Sale of gasoline coupons and other products by He Pao Management Consultants Ltd. through a multi-level sales platform where the main source of income for participants came from introduction of new members, rather than from marketing or sales of goods or services at reasonable market prices, thus constituting a violation of the Fair Trade Act

Chinese Taipei

Case:

Sale of gasoline coupons and other products by He Pao Management Consultants Ltd. through a multi-level sales platform where the main source of income for participants came from introduction of new members, rather than from marketing or sales of goods or services at reasonable market prices, thus constituting a violation of the Fair Trade Act

Key Words:

multi-level sales, gasoline coupons

Reference:

Fair Trade Commission Decision of December 19, 2002 (the 580th Commissioners' Meeting); Disposition (92) Kung Ch’u Tzu No. 092001

Industry:

Direct Sales Enterprises (4812)

Relevant Law:

Articles 23 of the Fair Trade Act

Summary:

1. He Po Management Consultants Ltd. (He Po) filed for recordation with the Fair Trade Commission (FTC) for marketing gasoline coupons issued by Chinese Petroleum Corporation (CPC) and Formosa Taffeta Co., Ltd. (Formosa Taffeta) through a multi-level sales platform, and afterward extended its business scope to include products or services such as hypermarket gift vouchers, engine oil, compulsory automobile liability insurance, and newspapers.

2. In response to the purchasing power and the needs of different member groups, He Po divided its direct sales system into two schemes -- Plans A and B. The membership fee for Plan A was NT$2,000 where participants were required to make monthly purchases of PV products totaling NT$2,000. The plan developed five lines. Participants received a "recommendation bonus" of NT$300 each time they introduced a new member. "Organization bonuses" were distributed to participants who recruited the first organizational level of five persons, and such participants were entitled to bonuses for the first and subsequent five levels. Those who completed a second organizational level of 25 persons were eligible for "recommendation bonuses" for the first and subsequent seven levels. That is to say, "recommendation bonuses," each valued at NT$20, were distributed to the prior participants in the six or eight organizational levels, whichever the case was, where a member made purchases totaled NT$2,000 or more. Consequently, for reach NT$2,000 of revenue, a maximum percentage of 8% (NT$160) was distributed in the form of "organization bonuses." The organizational structure and calculation of bonuses under Plan B were exactly the same as those under Plan A, except that the membership fee, monthly purchase amount, "recommendation bonus," and "organization bonus" were 400, 600, 100, and six New Taiwan Dollars respectively.

3. It can be inferred from the conditions listed above that the "recommendation bonus" was based purely on the introduction of new members. During the period when He Po was engaged in multi-level sales, it distributed a total of NT$2,828,917 as bonuses, of which NT$1,927,200 was for "recommendation bonuses." "Recommendation bonuses," therefore, accounted for 68% of the total, a percentage sufficient to presume that the main source of income for its participants came from introduction of new members. In addition, He Po's revenue structure also revealed that its distribution of bonuses was based mainly upon introduction of new members, rather than the marketing or sales of goods or services. He Po's estimated gross profit from selling gasoline coupons and other products, and commissions from promoting insurance and newspaper businesses, amounted less than NT$992,264, a figure less than 40% of the total bonuses. It was obvious that He Po used new members' payment of membership fees as a main source for distribution of various bonuses. The membership fees, however, were irrelevant to its marketing or sales of goods or services. On the basis of He Po's distribution of bonuses, it was concluded that the main source of income for its participants came from introduction of new members, rather than from marketing or sales of goods or services.

4. He Po's main business was the sale of gasoline coupons. Its participants made payments at the face value of coupons. In comparison with actual market prices, the participants did not gain favorable rates, but instead had to pay additional membership fees of NT$1,000 or NT$400 under Plan A and B respectively. The actual total payment was higher than the reasonable price of gasoline coupons. Under normal circumstances, gasoline coupons with selling prices higher than their face values are unmarketable. Most participants in this case, however, were willing to first pay a membership fee of NT$1,000 or NT$400 and then purchase the gasoline coupons at face value. Their motive was none other than obtaining the various bonus incomes gained by introducing new members and developing their personal organizations.

5. In consideration of He Po's sales revenue, the motives for its conduct, the influence of its conduct on the trading order, the anticipated improper gains, the duration of its violation, and its attitude after violation, the FTC imposed an administrative fine of NT$800,000 pursuant to Article 41 of the Fair Trade Act and ordered He Pao to cease its violation.

Appendix:
He Pao Management Consultants Ltd.’s Uniform Invoice Number: 70709169

Summarized by Chou, Pai-Wei; Supervised by Yeh, Tien-Fu