Mr. Chang Chin-bing violated the Fair Trade Law by engaging in illegal multi-level sales

Chinese Taipei

Case:

Mr. Chang Chin-bing violated the Fair Trade Law by engaging in illegal multi-level sales

Key Words:

multi-level sales, illegal multi-level sales, illusory goods

Reference:

Fair Trade Commission Decision of May 9, 2002 (the 548th Commissioners' Meeting); Disposition (91) Kung Ch'u Tzu No. 091079

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. The Fair Trade Commission (FTC) received a complaint from a citizen regarding statements made by the responsible person for the Li Chi Life Cooperative Association (Li Chi), Mr. Chang Chin-bing, claiming that his organization was an “association” as defined in the Civil Code and not a network marketing or direct sales enterprise. It was found, however that this association's recruiting methods, benefits and other profits were quite similar to those of a network marketing organization, in possible violation of the Fair Trade Law. The FTC thus initiated an ex officio investigation.

2. In May of 2001 Mr. Chang Chin-bing began to engage in multi-level sales through Li Chi. Membership application in Li Chi took place under Plan A or Plan B. Under Plan A each member paid NT$2,000 as well as a processing fee of NT$200. Members under this plan who recruited three new members could enjoy the association's various benefits. Those benefits included a “specialty counter” on the lailaisogo.com website valued at NT$18,000, receipt of profit returns, and “cooperative life bonuses” of NT$600,000. Members who were unable to recruit three new participants could pay an NT$2,200 sum in lieu of an individual recruitment. Under Plan B each member paid NT$8,800 (equivalent to four units) and could enjoy the association's benefits without the responsibility of recruiting new members. The head of the association and the other members would determine the rest of the placements in the organizational framework through what they called a placement system formula. No matter whether members joined this association through Plan A or Plan B, the NT$2,000 payments for each unit were used as partial payment for purchase of the “specialty counter” set up by lailaisogo.com (valued at NT$18,000). The remainder would be deducted from what were called “bid award bonuses” received in future periods as the organization continued to operate. It was found that the association's organization developed in groups of three. During the first round participants were required to recruit 3 down-line members to complete the first level. The second level would require nine new members and the third level 27. At the completion of each of those levels the introducer would receive a “bid award bonus” of NT$1,800, NT$5,400 or NT$16,200 respectively with deductions made for disbursements, website fees, social benefit fees as well as the “cooperative life bonuses.” Participants would also receive further profit returns amounting to NT$1,000, NT$2,000 and NT$5,000 respectively as well as being eligible for the NT$60,000 “cooperative life bonus” after completing one year with the association. This process would continue based on this structure for rounds 2, 3, 4 and so forth. As such the association established by Mr. Chang constitutes a multi-level sales platform as defined in the Fair Trade Law.

3. Grounds for disposition:
(1)It was found that Mr. Chang Chin-bing completed the preliminary framework for the lailaisogo.com website in March 2002, and according to his claims, his association had approximately 600-700 members, totaling 720 units by September 2001. However, information for publishing on web pages had been submitted by only 43 participants, and the FTC's check of those web pages on 8 April 2002 found that the websites were still under construction and that the only information available was regarding Li Chi organizational activities as well as links to four other websites. None of the aforementioned information published by participants was found. It was clear that this network marketing organization only emphasized the payment of membership fees in order to distribute bonuses. The association apparently did not inquire as to whether participants had an actual need or desire to use their websites. The purpose for joining the organization, for the majority of participants, was not to use lailaisogo.com e-commerce services, but rather to recruit new members and in turn, receive the substantial benefits and bonuses offered. The services in question were of little importance, and were in fact a kind of “illusory goods” that served only as a pretext for the recruitment of new members. This was sufficient to prove that the main source of income for participants was based on the introduction of new members and not on the marketing and sale of goods at reasonable market prices. Besides relying on the introduction of new members for the expansion of its organization, Li Chi also distributed bonuses through its “placement system formula.” Under this organizational system, every unit was purchased for NT$2,000. Participants who completed the first round would receive a premium of NT$23,400. With deductions for “website fees,” “social benefit fees” as well as the “cooperative life bonus,” participants would still receive cash returns amounted to NT$8,000, which was four times the membership fee paid by participants. Therefore, based only on membership fees paid by participants, there would have been absolutely no way to provide for the distribution of the cash returns and the NT$60,000 “cooperative life bonus.” Li Chi would have had to rely on another income source. No other concrete plans or results were provided which could explain this. In summary, it could be seen that all the bonuses and returns distributed by Mr. Chang were greater than the principal invested by participants. Mr. Chang relied primarily on the time discrepancy between when participants paid their membership fees and when they received returns, as well as expansion of the organization and the recruitment of new members to inject the capital that would serve as the source of the bonuses provided by Li Chi. The organization, however, could not expand indefinitely, and once it ceased to expand, the source of the bonuses would be cut off and the organization would be unable to operate continuously. As a result members who had joined later would be unable to receive the same returns as those who had joined earlier and would find it difficult to obtain refunds, resulting in losses for those new members. The commissions, bonuses and other profits received by participants in this case were not based on the marketing and sale of goods or services, but rather on the continuous introduction of new members to the organization, in violation of the provisions of Article 23 of the Fair Trade Law.
(2) In conclusion, Mr. Chang began to promote Li Chi's multi-level sales platform in May 2001, for which he recruited between 600 and 700 members for the distribution of profits. No report of these activities, however, was filed with the FTC, in violation of Article 5(1) of the Supervisory Regulations Governing Multi-level Sales. Furthermore, the association failed to provide members who joined the organization with a written contract setting out the statutorily required information, in violation of Article 12 of the same Supervisory Regulations. 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$4.5 million was imposed on Chang Chin-bing for his violation of Article 23 of the Fair Trade Law as well as NT$500,000 for his violation of Article 12 of the above-mentioned Supervisory Regulations, for a total of NT$5 million. In addition, Mr. Chang was ordered to terminate the illegal practices.

Summarized by Tai, Mei-Chin; Supervised by Yeh, Tine-Fu