Yi Lu Fa Trading Co. engaged in illegal multilevel marketing

Chinese Taipei

Case:

Yi Lu Fa Trading Co. engaged in illegal multilevel marketing

Key Words:

multilevel marketing, pyramid scheme

Reference:

Fair Trade Commission Decision of August 2, 1995 (the 199th Commission Meeting); Disposition (84) Kung Ch'u Tzu No. 094

Industry:

Retail Industry (4020)

Relevant Laws:

Article 23(1) of the Fair Trade Law

Summary:

1. Unlike general multilevel sales practices, Yi Lu Fa's bonus system requires participants to become members by paying royalties and obtaining a card number, specifying the sequence of admission, before they are eligible to receive distribution of bonuses based on the sequence of their admission. The standard for calculating such bonuses is summarized as follows (using a Golden Card of NT$30,000 as an example):

(1) A dealer will receive a bonus of NT$70,000 if the serial number of his admission card multiplied by three plus one is issued as a serial number of another new members admission card.

(2) To receive first-time feedback bonus, such dealer is required to recruit two persons to join the membership. Otherwise, such bonus will not be distributed until admission of two members is attained.

(3) Upon receipt of the feedback bonus, the company will deduct a fixed amount of money from the bonus and assign the dealer a new serial number for his consumer service card to continue the line up of serial numbers and distribution of bonuses.

(4) A dealer directly contributing to admission of three members will be eligible to receive the sales bonus in advance before settlement for serial number line up is completed.

According to direct sales theories in general, any person who has become a dealer of a direct sales company by paying royalties will be entitled to receive goods at members-only prices from the company and to sell such goods for retail profits. After selling the low-cost goods stocked up by large quantities to the dealers for prices below the market values, the direct sales company still maintains certain profit margins which can be used to compensate the dealers of the company. However, the sales volume achieved by the company at issue is very low, with even lower revenues. According to the Commissions investigation, the bonuses as distributed mainly come from the admission fees paid by the members. In the actual operations of the company, sales of goods through dealers is merely a camouflage. The idea is that a dealer can receive the feedback bonus of NT$70,000 after the serial numbers of membership cards are lined up to reach the number identical with the dealers card number multiplied by three plus one (if the serial number of the dealer is 100, such dealer will be waiting for emergence of No. 301). Out of the NT$70,000 bonus, NT$40,000 is distributed in cash (from which the amount for outstanding goods payment is deducted), and the remaining NT$30,000 will be used by the company for issuance of a new card with another serial number, ready to match another number lined up in the future and equivalent to such serial number multiplied by three plus one. If such future number is matched, the company will issue another card number. This process is known as "cycling", through which the membership cards can be accumulated. Although as many as 142 cards can be accumulated at the end of the 6th cycle, the time required for reaching the number multiplied by three plus one will be longer for such process when the card numbers get bigger (e.g., No. 10000 will be matched with No. 30001). The 6th cycle may never be achieved. Therefore, such accumulation of card numbers does not bring any benefit at all. The actual bonus that the participants may get is the first-time feedback bonus. And according to the operating methods of the company, the later people participate in this scheme, the less likely they will receive the first-time feedback bonus. As a result, they become victims of the scheme, and ultimately the company will be closed down for its inability to continue operations.

2. This Commission finds that Yi Lu Fa's system has violated Article 23(1) of the Fair Trade Law, which states that multilevel sales shall not be conducted if the participants thereof receive commissions, monetary awards, or other economic benefit mainly from recruiting others to join in the sales rather than from the marketing or sale of the goods or services at reasonable market prices.

　

Summarized by Kung, Chin-lung
Supervised by Tsu, Tien-liang

Appendix:
Yi Lu Fa Trading Co.'s Uniform Invoice No: 84302654.

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