Violation of the Fair Trade Law by Promail Worldwide Ltd. through engaging in multi-level sales in which participants' income was primarily derived from recruiting others to participate, rather than through promotion or sales of goods or services at a reasonable market price
Case:
Violation of the Fair Trade Law by Promail Worldwide Ltd. through engaging in multi-level sales in which participants' income was primarily derived from recruiting others to participate, rather than through promotion or sales of goods or services at a reasonable market price
Key Words:
multi-level sales, mutual aid association
Reference:
Fair Trade Commission Decision of August 16, 2001 (the 510th Commissioners' Meeting); Disposition (90) Kung Ch'u Tzu No. 110
Industry:
Direct Sales (4812)
Relevant Laws:
Articles 23 and 23-4 of the Fair Trade Law; Article 7(1) of the Supervisory Regulations Governing Multi-Level Sales
Summary:
1. Promail Worldwide Ltd. (Promail) is a multi-level sales enterprise that had declared its operations to the Fair Trade Commission (FTC) as required by law. The FTC noticed that the enterprise's business volume leapt from over NT$5 million in 2000 to over NT$100 million in 2001. The enterprise's phenomenal rate of growth, its pricing of goods, amounts of actual goods procured and sold, and its bonus system all gave rise to suspicions of unlawful conduct, prompting the FTC to initiate an investigation ex officio.2. Promail is the Taiwan branch of a multinational group that also does business in Southeast Asian countries such as Indonesia, Malaysia, and Thailand. Its headquarters in Brunei is responsible for planning and integration of business development in each of its regions. Its basic mode of operation involves participants subscribing to "shares" and paying fees on an ongoing basis; the participant begins to receive returns after a given period of time, eventually exceeding the amount invested, in what is known as "the D Plan." Participants interested in developing a business can take part under the "A Plan," making them eligible for additional bonuses.3. Participants were required to purchase a minimum of one share to become members, with a fee of NT$2,200 (originally NT$1,800) per unit; participants could choose to purchase an unlimited number of shares. Members purchasing more than one share would be required to make "repeat purchases" of similar volumes in the future, and their "purchase bonuses" would increase in relation to these amounts. The above was referred to as "purchasing to establish a business" or "the D plan." There was also "business entrepreneurship," in which participants would buy into the "A Plan" at NT$1,250 per unit (originally NT$1,000), for additional bonuses through developing a business. Under this plan, extra bonuses were also possible through purchases of more units. Participants who did not buy this plan, but only the "repeat purchases" under the "D plan," could also get "A plan" units but would not be able to participate exclusively in the "A plan" in that manner. Participants would be required to make repeat purchases of shares in the amount subscribed to at the time they joined, and were required to make a total of 12 such "repeat purchases." Promail's operation adopted "periods" of generally either one or one-and-a-half months, with repeat purchases required in given numbers of periods. Participants' performance would be reviewed to see if they met expectations. A given number of shares would be set as the sales goal for a particular period, with sales for the next period beginning upon completion of the sales for the previous period.4. Promail sold primarily kitchen utensils and nutritional supplements. The "purchases" it referred to were not based on ordinary transactions in which payments are calculated based on the amounts of goods sold and sales prices. The price was first decided based on the number of units to which the participant subscribed. The participant could acquire points based on the number of units he or she subscribed. With a ratio set at 10 to 1, a share at NT$1,800 would be rated at 180 points. Goods could only be obtained when the number of points reached a set standard.5. The FTC's investigation further showed that most participants would purchase from several up to hundreds of shares at a time. Most participants interviewed indicated that their motive for joining was the bonuses available under the "D plan", in which they would begin to see returns after making payments for the first several months, which they compared to "investing," "buying stocks," or "joining mutual aid associations." The respondent also described its method of operating as similar to "investing," "funds," or "pooling resources to get into stocks," with participants mostly motivated by bonuses. While the respondent's rules stated that a participant must meet a level of "business performance" before receiving bonuses under the "D" plan, participants indicated that payment of fees due in respective periods was sufficient to gain them bonuses, without any need to develop business. In the bonus system under the "D plan", participants paying the fees for the shares subscribed in a given period would be able to receive bonuses in the third period after joining, and from the fifth period on, bonuses would exceed the fees payable during the same period; from the ninth period on, accumulated bonuses would begin to exceed the total amounts invested. For each unit at NT$1,800, 12 accumulated payments would amount to NT$21,600, with total bonuses received reaching NT$74,100. Payment of bonuses under this category amounted to 75% of the company's total disbursement of bonuses. In addition, participants could sponsor new members, obtaining 10% of the fees those members paid in any period, and in the "A" plan, could get bonuses based on their ranking in the organization and the development of the businesses.6. Investigation showed that Promail's ability to pay out bonus amounts in excess of fees paid by participants without operational difficulties was dependent upon increasing sales of shares in each successive period. According to Promail figures, projected sales for each period would in principle need to be 1.75 times those of the previous period, and actual sales were maintained at a growth rate of more than 1.1 times previous periods, in order to sustain operations. Obviously, Promail's ability to pay out bonuses in multiples of fees received depended on growth in shares sold in succeeding periods, which meant repeat purchases by participants or continuing growth in new members. Growth of the business could not continue unabated, however, and with a slowing in growth, participants' motivation would be shaken if there were a delay in payment of bonuses, leading to curtailment of funds invested and an ultimate end to operations. With regard to the "purchases," while participants could accumulate points in exchange for goods, the conversions rates were set too high, with resulting irrationality in pricing. Most participants indicated that the products themselves were not sufficient to attract new members, with the emphasis remaining on the bonuses offered, while the products themselves became an extra benefit or a "free gift." Promail itself admitted that the products were similar to "gifts," with a kind of "peripheralization" of products taking place. In conclusion, the economic benefits obtained by participants through commissions and bonuses were not based on promotion of business or the sale of goods or services at a reasonable market price, but were tied in with the continuing growth of the organization, in violation of Article 23 of the Fair Trade Law.7. During the period when Promail implemented the above system, it failed to make a prior report to the FTC of matters related to its scheduled orders of goods, adjustments to the unit fees in its "D" plan, or provision of Carrefour delivery orders for exchange by participants, in violation of Article 7(1) of the Supervisory Regulations Governing Multi-Level Sales.8. In consideration of the income gained by Promail Worldwide Ltd., as well as its motives, expectation of illicit gains, the degree of effect on the market order, the duration of its unlawful activities, and its attitude after committing the unlawful act, the FTC imposed an administrative fine of NT$20 million against it for its violations of Article 23 of the Fair Trade Law, in accordance with the provisions of Articles 41 and 42(3) of the same law. For its violations of Article 7(1) of the Supervisory Regulations Governing Multi-Level Sales, an administrative fine of NT$200,000 was imposed, for a total fine of NT$20.2 million. Promail was ordered to immediately cease its unlawful activities.Appendix:Promail Worldwide Ltd.'s Uniform Invoice Number: 16622573Summarized by Chou, Pai-Wei; Supervised by Lin, Ching-Tarng