Ann Tai Shin Co., Ltd. [the respondent] violated the Supervisory Regulation of Multi-level Sales
Chinese Taipei
Case:
Ann Tai Shin Co., Ltd. [the respondent] violated the Supervisory Regulation of Multi-level Sales
Key words:
illegal multi-level sales, binary [bonus] system; artificial alignment
Reference:
Fair Trade Commission Decision of 27 August 1997 (the 304th Commission Meeting), Disposition (86) Kung Ch'u Tzu No. 137
Industry:
Retail Business (4020)
Relevant Laws:
Articles 23(1), 23(2), 35, 42 of the Fair Trade Law; Articles 3(2), 4, 5, 6, 7(4) of Supervisory Regulation of Multi-level Sales
Summary:
A multi-level sales business, which is a sales network in itself, remains essentially a business that provides products to the consumer through its sales network, thereby earning its profit. A multi-level sales business is legistimate if it carry out the sale of its products through a multi-level distribution network under which its business profit is generated from the participants' purchase of products, for its own use or resale, and the participants may recommend more people to join the distribution network. In other words, multi-level sales businesses must obtain their reasonable profit only from its participants' promotion, and selling of the products and recommendations that new participants join the sales network. The investigation by the Fair Trade Commission finds that the respondent's implementation of the so-called "unbalanced binary [bonus] system" multi-level sales business bonus system and its actual operating situation constitutes a violation of Article 23(1) of the Fair Trade Law. Reasons for the Fair Trade Commission's decision are as follows:
(1) The respondent argued that its "binary [bonus] system" had one distinctive feature. Anyone joining as a participant only needed to purchase one unit of operation right, which required only 10,000 cumulative points. With a [successful] recommendation of two new participants to join the business, the participant would be entitled to collect a weekly bonus, and such right would be "without restriction as to level [within the multi-level system] or limitation on length of time." In addition, the participant needed only to make one investment during his/her lifetime (i.e. purchase value of 10,000 cumulative points when joining) so as to repeat his/her consumption after finishing one cycle (set off from his/her bonus) and collect a bonus without any limit to the number of cycles. Such operation contravenes the essence of multi-level sales.
(2) The so-called "binary [bonus] system" bonus system that the respondent practiced developed in two ways and required only the introduction of two new participants. The organization [of this system] advocated "mutual benefit and co-existence" and "team work," which resulted in the formation of an "system organization" in which the most efficient participants who wasted the least accumulative points gained the highest proportion and the highest amount of bonus through "artificial alignment," with the participants' income coming not from promoting or selling/providing products/services at reasonable market prices but rather from introducing new members into the organization.
(3) With respect to the so-called "unbalanced binary [bonus] system" bonus system that the respondent practiced, the participants' primary purpose was to obtain bonuses with much less intention to sell the products. The respondent even informed the participants that they might choose not to carry the products. The respondent did not issue any product claim voucher since it carried only a small variety of products. Though it entered a so-called "alliance with different businesses" to obtain supply of products for sale, the profit obtained from selling the allied businesses' products was very limited, which accumulated very few points. Any participant seeking to obtain 10,000 points would have to spend more money [to buy the products for sale]. Therefore, participants focused on the limited number of items that brought higher points. Hoarding of products thus resulted. Participants were even able to collect bonuses before they claimed the products they had ordered. That is to say, participants did not even have to promote or sell the products to the customer. They needed only to introduce other participants to join the organization and they could collect bonuses. In addition, when any participant who had joined the organization at a later date asked to return the products because he or she was unable to collect any bonus, the participant was told that due to the system under which the bonus had already been distributed, return would not be accepted. Improper restrictions as such to prevent the participants from withdrawing or returning products constitute acts of conducting improper multi-level sales.
The investigation also revealed that the respondent was in violation of the Supervisory Regulation of Multi-level Sales as well:
(1) In August 1996 the respondent reported to the Fair Trade Commission its implementation of the "unbalanced [bonus] system". Shortly after the report, the respondent changed the terms for bonus collection. The new terms provided that where the participant entered the second portion of a cycle, the point accumulation that was originally three-phase would have to be completed within one week. If the participant failed to achieve the points required within the one-week period, the participant's accumulation record would have to start all over from zero again. Such requirement differed from the "no time restriction" in the first portion. However, the respondent did not report to the Fair Trade Commission prior to implementing the new requirement and avoided mentioning the new requirement when new participants joined the organization. Such an act is clearly in violation of Articles 3(2) and 4 of Supervisory Regulation of Multi-level Sales.
(2) With respect to the respondent's handling of requests for product returns, the respondent's business manual stipulates in page 27 thereof that, upon any participant's request to return products, the participant should be verbally informed that, subject to provisions of the Fair Trade Law, only 25% of the price of the product could be refunded upon termination of contract. The stipulation stated that if the products were purchased over fourteen days prior, regardless of whether the participant already claimed to possess the products after order and regardless of whether the products were actually ever used, the refund remained at only 25% of the price. Such a restriction is contrary to Article 5(5) of Supervisory Regulation of Multi-level Sales which provides that after termination of a contract, the multi-level sales enterprise shall buy back commodities possessed by the participant concerned at the price of 90% of the original purchase price paid by the participant. Clearly the respondent violated Articles 4 and 5 of Supervisory Regulation of Multi-level Sales.
(3) The Fair Trade Commission sent personnel to the respondent's premises on 21 June 1997 to inspect such written reference materials as the Supervisory Regulation of Multi-level Sales required to be prepared. The respondent failed to provide any material for inspect based on the excuse that they were unable to produce the requested information on a monthly basis due to the related computer program. The respondent claimed that the requested information would be supplemented on 28 July 1997. However, the respondent did not provide any information at all. The respondent apparently violated Article 6 of Supervisory Regulation of Multi-level Sales.
(4) Some participants joined the respondent but did not see the products they ordered until fourteen days after they joined. When they asked to withdraw, despite the fact that the products were never used, the participants were refunded only 25% of the price they had paid. The respondent reasoned that the bonus distributed to participants could not be returned, so it had to be set off against the amount of the refund for returned products. The Fair Trade Commission’ interpretation under reference Kung Yen Shih No. 006 stated that when any participant [of a multi-level sale business] asks to withdraw, the amount deductible from the refund to the withdrawing participant is limited to the amount distributed to the participant. The respondent did not seek return of the bonus from participants, but rather deducted [the amount of said bonus] from the amount to be refunded to the party returning the goods. Such an act is a blatant violation of Article 7(4) of Supervisory Regulation of Multi-level Sales.
Participants in the multi-level sales the respondent operated obtained their commission, bonus or other financial benefits based primarily on their introducing new participants rather than on the earnings obtained from promoting or selling/providing products/services at reasonable market prices. The respondent has violated Article 23(1) of the Fair Trade Law and Articles 3(2), 4, 5, 6, 7(4) of the Supervisory Regulation of Multi-level Sales, which was established pursuant to Article 23(2) of the Fair Trade Law. Due to the seriousness of the violations, the Fair Trade Commission in its 304 Commission Meeting decided that the respondent be imposed a penalty of NT$500,000 and be ordered to suspend its business from the day following its receipt of the Fair Trade Commission’s disposition. Regarding the respondent's violation of Article 23(1) of the Fair Trade Law concerning Article 35 of the Fair Trade Law, the Fair Trade Commission has forwarded the matter to judicial agency for criminal investigation.
Summarized by Yieh, T'ien-fu
Supervised by Tzuo, T'ien-liang
Appendix:
Ann Tai Shin Co., Ltd.'s Uniform Invoice Number 97462652