Violation of the Fair Trade Law and the Supervisory Regulation of Multi-level Sales by Chainsome International Corp.
Chinese Taipei
Case:
Violation of the Fair Trade Law and the Supervisory Regulation of Multi-level Sales by Chainsome International Corp.
Key Words:
improper multi-level sales, bank membership card, percentage of issued cards
Reference:
Fair Trade Commission Decision of September 23, 1998 (359th Commission Meeting); Disposition Ref. (87) Kung Ch'u Tzu No. 214
Industry:
Other General Goods Retail Sales Industry (5319)
Relevant Laws:
Articles 23(1), 23(2), 35, 41, 42 of the Fair Trade Law; Articles 3(2), 4(1), 5(1), 6(I) of the Supervisory Regulation of Multi-level Sales
Summary:
Chainsome International Corp. (respondent) has operated a multi-level sales plan since January 1994 with 80% or more of its participants entering through franchise stores. When joining the respondent's multi-level sales plan, a participant purchased eight points of blank membership application forms for sales. As of the end of May 1998, among the 20,299 blank applications for the family card (each accounting for two sales points) purchased by participants for joining the multi-level sales plan, only 5,960 were filed (i.e., membership cards actually were sold), reflecting a return percentage of only 29.4%. Among the 13,406 blank applications for personal cards (accounting for one sales point), only 6,154 were issued, reflecting a return percentage of 45.9%. If calculated by the number of applications filed, the percentage of cards issued was 35.9%. If calculated by the sales points, each family card accounting for two points and each personal card accounting for one point, the percentage of cards issued was 33.5%. If calculated based on the price prior to the adjustment on 1 March 1996, i.e. NT$25,000 per family card and NT$15,000 per personal card, the 14,339 unsold family cards account for a value of NT$358,475,000 and the 7,252 unsold personal cards account for a value of NT$108,780,000, the total of which is about NT$467,255,000. Such an amount accounts for 59.2% of the total amount of NT$789,641,000 paid for entry by the participants. If calculated based on the post-adjustment price, i.e., NT$30,000 per family card and NT$20,000 per personal card, the unsold family cards account for a value of NT$430,170,000 and the unsold personal cards account for a value of NT$145,040,000, the total of which is about NT$575,210,000, accounting for 72.8% of the total amount of NT$789,641,000 paid for entry by the participants. It is obvious that the so-called "blank membership cards" that a participant purchased for sales were in fact the price (entry fee) it paid to join the sales plan. That is, the primary source of income to a participant was not the reasonable price of the products or services it promoted, sold or provided, but was profit from introducing new participants. Such practice obviously violated Article 23(1) of the Fair Trade Law (FTL).
According to the respondent's operating policy, the blank outstanding applications it issued to participants were deemed securities, and in case of any missing or deficiency, the company will deal with only the actually left. In such a case the participant would be required to present all of the information previously presented for applying to join the sales plan, including the original purchase order, invoice and other documents. The lack of any information would render the participant's claim void, thereby preventing the participant from returning the goods. In addition, the respondent amended its operating policy to require that, if a participant was unsatisfied with the goods for which it had paid, the participant must return such goods within thirty days after receipt, or must perform the relevant obligations. This amendment was intended to prevent the goods from being returned. Additionally, the respondent designed an "assignment" scheme to prevent participants from withdrawing (from the sales plan) and the goods from being returned. The said "assignment" scheme is that, upon the participant's request for withdrawal or return of goods, the participant's ascendant participant would be notified to handle the returned goods at 40% of the original price. The above-described practices violated Articles 4(1) and 5(1) of the Supervisory Regulation of Multi-level Sales (SRMS).
In addition, the respondent failed to report the amendment of its operating policy prior to its implementation, which was a violation of SRMS Article 3(2). It also failed to provide its principal place of business with the required written information, which was a violation of SRMS Article 6(1).
In conclusion, the respondent was found to have violated FTL Articles 23(1) and 23(2), and SRMS Articles 3(2), 4(1), 5(1) and 6(1). During its 359th Commission Meeting, the FTC in accordance with FTL Articles 41 and 42 ordered the respondent to immediately stop its act of conducting improper multi-level sales, imposed a fine of NT$500,000, and ordered the respondent to suspend its business operations until such time as it has corrected the situation and has obtained an approval of the Fair Trade Commission.
Summarized by Yieh Tien-fu
Supervised by Yang Chia-chun
Appendix:
Chainsome Internation Corp.’s Uniform Invoice No.: 84490121