Lian Heng Co., Ltd.

Case:

Lian Heng Co., Ltd. violated the Multi-level Marketing Supervision Act by failing to buy back goods at 90% of the original price from a participant after contract termination

Key Word(s):

Multi-level marketing

Reference:

Fair Trade Commission Decision of May 28, 2014 (the 1177th Commissioners' Meeting); Disposition Kung Ch'u Tzu No.103071

Industry:

Direct Selling Establishments (4872)

Relevant Law(s):

Article 21(2) of the Multi-level Marketing Supervision Act

Summary:

1. The FTC received complaints from individuals via e-mail stating that they joined the multi-level marketing organization of Lien Heng Co., Ltd. (hereinafter referred to as "the Company") and purchased a pre-need funeral agreement and urn. However, when they intended to withdraw from the organization, the Company sent a legal attest letter notifying them that they had violated the Company's business regulations by encouraging other participants to withdraw from the organization, that their qualifications were cancelled, and that the Company would not refund their products. The complainants believed that the Company's conduct was likely in violation of the Multi-level Marketing Supervision Act.
2. The FTC received complaints from 14 other individuals while it was investigating this case. The complainants joined the Company between 2011 and 2012. After receiving their refund applications, the Company sent a legal attest letter notifying them that they had violated the Company's business regulations by encouraging other participants to withdraw from the organization, that their qualifications were cancelled, and that the Company would not refund their products. The complainants hired an attorney to respond to the legal attest letter on July 6, 2013, and requested that the Company to hand over the urn or return the payment of 13 individuals. The price of an urn was NT$55,000 when participants joined, and the refund was calculated based on the price of NT$45,000. At the same time, the Company also deducted several thousand NTD for warehouse management fees.
3. The Multi-level Marketing Supervision Act was enacted on January 29, 2014. The provisions of the Fair Trade Law on multi-level marketing are no longer applicable on the day the Multi-level Marketing Supervision Act took effect in accordance with Article 39 of the Multi-level Marketing Supervision Act. Article 21 of the Multi-level Marketing Supervision Act stipulates that after the lapse of the period as referred to in the first paragraph of the preceding article, the participant at any time may still terminate the contract by writing and withdraw from the multi-level marketing plans or organizations, and request to return the goods. Provided, however, that when six months lapse since the date that the products are deliverable, the participant may not request to return the goods. Within thirty days from the termination of the contract in accordance with the preceding paragraph, the multi-level marketing enterprise shall buy back all goods possessed by the participant at ninety percent (90%) of the original purchase price. The multi-level marketing enterprise may deducted the bonuses or remuneration paid to the participant for the purchase as well as the amount of the decreased value of the goods. If the returned goods are collected by the enterprise, the enterprise may deduct the shipping costs required for such collection. Article 5 of the Administrative Penalty Act stipulates that, in the case of change in law or self-governing ordinance after the commission of the act, the law or self-governing ordinance in force at the time when sanction therefor was initially imposed by the administrative agency shall apply; provided, however, that the provision most favorable to the person punished shall apply if the law or self-governing ordinance in force prior to the imposition of the sanction is more favorable to him." Article 23-2 of the Fair Trade Law and Article 21 of the Multi-level Marketing Supervision Act both stipulate that the multi-level marketing enterprise shall buy back all goods possessed by the participant at 90% of the original purchase price within 30 days from the termination of the contract, and that the multi-level marketing enterprise may deduct the bonuses or remuneration paid to the participant for the purchase as well as the amount of the decreased value of the goods. The time period for multi-level enterprises to handle affairs related to a participant's withdrawal and the deductible items are the same in the Fair Trade Law and Multi-level Marketing Supervision Act. As the administrative penalty in the Multi-level Marketing Supervision Act is more favorable than administrative penalty in the Fair Trade Law, the administrative penalty in this case therefore shall be based on the Multi-level Marketing Supervision Act in accordance with the Administrative Penalty Act.
4. Between June 3, 2013 and December 26, 2013, the Company received a total of 158 refund applications from participants after contract termination. The participants all joined the multi-level marketing organization between 2011 and 2013 and purchased an urn at the price of NT$55,000; the unit price for the second and any further urns was NT$45,000. From the date that the products were deliverable, only 6 did not pass the 6 month mark, while the remaining 152 all passed the six month mark. The FTC found that when the Company was buying back products from participants, the Company first deducted the bonus of NT$10,000 from the first urn of NT$55,000 and used NT$45,000 as the original price of the first urn; the Company then used NT$45 thousand as the price of the second and any further urns. The Company calculated 90% of the original price of the urns and then deducted warehouse management fees, which was the amount in contention. There were calculations provided by the Company to the complainants when buying back the products that could prove the Company did indeed deduct the bonus and warehouse management fee. These two items, i.e. the bonus and warehouse management fee, were not deductible items in accordance with the Multi-level Marketing Supervision Act. As a result, the fact the Company failed to buy back products from participants at 90% the original price due to deducting these two items was a violation of Article 21(2) of the Multi-level Marketing Supervision Act. The FTC therefore imposed an administrative fine of NT$200,000 on the Company in accordance with Article 32(1) of the same Act.

Appendix:
Lian Heng Co., Ltd.'s Uniform Invoice Number: 53809679

Summarized by Lin, Jia-Te; Supervised by Chen, Jen-Ying