Mr. Chen Hsin-he violated the Fair Trade Law by engaging in illegal multi-level sales

Chinese Taipei

Case:

Mr. Chen Hsin-he violated the Fair Trade Law by engaging in illegal multi-level sales

Key Words:

multi-level sales, illegal multi-level sales, worldbis.net website

Reference:

Fair Trade Commission Decision of May 30, 2002 (the 551st Commissioners' Meeting); Disposition (91) Kung Ch'u Tzu No. 091091

Industry:

Direct Sales Enterprises (4821)

Relevant Law:

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

Summary:

1. In November 2001 the Fair Trade Commission (FTC) received a complaint from a member of the general public regarding the worldbis.net website which, in brief, stated that Worldwide Technology Network Mutual Strategic Alliance (“Worldwide Alliance”) was recruiting members to its organization through its worldbis.net website. New members were required to purchase at least two “units” at a total price of NT$12,600. Bonuses were calculated and distributed according to such marketing methods as the “preferential bonus” and “benefit bonus” systems. Worldwide Alliance began operations in September of 2001 and had approximately 800 members at the time of the complaint, hence the Worldwide Alliance was suspected of engaging in illegal multi-level sales.

2. It was found that, to join this organization, new members would purchase US$200 of products from the worldbis.net webpage and fill out a membership application form, and those who introduced new members would receive a US$20 introduction fee. At the same time members were eligible for “preferential bonuses” and “benefit bonuses.” The “preferential bonus” was divided into personal and organizational performance bonuses. Personal performance bonuses were based on the sales performance of that particular member while organizational bonuses came from the introduction of new members. Introduction of one new member by a participant to the organization would count as two levels; introduction of two new members would count as four levels; introduction of three or more new members would count as six levels. Each level was valued at US$5. The benefit bonus provided participants with eight levels, with each level valued at US$10, for a total of US$80. Participants would be issued odd or even numbers according to the amount of points purchased and subsequently placed in a personal up/downline framework or one interlocking with an international framework. Members would also be accordingly assigned positions starting from top to bottom and from left to right. Calculations were made according to a formula which divided by four the number of points purchased by the individual plus points purchased by members who were directly introduced by that individual. When the points received were correlated with the various levels of participation, participants would receive between NT$40,000 and NT$3.44 million in benefit bonuses. The conditions making up this system undoubtedly characterized it as a multi-level sales enterprise.

3. Ch'en Hsin-he was the actor for purposes of operating the worldbis.net website in Taiwan, and also introduced foreign business network marketing plans, many of which were multi-level sales enterprises as defined in the Supervisory Regulations Governing Multi-level Sales. Mr. Chen claimed that that the worldbis.net website provided each member with 5MB units of space, allowing them to design their own personal web page, use e-mail, and sell goods. After viewing the members' web pages, however, it was found that 15 members had a total of 27 web pages, none of which had been designed or were in use, making it clear that members were not using this service. Many other portal sites that offer similar services, such as Yahoo! Taiwan, PC Home ONLINE and URL not only offer personal and exclusive web pages, as well as e-mail and electronic business management, but offer such services for free. Furthermore, the average webpage space they provide is approximately 15MB, far exceeding the amount offered on the worldbis.net website. It was obvious that offering services on the worldbis website was merely a formality, and there was certainly some doubt also about whether the web page product was sold at the “reasonable market price” to which the aforementioned law makes reference. In fact new participants joined this organization not based on the worldbis website's webpage services: the entire network marketing platform was instead based on the introduction of new members as its main source of income.

4. Grounds for disposition:
(1)The source of any commissions, awards or other profits received by worldbis website's participants was as follows: It was found that, in the network marketing system in question, for every unit of US$200 taken in US$20 was distributed as an introduction fee. This bonus was derived from the continuous addition of new members. In fact, the nature of the enterprise was based on the introduction of new participants. It was also found that the bonus system employed by this enterprise was divided into “preferential bonuses” and “benefit bonuses.” At most, eight levels of “Preferential bonus” were offered. Besides personal performance bonuses, participants could also receive US$5 per level in organizational performance bonuses. Participants who introduced one new member would receive two levels, while those who introduced two people would receive four levels and those who introduced three or more people would receive six levels. The amount of each bonus was calculated according to the number of people introduced. It is obvious, therefore, that the income of members was based on the introduction of new participants. The benefit bonus, in contrast, consisted of eight levels with each level valued at US$10. Participants would be issued an odd or even number according to the amount of points purchased and subsequently placed in a personal up/downline framework or one interlocking with an international framework. Odd numbers were placed in the personal frameworks while even-numbered participants were eligible for the international framework. While the profits produced by those involved in the personal framework did not necessarily exclude gains from the marketing and sale of webpage services, the bonuses distributed in the international system were based on the operation of the international organization's network marketing activities. Participants with even numbers were positioned within the international framework according to the order of their number. Normally in the network marketing industry, participants receive retail bonuses, performance bonuses, guidance bonuses and other economic benefits based on their sales performance and the overall performance of those in the organization directly under the participant. In the international framework, however, the bonuses and other profits received by participants were not based on the sales and other efforts of the participants and their personal organizational frameworks, but rather emphasized the expansion of the international organization under the “even-numbered ordering” system. Therefore, any commissions, bonuses, and other profits were based on the idea of introducing new members. The situation as described above was sufficient to prove that participants were not motivated to join the organization in order to use the webpage services offered on the worldbis website but rather to receive the substantial benefits and bonuses offered. Such activities could not be considered the marketing and sale of goods or services. The webpage services, in fact, were insignificant to the whole transaction process, and as such, these products were merely "illusory goods." Hence, the FTC found that the profits received by participants were mainly based on the introduction of new members, rather than on the marketing or sale of services at reasonable market prices, in violation of article 23 of the Fair Trade Law.
(2) Chen Hsin-he engaged in multi-level sales activities, beginning to promote and distribute “preferential bonuses” and “benefit bonuses” in October 2001 using multi-level sales methods. Mr. Chen recruited approximately 1000 members, distributing approximately NT$5.3 million in bonuses and economic benefits without ever reporting to the FTC, thus violating Article 5(1) of the Supervisory Regulations Governing Multi-level Sales. Furthermore, membership application forms signed by new participants only included the member's basic information and an account number for remitting bonuses. Other information required by law was not included, thereby violating Article 12 of the same Supervisory Regulations.
(3) In conclusion, the FTC found Chen Hsin-he in violation of Article 23 of the Fair Trade Law as well as Articles 5(1) and 12 of the Supervisory Regulations Governing Multi-level Sales. Hence, pursuant to the fore part of Article 41 of the Fair Trade Law, and considering the number of participants, the operational conditions, the volume of business, the cooperativeness with the investigation and the extent of damage to the trading order, an administrative fine of NT$2.5 million was imposed on Mr. Chen for his violation of Article 23 of the Fair Trade Law as well as an NT$500,000 administrative fine for violation of Article 12 of the above-mentioned Supervisory Regulations, for a total of NT$3 million. In addition, Chen Hsin-he was ordered to cease the illegal practices.

Summarized by Kuo, An-Chi; Supervised by Lin, Ching-Tarng