Jhong Hua National Telecommunications Ltd., Co.’s unlawful multi-level sales violated the Fair Trade Law
Case:
Jhong Hua National Telecommunications Ltd., Co.’s unlawful multi-level sales violated the Fair Trade Law
Key Words:
multi-level sales
Reference:
Fair Trade Commission Decision of October 9, 2003 (the 662nd Commissioners’ Meeting); Disposition (92) Kung Chu Tzu No. 092170
Industry:
Direct Sales Enterprises (4812)
Relevant Law:
Article 23 of the Fair Trade Law; Article 5(1) of the Supervisory Regulations Governing Multi-Level Sales (SRMS)
Summary:
1. Jhong Hua National Telecommunications Ltd., Co. (Jhong Hua National) filed to record its multi-level sales operations in connection with its “international personal number card” with the Fair Trade Commission (FTC) on 25 January 2002. Even after supplementing information for several times, there was still not been complete submission of information. According to business data submitted for the period from March to May 2002, its ratio of bonuses distributed reached 72.36%, and after a request was made that Jhong Hua National send a representative to the (FTC), it was reported that membership fees, activation service charges and set-up fees paid by participants were being used to issue bonuses. It was suspected that the economic benefits, such as bonuses, collected by the participants were based mainly on fees obtained from the introduction of new members. The FTC, on the suspicion that Jhong Hua National was engaged in unlawful multi-level sales, initiated an ex-officio investigation into the matter.
2. Jhong Hua National’s Multi-level sales system: Participants joining Jhong Hua National are required to pay a total of NT$2500 in fees in order to receive the right to operate. This fee can be broken down into an NT$300 membership fee, an NT$1900 line activation service charge and an NT$300 set-up fee. The membership fee is the basic charge for participants joining the sales organization in order to obtain the right to both promote and sell products and services and introduce new members and is, in fact, irrelevant to the promotion and sale of products or services. The line activation service fee and the set-up fee, on the other hand, are the service fees for activation and set-up of the international personal number, and total NT$2200. It was found, however, that no cost was required to activate the international personal number and, in other words, the service fee was zero. Although the NT$1900 fee collected from participants for each card was, in name, an activation service charge, but in practice, there is no “so-called” activation service. Therefore this fee, in essence, is no different than the membership fee. It is a fixed consideration paid by participants upon joining and is completely unrelated to the promotion and sale of products or services. Jhong Hua National allocates NT$2000 in bonuses for each card, which not only is derived from the membership fee described above, but is mainly allocated out of the activation service fee, and this fee comes mainly from the introduction of new participants and rather than being based on marketing or sale of goods or services at reasonable market prices. In addition, in selling the “international personal number cards”, Jhong Hua National’s main source of income, besides the fees paid by new participants, comes only from the commission rebates from the cards' activation fee. There are no other revenue sources. Furthermore, the total revenue from these rebates amounts to only 1.9% of Jhong Hua National’s total operating revenue. If the total amount of the rebates was allocated for the distribution of bonuses it would account for only 78.1%. In other words, it would be impossible to rely solely on the revenue from rebates to provide for bonuses and operation costs, and therefore they must be derived from other operational revenue or income. In practice, Jhong Hua National’s bonuses are derived mainly from membership fees and activation service fees paid by participants when they join. Therefore, the participants’ source of income is derived solely from the fees paid by new participants upon joining. As Jhong Hua National’s income comes mainly from the introduction of new members and not from the sale or promotion or goods or services, it thus violates the provisions of Article 23 of the Fair Trade Law.
3. On 25 January 2002, Jhong Hua National reported to the FTC its intent to engage in multi-level sales, and by law was required to begin multi-level activities such as signing contracts with participants and selling goods only after 25 February. It was found, however, that by 18 February of 2002, Jhong Hua National already had 872 participants, and had already issued a certain amount of bonuses and engaged in multi-level activities, violating the provisions of Article 5(1) of the Supervisory Regulations Governing Multi-Level Sales in effect at the time the acts were committed.
4. In conclusion, Jhong Hua National violated Article 23 of the Fair Trade Law, and the Supervisory Regulations Governing Multi-Level Sales adopted pursuant to Article 23-4 of the Fair Trade Law that were in effect at the time the acts were committed. After consideration of the number of participants involved, the company's operational circumstances, its revenues, its cooperation with the investigation, and the degree of harm to the trading order caused by its actions, the FTC imposed a total of NT$1 million in administrative fines in accordance with the fore part of Article 41 of the Fair Trade Law NT$800,000 for violation of Article 23 of the Fair Trade Law and NT$200,000 for violation of the Supervisory Regulations Governing Multi-Level Sales and ordered Jhong Hua National to cease its unlawful activities.
Appendix:
Jhong Hua National Telecommunications Ltd., Co.’s Uniform Invoice Number: 13001299
Summarized by Kuo, An-Chi; Supervised by Ye, Tien- Fu