Genesis Merchandisers, Inc (GMI) violated Article 23(1) of the Fair Trade Law
Chinese Taipei
Case:
Genesis Merchandisers, Inc (GMI) violated Article 23(1) of the Fair Trade Law
Key words:
illegal multi-level sales, binary system, man-made alignment
Reference:
The Fair Trade Commission Decision of August 27, 1997 (the 304th Commission Meeting); Disposition (86) Kung Chu Tzu No. 136
Industry:
Retail Industry (4020)
Relevant Laws:
Summary:
(1) According to the investigation, GMI implemented a binary bonus system, which was claimed as a unique feature of its multi-level sales network. Based on the binary system, an applicant needed only 10,000 points for the purchase of each business unit. If they introduce another two persons to join the organization, they would be entitled to point cumulation without any restraints or limitation on length of time, and would collect bonuses every week. In addition, with the "once-in-a-lifetime" investment (the 10,000 points they initially purchased), they could have repeated consumption after each cycle (deducted from the bonuses) and collect bonuses for unlimited numbers of cycles. As the amount of potential bonuses were far more than the amount of investment, which is why they called it "the once-in-a-lifetime investment," all participants rushed to join the system with an opportunistic mentality. Moreover, in order to reap the profits as fast as possible and to receive bonuses in multiples, they usually purchase several business units (the maximum was seven units) when they first joined. Once the organizational cycles were completed, they could regenerate the so-called "subsidiary (business rights)," which aimed to create more multiple bonuses and was to deviate from the very essence of multi-level sales.
(2) GMI's binary bonus system made it a rule that there must be two lines and each participant needed was to introduce two persons into the network. It placed emphasis on the ideas of "mutually beneficial co-existence" and "teamwork," forming a "system organization," which helped the participants receive the highest percentage and highest amount of bonuses with a man-made alignment that was most efficient and wasted the least points (persons). The system was also characterized by the absence of breakaway and surpassing. As a result, the early participants could occupy the most privileged positions without promoting or selling products. As long as there was a steady stream of new participants coming in the organization, the early participants could enjoy the fruits of others' work without toil. Every week they could receive handsome bonuses. In fact, most of the bonuses available were collected by the small number of first participants and network leaders. So it is obvious that the income for GMI's participants did not come from promoting or selling products at reasonable market prices, but rather from introducing new members into the organization.
(3) Besides, GMI also issued purchase orders. However, as most participants joined the organization for the purpose of receiving bonuses, few would actually purchase the products, so only 10 to 20 percent of the products were purchased with purchase orders. In addition, as the range of products was very limited, the company also sold products made by different industries allied with it. Nonetheless, due to the limited profit margins, the corresponding points for each product were relatively low. If a participant intended to accumulate the required 10,000 points, the cost would be much higher and became a disincentive for participants. As a result, the participants had no choice but to purchase the company's main products, which were again limited in numbers but had higher point value. Eventually, hoarding occurred. Some participants even received bonuses before they actually purchased the products. So, the participants needed not promote or sell products to the consumers, but instead to introduce others to join in exchange of their bonuses. In some cases, the participants who were unable to receive bonuses asked to return the products, but were told that all bonuses had been given away and that, with the design of the bonus system, there was no way to calculate or recover the bonuses that the upline participants had received. Therefore, GMI's development of inappropriate restrictions on the participants' withdrawal and return of goods constituted illegal multi-level sales activities.
(4) In accordance with traditional multi-level sales systems, the participants make their earnings, whether it be commission or bonuses, by promoting and selling products through the multi-level sales network they have built and sponsored. However, as the number of generations is limited, the later a member joins the company, the more distant he/she will be from the network leadership, and the lesser the bonuses/commission percentage available to him/her. Nonetheless, as GMI's binary system imposes no restraints of generations or length of time on its members, the bonus accumulation based on sales performance of the whole network increased along with the expansion of the network. In other words, the more new members introduced into the organization, the more bonuses available, which was obviously different from traditional multi-level sales. According to GMI's system, the bonuses for upline participants were funded from the admission fees paid by later participants. So, the earlier a member joined the organization, the more privileged position he/she would occupy while the later a member joined the company, the more disadvantaged he/she would be under the system. Moreover, due to the man-made alignment, where the operations were best organized and caused the least waste of points, the network leadership kept receiving bonuses every week as the number of new members kept growing. As a result, the bonuses given away increased with divergent progression to the extent that the overall sum exceeded more than 100% of the products' point value, leading to a decrease in the company's earnings, or even losses to the company.
Summarized by Yeh, Tien-fu
Supervised by Tsuo, Tien-liang
Appendix:
Genesis Merchandisers, Inc.'s Uniform Invoice Number: 97171388