Lung Ying International Technology, Ltd. allegedly engaged in unlawful multi-level marketing in violation of the Fair Trade Law
Case:
Lung Ying International Technology, Ltd. allegedly engaged in unlawful multi-level marketing in violation of the Fair Trade Law
Key Words:
multi-level sales, degenerative multi-level sales, mutual aid association, nationwide pyramid
Reference:
Fair Trade Commission Decision of April 4, 2002 (the 543rd Commissioners' Meeting); Disposition (91) Kung Ch'u Tzu No. 091060
Industry:
Direct Sales (4812)
Relevant Laws:
Article 23 of the Fair Trade Law; Articles 5(1)(i) and 12 of the Supervisory Regulations Governing Multi-Level Sales
Summary:
1. A member of the general public filed a complaint against Lung Ying International Technology, Ltd. alleging the that company recruited members through a mutual aid association to promote its "NT$10,000 Business Starter Mutual Aid Fund" and encouraged the general public to join up through its "Easy Go 18 Plan" at NT$2,500 per person and its "Glorious China Tycoon Lifelong Benefits Plan" at NT$5,000 per person, advertised under the slogan "Pay NT$10,000, Earn NT$100,000" slogan, and engaged in multi-level sales type operations, prompting an ex officio investigation by the Fair Trade Commission (FTC). 2. Lung Ying International Technology, Ltd. (the respondent) engaged in membership recruiting activities through its NT$1,000 membership fee and its "Pay NT$10,000, Earn NT$100,000 (NT$50,000 in cash and NT$50,000 in merchandise)" and "Mutual Aid Association" plans. Joining members, in addition to receiving NT$10,000 in sales merchandise, also obtained the right to introduce two new members, upon introduction of whom the member would receive a computer number assigned based upon the time they joined the organization. The economic benefits of NT$50,000 in mutual aid funds, NT$50,000 in merchandise and the gratis NT$50,000 for members of the Easy Go 18 Plan and the Glorious China Tycoon Lifelong Benefits Plan after between five and seven new members joined and were assigned computer numbers and entered the pyramid constitute multi-level sales as defined in the Fair Trade Law. 3. The respondent's mutual aid association system was designed in a way that members who pay NT$10,000 into the mutual aid fund receive NT$140,000 in cash and economic benefits. Members were required only to pay membership fees and introduce two new members to receive a computer number placing them in the organization's benefits pyramid, with no further obligation. Upon notification, members then collect a return of 14 times their initial investment from the mutual aid benefits fund. Unlike other sales organizations, which generally consider the sales performance of members and the overall sales circumstances of the administering organization when approving and issuing retail sales bonuses, performance bonuses, assistance bonuses and various other economic benefits, the respondent's organization did not base the cash and other economic benefits collected by members upon sale of merchandise or other efforts by individual members or the organization as a whole. The respondent's system solely emphasizes the expansion of the computer number (membership) pyramid, requiring continuous growth of at least 12- to 16-fold in new membership to maintain the operation of the organization and enable the assigned computer numbers to achieve a certain multiple as the basis for the eventual payout to each assigned computer number [member] in the pyramid to obtain commissions, bonuses and other economic benefits worth 14 times the original investment. Consequently, the respondent is engaged in multilevel sales through means of a computer-assigned pyramid in which participants must pay their fees and introduce two new members to receive a computer assigned number in the pyramid. Receipt of bonuses or compensation for that particular computer assigned number is contingent upon achievement of a certain multiple of membership growth for that particular computer number. Marketing activities in which participants engage involve no actual sales promotion, sales of goods or other efforts, as the commissions, bonuses and other economic benefits for participants are based solely upon the continuous infusion of new members or funds to maintain the continued rapid expansion of the organization, in violation of Article 23 of the Fair Trade Law. 4. The respondent began its multi-level sales business in September 2001, recruiting more than 400 members through promotion of its "Mutual Aid Association," "Easy Go 18" and "Glorious China Tycoon" plans and approving payouts of bonuses and other economic benefits totaling NT$6,651,000. The respondent failed, however, to file a written report for recordation with this commission, in violation of the provision of Article 5(1) of the Supervisory Regulations Governing Multi-level Sales. Furthermore, the respondent also failed to provide participants with a written participation contract that fully disclosed all pertinent matters required by the law, in violation of the provisions of Article 12 of the Supervisory Regulations Governing Multi-level Sales. After weighing factors such as the number of participants involved, operational status, operating revenues, attitude of cooperation with investigators, and the degree to which the violations harmed the trading order, and in accordance with the forepart of Article 41 of the Fair Trade Law, the FTC imposed separate administrative fines of NT$4.5 million and NT$500,000 on the respondent for violations of the provisions of Article 23 of the Fair Trade Law and violations of the Supervisory Regulations Governing Multi-level Sales, respectively, and ordered it to immediately cease the unlawful practices.Appendix: Lung Ying International Technology, Ltd.'s Uniform Invoice Number: 12887094 Summarized by Kuo, An-Chi; Supervised by Lin, Ching-Tarng