Violation of the Fair Trade Law by Chang Shu-feng in establishing the multi-level sales organization Kuei Tsu Ch'i Chien Corporation, in which the participants received bonuses mainly from introducing other participants

Chinese Taipei

Case:

Violation of the Fair Trade Law by Chang Shu-feng in establishing the multi-level sales organization Kuei Tsu Ch'i Chien Corporation, in which the participants received bonuses mainly from introducing other participants

Key Words:

multi-level sales, illusory goods

Reference:

Fair Trade Commission Decision of October 17, 2002 (the 571st Commissioners' Meeting); Letter (91) Kung San Tzu No. 0910010224

Industry:

Direct Sales Enterprises (4812)

Relevant Law:

Article 23 of the Fair Trade Law; Articles 5(1) and 12 of the Supervisory Regulations Governing Multi-level Sales

Summary:

1. The brochures on the cooperative organization and the relevant bonus systems disseminated by Kuei Tsu Ch'i Chien Corporation (Kuei Tsu) specified items such as “recommendation bonus,” “organization bonus,” and “guidance bonus” that were similar to the commissions and bonus items typically adopted in the multi-level sales industry. Kuei Tsu, however, did not duly report its multi-level sales activities to the Fair Trade Commission (FTC) for recordation and thus allegedly violated the provisions of the Fair Trade Law. The FTC accordingly took the initiative to conduct an ex officio investigation of the case.

2. Upon investigating the case, the FTC discovered that Chang Shu-feng was the responsible person of Kuei Tsu, and had recruited participants under the name of the Kuei Tsu cooperative organization even prior to the company's establishment. The system was designed such that a payment of NT$6,500 was made for each lot unit subscribed to by a participant, from which Chang set aside NT$700. Based upon the time sequence for a participant's purchase of lots, for each sale of five lots the prior participant obtained an “A Card” unit issued by Lin Yu Publishing Group and personal website construction services. Additionally, from each unit of payment (NT$6,500), Chang set aside NT$1,000 as a “recommendation bonus” to the direct introducer, NT$2,500 as an “organization bonus” to participants who fill up two levels below with recruits in multiples of two at each level, and NT$1875 as “sales performance bonus” to the participant with “N” as his lot number when the total number of lots reached (N*8+1). The organization recruited a total of more than 49,000 units of memberships. Based upon the system, at least 9,800 “A Card” units should have been issued to the participants. However, only 751 “A Card” units were actually provided to the participants through transfer, a huge difference relative to the original system design. In addition, the FTC discovered that the sources of the bonuses provided and the standards for their issuance were coming from payments made by later participants. Some money were directly set aside from payments made by later participants as bonuses given to introducers or prior participants.

3. Grounds for disposition:

(1) Whether the marketing or sale of services through multi-level sales is legitimate should be decided based upon whether or not services are actually delivered and used. The phenomenon of “illusory goods” is created when services are not actually delivered or used and participants conduct transactions that exist in name only, while fees are collected and economic benefits are awarded based on those transactions. It can accordingly be determined that participants receive economic benefits mainly from introducing other participants, rather than from the marketing or sale of services at reasonable market prices. Upon investigation, the FTC discovered that Lin Yu Publishing Group sold an “A Card” unit at a service price of NT$3,500, while participants obtaining “A Cards” through the Kuei Tsu cooperative organization administered by Chang Shu-feng had to pay at least NT$6,500 per unit to obtain an “A Card” unit after five lots were sold by the organization. The transactions were obviously not conducted at a reasonable market price. Also, as most participants involved in this case continued to make payments to join the Kuei Tsu cooperative organization even though they did not duly obtain “A Cards” as promised in the system, it was obvious that they joined the organization with the expectation of receiving high economic benefits from payments by new participants, instead of “A Card” services. “A Card” services were of little importance during the entire transaction process, resulting in a serious phenomenon of “illusory goods.” Therefore the FTC considered that Chang Shu-feng violated Article 23 of the Fair Trade Law because participants received economic benefits mainly from introducing other participants, rather than from the marketing or sale of services at reasonable market prices.

(2) The FTC further found that Chang Shu-feng violated Articles 5(1) and 12 of the Supervisory Regulations Governing Multi-level Sales by failing to duly report to the FTC for recordation prior to the commencement of its multi-level sales activities and failing to enter into a participation contract with participants specifying statutory matters at the time of their participation.

(3) Weighing the number of participants and Chang's operating status, the total amount of profits illegally obtained, the cooperativeness during the investigation, and the degree to which such conduct damaged the trading order, the FTC ordered Chang Shu-feng to cease the violation and imposed administrative fines of NT$25 million — NT$24 million pursuant to the Fair Trade Law and NT$1 million pursuant to the Supervisory Regulations Governing Multi-level Sales.

Summarized by Chi, Hsuen-Li; Supervised by Lin, Ching-Tarng