) Weighing such factors as the number of participants in Power Mesh organization, the economic benefits, the company's attitude toward the investigation, and the harm the company's acts caused to the trading order, Power Mesh was fined NT$400,000 and was ordered to cease and/or rectify all improper practices under the provisions of Articles 41, 42(2) and 42(3) of the Fair Trade Law. Appendix: Power Mesh International Co., Ltd.'s Uniform Invoice Number: 70373827 Summarized by Chi, Hsuen-Li; Supervised by Lin, Ching-Tarng