Multi-level sales enterprise Chao Shih Chi New Generation Technology Co., Ltd. improperly deducted a fee from the refund given to participants for goods returned upon termination of their contract, in violation of Article 23-2(2) of the Fair Trade Law

Chinese Taipei

Case:

Multi-level sales enterprise Chao Shih Chi New Generation Technology Co., Ltd. improperly deducted a fee from the refund given to participants for goods returned upon termination of their contract, in violation of Article 23-2(2) of the Fair Trade Law

Key Words:

multi-level sales enterprises

Reference:

Fair Trade Commission Decision of December 25, 2003 (the 633rd Commissioners’ Meeting); Disposition Kung Ch'u Tzu No. 093001

Industry:

Direct Selling Establishments (4812)

Relevant Laws:

Article 23-2(2) of the Fair Trade Law; Article 5(1) of the Supervisory Regulations Governing Multi-Level Sales

Summary:

1. The complainants in this case, Messrs. Lu, Hong et al. jointly complained that, on separate occasions in December of 2001, they had respectively paid NT$41,000 (including a membership fee of NT$2,000) to purchase a product (the “magical black box”) from Chao Shih Chi New Generation Technology Co., Ltd. (New Generation Technology) and participate in the company’s multi-level sales program. Subsequently, on 1 February 2002, the complainants carried out procedures to terminate their contracts, including withdrawing from the organization and returning unsold goods, after which, New Generation Technology unexpectedly deducted the bonuses previously received by the withdrawing upstream participants (including the complainants in this case) from the amounts of the refunds for the returned goods, an act suspected to violate applicable provisions of the Fair Trade Law. In addition, on 22 March 2002, a Mr. Chen filed a separate complaint alleging that New Generation Technology failed to report its engagement in multi-level sales activities to the Fair Trade Commission (FTC) for recordation and that, upon application to withdraw from the organization and return the goods, New Generation Technology improperly and illegally deducted processing fees.

2. Results of the FTC’s investigation: New Generation Technology was suspected of commencing to engage in multi-level sales activities before reporting the activity to the FTC for recordation, and of failing to report changes to the terms of its “Distribution Application Form and Contract” (“Participation Contract”). When processing refunds for participants terminating their contracts and returning goods, New Generation Technology improperly deducted a fee for the returned goods and took back the “Distribution Application Form and Contract,” the “Product Order Form,” and the “Form for Recission or Termination of Contract (Consent Letter)” originally provided by the company.

3. Grounds for the disposition:

(1) It was found that when terminating a participant’s contract and processing their withdrawal from the organization and giving refunds for the return of previously purchased goods, New Generation Technology deducted a 20 percent return fee from the price of the returned goods. However, multi-level sales enterprises have an obligation to buy back returned goods at 90 percent of the original price. It is therefore evident that New Generation Technology improperly deducted fees from participants’ refunds and thereby violated Article 23-2(2) of the Fair Trade Law.

(2) New Generation Technology changed the terms of its Participation Contract, and failed to report the changes to the FTC for recordation prior to implementation, in violation of Article 7(1) of the Supervisory Regulations Governing Multi-Level Sales in force at the time the actions were committed, which provided that “contract clauses and other agreements governing the rights and obligations of participants” (per Article 5(1)(vii) of the Regulations) shall be reported for recordation. In addition, according to Article 7(1) of the same Regulations in force at the time the actions were committed, any change to the recorded information shall also be reported for recordation prior to implementation. It was found that New Generation Technology added the “Distribution Application Form and Contract” to its written Participation Contract, thus changing the content of the information originally reported to the FTC, and also failed to report this change to the FTC for recordation prior to implementation, in violation of Article 7(1) of the Supervisory Regulations Governing Multi-Level Sales.

(3) The FTC, therefore, imposed an administrative fine of NT$700,000.

Appendix:

Chao Shih Chi New Generation Technology Co., Ltd.’s Uniform Invoice Number: 12895691

Summarized by Liao, Wei-Min; Supervised by Lin, Ching-Tarng