Liao Wen-chih, Kung Hsiang Jen Sheng Telecommunications Network Co., Ltd., and Over The Centery [sic] Technology Co., Ltd. violated the Fair Trade law through engaging in multi-level sales in which members received bonuses primarily through introduction of new members

Chinese Taipei

Case:

Liao Wen-chih, Kung Hsiang Jen Sheng Telecommunications Network Co., Ltd., and Over The Centery [sic] Technology Co., Ltd. violated the Fair Trade law through engaging in multi-level sales in which members received bonuses primarily through introduction of new members

Key Words:

multi-level sales

Reference:

Fair Trade Commission Decision of January 31, 2002 (the 534th Commissioners' Meeting); Letter (91) Kung San Tzu No. 0910001044

Industry:

Direct Sales Enterprises (4812)

Relevant Law:

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

Summary:

1. The Fair Trade Commission (FTC) received a complaint alleging that Kung Hsiang Jen Sheng Telecommunications Network Co., Ltd. (Kung Hsiang) was promoting an “ ‘ELT’ E-business International Fellowship Association” and selling memberships through purchases of its “E-cards” and “L-cards.” For NT$3,500, “E-card” members could have their own web pages and e-mail account set up, and for a further NT$1,000 in service fees per month could enjoy fourth-level bonus distribution that would bring a monthly maximum of NT$33,000 for a total over an 18-month period of over NT$600,000. “L-card” members paid NT$8,000 for stored-value cards, and six months after their purchase were eligible for participation in a funeral-expense cooperative organization sponsored by Kung Hsiang, which would pay NT$600,000 to members upon their decease. These schemes were suspected to be unlawful means of raising funds.

2. Investigation showed that the actor in this case was, from July 2000 to April 2001, Liao Wen-chih; he was succeeded from May 2001 through 1 August of that year by Kung Hsiang, which was succeeded after 1 August by Over The Centery [sic] Technology Co., Ltd. The marketing systems promoted by these three actors were principally these three: the “E-card,” the “L-Card,” and the “marketing system and T-card.” The “E-card” system referred to “members” who would pay fees for personal web pages and related peripheral services, and who, based on their E-card serial numbers, would be assigned a place in the national hierarchy. When the numbers of card holders reached a high enough amount, they would receive a substantial bonus amount. Under the “L-card” system, “members” paid to qualify for L-card membership and to receive a stored-value card. Points on the card could be exchanged for products, and members who had held cards for more than 180 days would also receive NT$600,000 in funeral expense subsidies upon their decease. Under the “marketing system and T-card,” “marketers” would receive multi-level sales bonuses and a T-card number based on their performance in sales of E-cards and L-cards; when the volume of T-card holders rose high enough, card holders would receive cash benefits based on the ranking that their card numbers gave them in the overall national hierarchy.

3. The economic benefits received by the aforementioned “members” and “marketers” were derived entirely from the initial and monthly fees paid for web-page services. The actual rate of utilization of web pages by members was below 1%, however, so that in the vast majority of cases, those initial and monthly fees were in fact not a consideration paid for those services, but should be defined instead as a kind of “royalty payment” for membership and for economic benefits received later. While the benefits gained by early members were derived nominally from their payment of the initial and monthly web-page service fees, they were in actual fact derived from the “royalty payments” made by late-joining members. Thus it could be determined that members were transacting business in web-page services in a formal sense only, as the method for obtaining membership and with membership as their sole aim, allowing them to be compensated with large sums of money derived from the payments made by members who joined later. Actual web services had become an illusory product that played only an insignificant role in the overall transactional scheme.

4. Each of the actors in this case were able to give out a substantial amount of bonuses and cash benefits, larger even than the amounts members had paid in, principally because of the time differential between the paying of fees by a new member and the paying out of benefits, as well as the continuing expansion of the organization and absorption of supplementary funds from new members who served as the source of the benefits. The organization, however, could not expand without limit, and any discontinuance on its expansion immediately created problems with further distribution and naturally led to difficulties in continuing operations. This will adversely affect the newer members in the expanded organization. They will neither be able to receive the anticipated benefits nor be able to easily get refunds, and they will suffer losses as a result. The FTC therefore found that the participants in this case who received such benefits as commissions and bonuses did so not in the process of promoting and selling products or as a reasonable market value for their services, but instead as a result of the introduction of new members into the organization, in violation of Article 23 of the Fair Trade Law.

5. The FTC also held that those parties above who failed to file a report with the FTC in accordance with the law prior to the commencement of multi-level sales activities, and who also failed to enter into a written participation agreement with participants setting out the statutorily required particulars at the time they became members, were in violation of Articles 12 and 5(1) of the Supervisory Regulations Governing Multi-level Sales.

6. The FTC considered the numbers of participants involved, the operating conditions of the organization, the amount of unlawful gains obtained, the cooperativeness with the investigation, and the degree of injury which the unlawful conduct inflicted on the trading order. With respect to the violation of the Fair Trade Law, in addition to ordering the parties to cease the aforesaid unlawful activities, the FTC imposed an administrative fine of NT$4.2 million on Liao Wen-chih and respective administrative fines of NT$9.2 million each on Kung Hsiang and Over The Centery [sic] Technology Co., Ltd. With regard to violation of the Supervisory Regulations Governing Multi-level Sales, an administrative fine of NT$800,000 was imposed on each. Total fines imposed on Liao Wen-chih were NT$5 million and on Kung Hsiang and Over The Centery [sic] Technology Co., Ltd., NT$10 million each.

Appendix:
Kung Hsiang Jen Sheng Telecommunications Network Co., Ltd.’s Uniform Invoice Number: 12613742
Over The Centery [sic] Technology Co., Ltd.’s Uniform Invoice Number: 97307532

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