Sunrider International

Case:

Key Words:

multilevel marketing

Reference:

Fair Trade Commission Decision of January 13, 2010 (the 949th Commissioners' Meeting); Disposition Kung Ch'u Tzu No.099005

Industry:

Direct Selling Industry (4872)

Relevant Laws:

Article 23-4 of the Fair Trade Law and Paragraph 1 of Article 5 of the Supervisory Regulations Governing Multilevel Sales

Summary:

1. The FTC was informed that Sunrider International (hereinafter referred to as Sunrider) requested each distributor to open a shop and pay over 30,000 NT dollars (same currency applied hereinafter) as the franchise fee as well as to cover part of the cost to set up downline shops. Those who failed to open a shop before February 20, 2009, would no longer be qualified to receive cash bonus. Although Sunrider changed the operating model to selling through physical stores, multilevel sales conducts continued. Each shop could take a commission from the cash bonus of 7th to 8th downline participants' shops. The conduct was suspected of violation of Paragraph 1 of Article 5 of the Supervisory Regulations Governing Multilevel Sales.
2. Findings of the FTC after investigation: Sunrider filed its multilevel sales operations with the Fair Trade Commission on April 3, 1992. However, it filed with the FTC again on January 14, 2009, that it had stopped the multilevel sales operations. Starting on February 1, 2009, the company changed the operating model and adopted the so-called "authorized" shop system as an intention to set up physical chain stores to replace multilevel Sales. The FTC discovered that the operations of the authorized franchise chain system were not any different from multilevel sales as defined in Article 8 of the Fair Trade Law.
3. Grounds for Disposition:
   1. The FTC's investigation showed that in order to join Sunrider's franchise chain stores, besides paying a certain franchise fee, the franchisee also had to invest in other branches or do so to acquire a certain position; otherwise, the franchisee would not be qualified to receive leadership cash bonus and other benefits given out in accordance with the company's marketing and incentive criteria. This conduct complied with the description of "paying a certain consideration." Secondly, in addition to the right to promote and sell the company's products, the franchisees were required to pay a certain franchise fee and purchase a certain quantity of products from the company. In other words, a new franchisee had to establish relations with other stores in order to be promoted and qualified for receiving cash bonus. This arrangement was not any different from "the right to introduce other people to participate" and thus constituted the element of "obtaining the right to promote or sell goods or services and introduce other persons to participate only after cumulatively paying a certain amount of consideration" as described in the Fair Trade Law. As for the cash bonus rewarding system, franchisees could establish their multilevel sales networks by bringing in participants and consequently be awarded with promotions in position. Apart from the commissions and cash bonus calculated based on the sales of the shop, the profit each franchisee could make also included the "leadership cash bonus and benefits" given only to franchisees who had invested in other stores or to obtain positions or certain levels. In other words, people in managerial positions could get commissions, cash bonus, and other benefits from the sales of their downline operations or because of the ranks they were promoted to. This was clearly a characteristic of payment based on teamwork and cash reward commission acquisition in multiple levels. With the above combined, the franchise chain system Sunrider applied was exactly the multilevel sales defined in Paragraph 1 of Article 8 of the Fair Trade Law.
   2. Between February 1, and November 2009, Sunrider recruited 346 people into its franchise chain system. The company never filed with the FTC as stipulated in related regulations. The conduct was in violation of the regulation of Paragraph 1 of Article 5 of the Supervisory Regulation Governing Multilevel Sales. The FTC therefore acted in line with the regulation of Paragraph 3 of Article 42 and the first section of Article 41 and ordered Sunrider to file for record with the FTC as stipulated in related regulations within 10 days from reception of the Disposition and imposed the company a fine of 100 thousand NT dollars.

Summarized by: Su, Min-Huang; Supervised by: Yeh, Tien-Fu

Appendix:
Sunrider International's Uniform Invoice Number: 86689098