Hsin Men International Company’s Friendly Society ( i.e., “Chiu Yu Friendly Society”) engaged in multi-level sales against the requirements of the Fair Trade Law

Chinese Taipei

Case:

Hsin Men International Company’s Friendly Society ( i.e., “Chiu Yu Friendly Society”) engaged in multi-level sales against the requirements of the Fair Trade Law

Key Words:

Multi-level sales, Serial Number

Reference:

Fair Trade Commission Decision of June 23, 2005 (the 711th Commissioners' Meeting), Disposition Kung Ch’u Tzu No. 094071

Industry:

Direct Selling Establishments (4812)

Relevant Laws:

Article 23 of the Fair Trade Law, Paragraph 1, Article 5 and Paragraph 1, Article 12 of Supervisory Regulations Governing Multi-Level Sales enacted pursuant to Paragraph 4, Article 23 of the Fair Trade Law

Summary:

1. Hsin Men International Company’s Friendly Society ( later changed to “Chiu Yu Friendly Society”) was organized and formed in November 2002 to sell number cards to the general public through multi-level sales. The participants only paid NT$16,800 and did not sign any written agreements after joining the Friendly Society. The participant, under the condition that was not based on reasonable prices of making promotion or selling products or giving labor service, would receive NT$64,000 when the number purchased coincided with the specially designated serial number. Th is Commission’s investigation found that the decision-making committee of the aforementioned Friendly Society was made up of Lin, Yu-Che and the other eleven persons (Lin, Yu-Che and He, Chiu-Kuang were respectively the former and the succeeding presidents for the Friendly Society). The decision-making committee members jointly decided the “Memorandum of Chiu Yu Friendly Society” that included the admission policy, bidding (that is the ways to calculate bonus), and the rights and obligations of members. The name “Chiu Yu Friendly Society” was used in the Friendly Society’s external operation. Furthermore, according to the testimonies of Lin, Yu-Che and the others, the decision-making committee members resolved, by show of hands voting and simple majority, upon proposals related to memorandum, name, operation, work assignments and other issues in accordance with the “Minute of Self-Help Meeting for Hsin Men Victims” and “Minute Books”, . The voting was then recorded in the aforementioned minute books and the decision-making members participating in the voting had to sign the minutes in person. The aforementioned Friendly Society was not incorporated, even though the Friendly Society has instituted a President and two Vice President to handle the routine affairs of the Friendly Society according to its memorandum, while the members’ rights and obligations, bonus calculation and operation of the Society were jointly decided by Lin, Yu-Chen and the other eleven members.
2. When the participants bought number cards, they were also requested by Chiu Yu Friendly Society to purchase the products of Li Erh Biotechnology Co., Ltd., Li An Biotechnology Pharmaceutical Co., Ltd. and Te Chun Biotechnology Co., Ltd . However , this Commission’s investigation found that the aforementioned Friendly Society mostly emphasized on the key issues of “Get out of poverty and become rich”, “Do you want to become a rich man” and “Safe, Stable and Sustainable” in the recruitment of new members. The enrollment into the Friendly Society was regarded as a plan of money management; the members could become rich within a short time through the redouble of organization. It is obvious that the aforementioned Friendly Society has deviated from the regular promotion and marketing of products or labor service and engaged in the game of money when performing the act of multi-level sales. The participants of the Friendly Society derived their incomes from the fees paid by new members, the earlier entrants shared the fees paid by the latter entrants, the main source of income for the participants came from getting new members rather than from the reasonable market prices of promoting or selling products or labor services. With regard to the system at issue, each participant must actually pay NT$25,200 for each serial number, that is NT$16,800 for a number card and NT$8,400 for products sold by the Friendly Society. After joining, the participant can recommend other person to join the Friendly Society, the participant thus may receive compensation that varies from NT$2,600 to NT$81,000 when the recommended person joins the Friendly Society or when such person further recommends another to join the Friendly Society. The Friendly Society also adopted a mutual assistance model of placing four numbers in a group, a number will have three numbers at its lower level. For example, A directly joined the Friendly Society; A (the first level) will receive the bonus when A has recruited three members, B, C and D. Then, B, C, and D (the second level) will receive bonuses when B, C and D have respectively recruited three members; that was total of nine members (the third level). These nine members will only receive bonuses when all nine of them have respectively recruited three members (the forth level) and so forth. The members were arranged according to the order that they joined the Society. When the member’s serial number appears, the said member would receive NT$64,000, the returns was approximately four times of the payment. According to this manner of calculation, the later a member joins the Friendly Society, the longer the time for the said member to have enough members to made up its lower level arrangement (the occurrence of serial number 4’s multiples). In other word, the later a member joins the Society, the more likely that the member would not receive the bonus or may never have a chance to receive the bonus and finally become a victim. Accordingly, the participants of the Friendly Society at issue received commissions, bonuses or other economic benefits solely on the basis of the total members in its lower level arrangement; the participants would only receive bonuses and other economic benefits provided new members kept joining the Friendly Society afterwards. That is to say, the Friendly Society could continue operating normally only if the marketing system at issue kept recruiting new members to participat e in the Friendly Society’s open arrangement and throw in additional capital. It is obvious that the bonus received by a participant was solely determined by the respective “admission’s serial number”, “number of person-time joining the Society”, “time joining the Society” and whether “there is additional invested capital”. It is clear that the participant had primarily derived income from recommending other person to join the Friendly Society and thus has violated the provision of Article 23 of the Fair Trade Law.
3. “Chiu Yu Friendly Society” commenced the aforementioned multi-level sales system since December 2002 but the Friendly Society so far had not filed a written report with this Commission. Furthermore, the Friendly Society only signed “Voluntary Agreement” with the participants at the time of joining. However, the said agreement only stated briefly that the participants understood and agreed on the substance of the aforementioned Friendly Society, thereafter they would comply with the policy decisions of the aforementioned Friendly Society. The aforementioned agreement did not include matters that statutorily must be prescribed in the written participant contract and thus has violated the provisions of Paragraph 1, Article 5 and Paragraph 1, Article 12 of Supervisory Regulations Governing Multi-Level Sales.
4. Taking into consideration the motivation, purpose, and expected improper benefit of the unlawful act of Lin, Yu-Che and the other 11 persons; the degree of the act’s harm to market order; the duration of the act’s harm to market order; benefits derived on account of the unlawful act; the scale, operating condition and market position of the Friendly Society; past violations; remorse shown for the act and attitude of cooperation in the investigation, therefore, according to Paragraph 1, Paragraph 3, Article 42 and the anterior paragraph of Article 41 of the Fair Trade Law, Lin, Yu-Che and the other 11 persons are ordered to cease the unlawful acts, in addition, an administrative fine of NT$3,000,000 was respectively imposed on Lin, Yu-Che and He, Chiu-Kuang; an administrative fine of NT$1,000,000 was respectively imposed on Wu Ju-Ying, Hung Ching-Tse, Kao Li-Lieng, Chen Tzu-Lieng (former name was Chen Hui-Min), Huang–Peng Chiu-Hsia, Yeh Ping-Yuan, Wang Wen-Tung, Chu Chen-Wei and Peng Meng-Yi; and an administrative fine of NT$800,000 was imposed on Lin Hsien-Chun.

Summarized by Lin, Shu-Ling;
Supervised by Yeh, Tien-Fu

Appendix:

Nil