Violation of Article 23(1) of the Fair Trade Law and the Regulations Governing Multilevel Marketing by Mr. Chun Fu Wu (Responsible Person of "Life Service Association")

Chinese Taipei

Case:

Violation of Article 23(1) of the Fair Trade Law and the Regulations Governing Multilevel Marketing by Mr. Chun Fu Wu (Responsible Person of "Life Service Association")

Key Words:

illegal sequential numbering method; improper multi-level sales

Reference:

Fair Trade Commission Decision of August 2, 1995 (the 199th Commission Meeting); Disposition of (84)-Kung-Chu-010

Industry:

Retail Business (4020)

Relevant Laws:

Article 23(1), 1st half of Article 41, and Article 42 of the Fair Trade Law; Article 3(1), Article 4(2) and Article 5(1) of the Regulations Governing Multilevel Marketing

Summary:

1. In March 1995, the Fair Trade Commission received an inquiry as to whether the mode of operation of "Life Service Association" (hereinafter referred to as "the Association") is subject to the regulation of the Fair Trade Law. Based on the investigations over the past months, it is found that Mr. Chun Fu Wu, the responsible person of the Association has engaged in illegal multi-level sales activities since early November of 1994.

The investigation reveals that the multi-level sales system adopted and implemented by the Association is peculiar and different from ordinary multi-level sales systems. In short, there is no member qualification restriction for persons desiring to join the Association. Any person may, through the introduction by a member of the Association, become a member with an admission application and NT$3,000 (in exchange for a "Bonus Discount Coupon" of equal value). After his/her admission to the Association, a member may obtain a right to receive the "Bonus Reward" as long as

(i) he/she introduces to the Association three (3) new members within one month, or five (5) new members within two (2) months, or seven (7) new members within three (3) months, from the time of his/her admission; and

(ii) he/she continues to pay the Association for each month NT$3,000 in exchange for the Bonus Discount Coupon.

According to the method being used by the Association for calculating the Bonus Reward, the Association will assign to each new member a serial number based on the sequential order of his admission to the Association. (Normally, each member will be assigned a serial number upon his/her admission to the Association, but each member is entitled to apply for admission repeatedly without limitation and to obtain two or more serial numbers, and two or more rights, to receive the Bonus Reward. Since the serial numbers are uniformly assigned by the Association's computer that cannot be predicted by the members, such numbering system is therefore referred to as the "Sequential Numbering Method"). It is further noted that an old member is entitled to draw the Bonus Reward when the serial number assigned to a new member doubles the former's serial number. In other words, when the sequential number of all members of the Association attains a figure with a serial number that doubles that of an old member, it is called the completion of an algebraic arrangement of the sequential orders (e.g. if the serial number is "1", the member shall wait for the appearance of the serial number "2", and then wait for the appearance of the serial number "4" ... etc.). From this time on, the said member is entitled to draw (receive) a Bonus Reward in the amount of NT$360 upon the completion of the first algebraic arrangement of the sequential orders, and in the amount of a cumulative multiple of NT$360 upon the completion of each subsequent algebraic arrangement of the sequential orders until the completion of the ninth (9th) algebraic arrangement thereof, at which time the said member is entitled to receive the highest Bonus Reward of NT$183,960, and thereafter will be continuously entitled to receive such Bonus Reward. According to the system and the practice, a new member can only be admitted to the Association through the introduction by an existing member, and 60% of the monthly membership fee of NT$3,000 paid by the new member is allocated to the old members as the Bonus Reward. Based on this method, the latter a member is admitted to the Association, 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 Bonus Reward; the extreme is that he/she will never win the Bonus Reward and therefore becomes a victim of this system, at which point the Association will have to close down for its inability to continue.

2. Furthermore, the Bonus Discount Coupon purchased by the members is a scam because it only offsets the discount portion of the price given by the franchised stores. For example, when a television originally sold at NT$15,000 is 20% off, the member is required to make a cash payment in the amount of NT$12,000 if he/she is using a Bonus Coupon with a face value of NT$3,000 and thus enjoys no discount in fact. On the other hand, the Bonus Coupon received by the franchised store can not be redeemed with the Association for cash or in kind.

3. As analyzed above, it is clear and evident that the Bonus Reward for the Association's members is funded primarily by the membership fees paid by the new members or, specifically, derived from the activities conducted by the members in introducing new members to the Association, rather than from the marketing revenue of any merchandise and/or services at reasonable market prices. This mode of operation is obviously in violation of the provisions of Article 23(2) of the Fair Trade Law. Therefore, this case was referred to the Prosecutors Division of Taipei District Court for investigation and prosecution.

4. In addition, since the party subject to this Disposition was conducting multi-level sales, he is governed by the provisions of the " Regulations Governing Multilevel Marketing " (the Regulations) enacted pursuant to the Article 23(2) of the Fair Trade Law. However, it is found that the Association started the multi-level sales from November 2, 1994 but failed to apply for recordation with FTC until May 26, 1995. Furthermore, the membership agreement entered into by and between the Association and its members did not provide for the particulars, including the conditions for withdrawal from the organization/project and the rights and obligations arising from such withdrawal, which should be disclosed to each participant as required by Article 4(1) of the Regulations. Accordingly, the Association violated Article 3(1), Article 4(2), and Article 5(1) of the Regulations and is subject to this Disposition pursuant to the first half of Article 41 and Article 42 of the Fair Trade Law.

　

Summarized by Liu, Shih Ming
Supervised by Tso, Tien Liang

＄: For information of translation, click here

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