Worldwide Marketing Electronics Co., Ltd. violates the Fair Trade Law by improper engaging in multi-level sales activities

Case:

Worldwide Marketing Electronics Co., Ltd. violates the Fair Trade Law by improper engaging in multi-level sales activities

Key Words:

multi-level sales, electronic dartboards

Reference:

Fair Trade Commission Decision of January 2, 2004 (the 634th Commissioners' Meeting); Disposition Kung Ch'u Tzu No. 093002

Industry:

Direct Selling Establishments (4812)

Relevant Laws:

Article 23 of the Fair Trade Law; Articles 5(1) and 12(1) of the Supervisory Regulations Governing Multi-Level Sales

1. This case originated with a letter sent by the Ministry of Justice Investigation Bureau's Central Taiwan Mobile Task Force on June 20, 2002 roughly stating that Worldwide Marketing Electronics Co., Ltd. (hereinafter called "Worldwide") was selling electronic dartboards (dartboards) through a multi-level sales platform and engaged Ying Feng Management Co., Ltd. (hereinafter called "Ying Feng") to install the dartboards in places such as pubs, bars, pool halls, coffee shops as entertainment for customers and a source of profit for the business. In addition, there existed both "customer" and "business" income distribution methods. The customer portion dealt solely with the sale of dartboards and derived income from "income dividend 1" (purchase of the machine), "income dividend 2" (operation), as well as the monthly management fee dividend (installation). In contrast, the "business" method distributed earnings through bonuses for increased consignments, namely, a bonus for the introduction of new franchise participants. This bonus system was divided into ten levels with an increase of one level given for each person introduced. The bonus for the first level was New Taiwan Dollars (NT$)300 while that of the tenth level amounted to NT$8,857,200. It is this portion of the scheme that was alleged to involve questionable multi-level sales practices.
2. Worldwide's sales system: Participants in this system were first required to purchase a dartboard to obtain a membership number to earn a place in the organization hierarchy and participate in income distribution. Of the revenue from the dartboards, Worldwide allocated NT$10,000 from each machine for an income dividend bonus. All members were under the same organization and were organized in a pyramid ordered from top to bottom and from left to right. Those who completed the necessary requirements were eligible to receive "income dividend 1" which ran as high as NT$170,000 as well as another dartboard and another consignment number. The "income dividend 2" and the "consignment award" were each as high as NT$8,857,200. According to the description of these bonuses, "income dividend 1" and "income dividend 2" were developed and collected by members who had purchased a dartboard and obtained consignment numbers through the subsequent addition of new "consignment numbers", while the "consignment award" was collected through the introduction of new buyers. All of these bonuses were derived from the membership fees paid by members. It was further found that the product in question (electronic dartboards) was manufactured by Worldwide and, according to their own statements, only approximately 400 to 500 machines had actually been produced and installed and the remainder was yet to be produced. However, the number of machines sold had reached 870 and more than 1,900 assigned numbers had already been given out, forming the basis for the issuance of bonuses. Thus, the number of completed and installed machines made up only 26% of the consignment numbers while uncompleted machines made up 74%. The latter percentage furthermore represented yet-to-be produced goods; that is, the subject matter sold under this portion of the contracts does not even exist, not to mention not been installed or yielded any economic benefit to the participants. In addition, according to statements made by the participants, they had purchased a dartboard but had not actually seen the machine and although they had signed the consignment contract they were unclear as to whether or not the machine had been installed, its location, and the amount of revenue created. The participants also stated that their purpose for joining was to collect dividends based on income earned and distributed from subsequent participants. Furthermore, upon inspecting the operational revenue and bonuses issued, it was found that the amount of bonuses distributed in this case totaled NT$39,890,110, which varied greatly from the real income earned from the dartboards themselves, which totaled only NT$479,900. Thus, the income from the dartboards comprised a mere 0.6% of the company's total operating revenues of NT$76,560,000. This information clearly indicates that participant's main income was derived not from operational revenue garnered from the dartboards but rather from the addition of new members. Moreover, the extremely low proportion of installed machines seems inconsistent with common commercial practices. In summary, participants' motive for joining was not to use or operate the dartboards but rather focused on the substantial bonuses that were received from subsequent participants, thus making the disputed goods insignificant within this multi-level sales scheme, reducing it to a mere formality and a pretense for bringing in new members. These facts are sufficient to prove that the participants' main source of income was derived from the introduction of others and not from the marketing or sale of goods or services. Consequently, these acts violated Article 23 of the Fair Trade Law (FTL).
3. Worldwide began promoting dartboards through its multi-level sales platform in March 2002 and to date has not yet completed the recordation procedures required for multi-level sales enterprises under Article 5(1) of the Supervisory Regulations Governing Multi-Level Sales. It was also found that Worldwide failed to sign participation contracts specifying the statutorily required particulars with participants joining the organization and merely engaged Ying Feng to sign consignment agreements with the participants. Furthermore, these agreements violated Article 12(1) of the same regulations by only including members' basic information, the guidelines for consignment, operation, and management of the dartboards, the rules regarding income distribution, and the product order form but failing to include the statutorily required particulars.
4. In summary, Worldwide violated Article 23 of the Fair Trade Law (FTL) as well as Articles 5(1) and 12(1) of the Supervisory Regulations Governing Multi-Level Sales promulgated pursuant to Article 23-4 of the FTL. After weighing the number of participants, the organization's operational status, business revenue, cooperativeness in the investigation, and the degree of damage to the trading order, the Fair Trade Commission (FTC), in accordance with the fore part of Article 41 of the FTL, imposed an administrative fine of NT$7.5 million for Worldwide's violations of Article 23 of the FTL, as well as an administrative fine of NT$500,000 for its violations of the aforementioned Supervisory Regulations Governing Multi-Level Sales, or a total of NT$8 million. The FTC also ordered Worldwide to cease the illegal acts.

Appendix:
Worldwide Marketing Electronics Co., Ltd.'s Uniform Invoice Number: 13036993

Summarized by Kuo, An-Chi; Supervised by Yeh, Tien-Fu