Chin Wang Co., Ltd. was complained in violation of Articles 20, 21, and 24 the Fair Trade Law

Chinese Taipei


Case:

Chin Wang Co., Ltd. was complained in violation of Articles 20, 21, and 24 the Fair Trade Law

Key Words:

multi-level sales, promotion

Reference:

Fair Trade Commission Decision of February 20, 2003 (the 589th Commissioners' Meeting); Letter Kung Tsan Tzu No. 0920001780

Industry:

Retail Sale of Other Retail Trade Not Elsewhere Classified (4799)

Relevant Law:

Articles 11(1), 12(1) and 19(1) of the Supervisory Regulations Governing Multi-level Sales

Summary:

1. Chin Wang Co., Ltd. (Chin Wang) was a multi-level sales enterprise with many outlets under the “Chin Wang Supermarket” name. It filed notice that it would implement its promotion campaign “Call each other up and line up for refunds” to the Fair Trade Commission (FTC) for recordation in August 2001. Participation in the campaign was not restricted to the company's original members. New participants making purchases totaling 150 points at any of its chain supermarkets received a voucher, and then, upon dialing a special phone line and entering information such as the voucher serial number could receive a prize redemption number assigned according to sequence order of phone call. Participants were entitled to bonuses or gift certificates according to a formula utilizing the prize redemption number. For example, suppose a participant obtained a prize redemption number of n. He would be entitled to receive NT$500, NT$1,500, NT$3,000, or NT$6,000 in cash with the appearance of the number as (n*32+31), (n*64+63), (n*128+127), and (n*256+255), or NT$9,000 plus Ch'in Wang Supermarket gift certificates valued at NT$20,000 for the participation number (n*512+511).

2. The prize redemption numbers in the promotional campaign increased as the number of participants grew. By continuously recommending others to buy the products, prior participants caused the order number to grow and thus met the above requirements for economic benefits such as bonuses and gift certificates. The above manner was no different from arranging participants in level and order according to the order in which they began participating. The number of participants for each level grew by a factor of two. When the positions of a level were full, new participants were entered in the next level. Due to the fixed sequence in which new participants were distributed, the position of a participant in the organization was equivalent to his/her order of participation and could be represented by a number. For example, a participant was entitled to receive the above-mentioned bonuses or gift certificates when the positions of the 6th, 7th, 8th, 9th, or 10th level were all filled, namely, upon occurrence of the numbers (n*32+31), (n*64+63), (n*128+127), (n*256+255), or (n*512+511). Therefore, even though its rules were shown in formulas, the campaign in question still had features of multi-level organizations and conditions for bonus distribution, and thus was no different from an ordinary multi-level sales system. According to the prize redemption scheme adopted by Chin Wang, with the increase by one in a participant's sequence number, the sequence numbers he had to reach to meet the condition for prize redemption at each level increased by approximately 32, 64, 128, 256, and 512 respectively. A later participant had lower, or even zero, probability, of receiving bonuses. The activity in question started in September 2001. From June to August 2002, no participants met the conditions for redeeming prizes or gift certificates at any level. It was clear that the activity did contain the potential risks of a multi-level sales activity, and needed to be regulated.

3. Chin Wang contended that the campaign in question was intended for promotional purposes only. However, the participants received economic benefits such as commissions and bonuses by introducing others and by promoting sales, attributes which made the campaign different from other general gift- or award-giving promotions not categorized as multi-level sales activities. The campaign in question was not exclusive to the company's original participants. Customers outside of the multi-level sales organization only had to purchase products, obtain vouchers, and register relevant information over the phone to join the organization. Obviously, Chin Wang violated Articles 11(1) and 12(1) of the Supervisory Regulations Governing Multi-level Sales for not duly exercising its duty by making notification and entering into a contract with participants. Chin Wang also violated Article 19(1) of the same regulation by implementing the promotional campaign to recruit participants without making the nature of the campaign known to the participants. Weighing the motives and purpose for its violation, benefits obtained from the violation, the degree of injury to the trading order, the duration of the violation, the seriousness of the violation, the scale of the enterprise’s business, operating conditions, market position, and its cooperativeness during the FTC’s investigation, the FTC imposed an administrative fine of NT$700,000 on Chin Wang.

Appendix:
Chin Wang Co., Ltd.’s Uniform Invoice Number: 16976168

Summarized by Chou Pai-wei; Supervised by Yeh Tien-fu