Chun Hung Company violated the Fair Trade Law and the Regulations Governing Multi-level Marketing
Chinese Taipei
Case:
Chun Hung Company violated the Fair Trade Law and the Regulations Governing Multi-level Marketing
Key Words:
illegal sequential numbering method, improper multi-level sales
Reference:
Fair Trade Commission Decision of 20 December 1995 (the 219th Commission Meeting); Disposition (84) Kung Chu Tzu No. 175
Industry:
Retail industry (4020)
Relevant Laws:
Article 23(1), the first half of Article 41, and Article 42 of the Fair Trade Law; Articles 3(1), 4(2), 5(1) of the Regulations Governing Multi-level Marketing
Summary:
1. From the information Chun Hung Company (Chun Hung) provided on 30 August 1995 in its application for approval, this Commission suspected that Chun Hung's multi-level marketing system violated Article 23(1) of the Fair Trade Law. This Commission investigated and discovered that the company had begun illegal multi-level sales activities as early as 20 August 1995.
The investigation revealed that, under Chun Hung's multi-level marketing system, , an applicant can become a member of the company, i.e., a business agent in the company, as long as a contracted member introduces him/her, a "Membership Application Form" is filled out, and Shuang Pao Tea or an ozone generator worth 3,000 PV (units of points used in the company) (for about NT$3,000) is purchased. A member is entitled to receive the "Purchasing Bonus" and "Heritage Bonus" by maintaining the basic purchase of more than 3,000 PV per month. These two bonuses are drawn from the pool of the monthly NT$3,600 paid by each member for a set of 3,000 PV products. From the NT$3,600, NT$300 is allocated for the "Purchasing Bonus" and NT$2,000 for the "Heritage Bonus." A member can receive a "Purchasing Bonus" of NT$50 by introducing a new member who buys a set of 3,000 PV products. Members under the sixth generation in the company will continuously receive this type of bonus.
In terms of the "Heritage Bonus," each member receives a serial number when he/she joins the company. When the total number of members surpasses his/her serial number by every multiple of two, which ends the numbering of a generation and starts another generation, the member can begin receiving the "Heritage Bonus." The Heritage Bonus ranges from NT$400 for the completion of the first generation to NT$204,400 for the completion of the ninth. Members of each generation can receive the bonus every month. However, those members who maintain monthly basic purchase of 3,000 PV products without introducing new members can no longer receive the heritage bonus when they have the fourth or higher generations. To add more generations and receive higher bonuses, members have to introduce new members. Each member of the fifth and sixth generation has to introduce one new participant while each of the seventh, eighth, and ninth generation has to introduce respectively two, three, and four new members. In other words, for a member to receive the heritage bonus of the ninth generation, he/she has to introduce eleven participants in total.
Even though the Purchasing Bonus, in the company's system and in practice, can be reckoned as the income from selling or promoting products, it only accounts for a small percentage in a member's earnings. Instead, a member's income is mainly decided by the Heritage Bonus. According to the formula of the Heritage Bonus, most of the NT$3,600 paid by new members for the products is used for the bonuses of those members who introduce them. Based on this method, the latter a member is admitted to the company, the longer he/she will have to wait for the double of his/her serial number. In other words, the latter a member applies for admission, the slimmer the chance is for him to win the Heritage Bonus; the extreme is that he/she will never win the Heritage Bonus and therefore becomes a victim of this system, at which point the company will have to close down for its inability to continue. Such situation is the characteristic of illegal multi-level marketing.
2. According to the above analyses, the bonuses for members in Shou Mao and Ching Ya are mostly funded from the admission fees paid by latter participants. In addition, the bonuses are granted for introducing new members into the companies, not for promoting nor selling products at reasonable market prices. Such activities have obviously violated Article 23(1) of the Fair Trade Law. Therefore, the case is referred to the Prosecutor General's Office, Taichung District Court for prosecution.
3. The multi-level marketing system in this case, in essence, is similar to that of the "Life Service Association" which was sanctioned by this Commission for its violation of Article 23(1) of the Fair Trade Law in the early August of 1995. In comparison, the products of Chung Hung seemed more valuable than Life Service Association 's "Bonus Discount Coupons", which worth nothing. However, the products of Chung Hung were also nothing more than a "sham".
4. The sanctioned party should have complied with Article 23(2) of the Fair Trade Law for their multi-level marketing. Shou Mao and Ching Ya started multi-level marketing around August 20, 1995, but did not report to this Commission until August 30, 1995. Moreover, their contracts with members did not comply with Article 4(1) of the Regulations Governing Multi-level Marketing for its failure to inform participants of matters concerning the conditions of withdrawing from the organization and their rights, obligations arising from their withdrawals. Such activities have obviously violated Articles 3(1), 4(1), 5(1) of the Regulations Governing Multi-level Marketing, and therefore, a disposition is given under Article 42.
Summarized by Liu, Shi-ming
Supervised by Chuo, Tian-liang
＊＊: For information of translation, click here
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