The Thirteen Must-Knows of the New MLM Act
The Thirteen Must-Knows of the New MLM Act
Compiled by Zhongyin Law Firm (Taiwan) / Charlotte S.H. Wu Attorney-at-law, PartnerThe recent “Multi-Level Marketing Governing Act”
<Articles on New Laws>
The “Multi-Level Marketing Governing Act” (MLM Act) was formerly announced by the President on January 29, becoming effective on January 31 and replacing the “Supervisory Regulations Governing Multi-Level Sales.” The legal hierarchy for the two regulations is largely different; when the regulations existed as the “Supervisory Regulations Governing Multi-Level Sales,” they were classified as under the Fair Trade Act. Now, the “Multi-Level Marketing Governing Act” is an independent law and, as a result, provides more clearly defined regulations and penalties.
While obvious that the MLM Act is a continuation of the “Supervisory Regulations Governing Multi-Level Sales,” the new MLM Act includes many modifications and additions.
Zhong Yin Law Firm has organized these important changes into thirteen must-know points, presenting them in a concise outline so that MLM enterprises can clearly understand and adapt to the regulations, avoiding criminal liabilities that come with not complying with the new MLM Act.
1. Term Usage Amendment
The previous usage of an MLM distributor as “Participant” has been amended to “Distributor.”
2. Requirements for Establishing an MLM Enterprise
The requirement for Distributors to pay for participation no longer defines an MLM Company. As long as other distributors recruit Distributors, and the MLM enterprise is established to promote the sale of goods or services, the enterprise shall be legally deemed as “Multi-Level Sales.”
3. Amendment to Reporting Information Changes to Authorities
Changes to the MLM Enterprise’s basic information, excluding change in company name, no longer need to be reported to authorities prior to their going-into-effect.
4. Required Information to be Communicated by the MLM Enterprise to the Distributor Prior to the Distributor Joining the MLM Enterprise
1) The MLM Enterprise shall, upon the Distributor terminating the Contract, buy back the products at 90% of the original purchase price while deducting costs due to depreciation. Thus, the method of calculation, standards, and reasons estimating depreciation has been added as required information to be communicated to the Distributor prior to his/her joining the MLM enterprise.
2) MLM enterprises should revise their Participation Agreements to include this addition.
5. Required Provisions for Participation Agreement
1) The following items were added:
(1) Method of calculation, standards, and reasons of evaluating depreciation.
(2) Distributor breach of contract and handling of such breach.
(3) Distributor’s rights and obligations in terminating the agreement.
(4) Handling of product returns if the agreement is rescinded or terminated due to the Distributor’s breach of agreement or breach of other operational rules, or other reasons attributable to the Distributor.
(5) Effective period of the agreement and conditions for renewal
2) MLM enterprises should revise their Participation Agreements to include these additions.
6. Illegal MLM Enterprise Behavior
The Act has added the provision prohibiting “the unlawful promotion of purchasing or owning more than two MLM distribution rights.”
7. Cooling-Off Period
The cooling-off period has extended from 14 days to 30 days. The Distributor must submit a written notice to the MLM Enterprise within 30 days of executing the contract.
In note of this amendment, we remind MLM Enterprises to realize the Distributor’s cooling-off period and to make the relevant amendments to their Participation Agreements.
8. Restrictions on Distributor’s Rights to Product-Return Upon Termination of Contract
Distributors who have had the products for six months or more shall not request returns. Additionally, if an MLM Enterprise buys back the products, it may deduct shipping fees from the buy-back price.
9. Distributor’s Rights of Rescinding or Terminating a Contract when Products are Provided by The Third Party
1) When products are provided by a third party, and the Distributor has rescinded or terminated the participation agreement in accordance with regulations, the MLM enterprise shall proceed with returns and buy-back as provisioned by the New MLM Act and the Distributor shall be liable for damages born from rescinding or terminating the participation agreement.
2) In response to this amendment, when products are provided by a third party, MLM enterprises should be sure to provide the third party with an agreement that clearly provides terms for termination. In this way, the MLM enterprise avoids excessive liability for returns and punitive damages.
10. Expanded Inspection Scope for the Competent Authority
1) The competent authority will ask MLM enterprises to provide information and report operational developments in the prescribed manner as it provisions. Violators must cease activity and take corrective measures within the time prescribed by the competent authority and face a fine of more than NTD50,000 and less than NTD1,000,000. If the MLM enterprise does not take corrective measures within the time prescribed by the competent authority, it will face a further fine of more than NTD100,000 and less than NTD2,000,000 and will continue to face this range of fines until corrective measures are taken.
2) The competent authority can seize any evidence. Violators who fail to comply with the investigation will face a fine of more than NTD50,000 and less than NTD500,000. Those who are investigated again and, without justifiable reason, evade, obstruct, or refuse the investigation will face a fine of more than NTD100,000 and less than NTD1,000,000 until they comply with the investigation and hand over all relevant documents and information.
11. Increased Penalties for Criminal Activity
The previous penalty of 3 years imprisonment and/or a fine of up to NTD 10,000,000 has been increased to 7 years imprisonment and a fine of up to NTD 10,000,000. In addition to criminal persons being penalized, MLM companies will also be fined with the above terms.
12. Addition of a Participant Protection Agency
1) The competent authority will ask MLM enterprises that have completed filing to pay a lump sum to implement a protection agency that will protect the rights of the business and its participants as well as assist in disputes. The protection agency, in implementing its services, shall accept a bond and annual fee (the fees and payment method to be determined by the competent authority) from MLM enterprises that have completed filing with the competent authority.
2) The Fair Trade Commission is currently drafting laws involving the implementation and management of the participant protection agency.
13. MLM Enterprises that Had Filed with the Competent Authority Prior to the Implementation of the New MLM Act Should Re-file in Compliance with the New MLM Act and Make Necessary Changes to the Participation Agreements.
1) MLM enterprises that had filed prior to the new MLM Act must make the necessary changes to documents and information complying with the new MLM Act and report such changes to the competent authority within two months of the promulgation of the MLM Act. For those who fail to complete the necessary changes, the competent authority may demand for the enterprise to stop operations or to take the necessary corrective measures. Additionally, the company will face a fine greater than NTD50,000 and less than NTD1,000,000. Companies that continue to not make the necessary changes will be asked again to take corrective measures within a deadline and will face further fines of more than NTD100,000 and less than NTD2,000,000 until corrective measures are taken.
2) MLM enterprises that had filed prior to the promulgation of the new MLM Act must, within 3 months of the MLM Act coming into effect, make necessary changes on paper to their participation agreements and notify the Distributors in writing of the changes. MLM enterprises that fail to comply may be ordered by the competent authority to take corrective measures by a deadline, and face a fine of more than NTD50,000 and less than NTD1,000,000. MLM enterprises that continue to operate without taking corrective measures will be ordered to make the corrections by a deadline and will face further fines of more than NTD100,000 and less than NTD 2,000,000 until corrective measures are taken.
3) The new MLM Act was implemented on January 29 and came into effect on January 31. According to the above provisions, MLM Enterprises that had filed with the competent authority prior to the promulgation of the new MLM Act must file all corrected documents and information with the Fair Trade Commission by March 31, 2014. By April 30, 2014, MLM enterprises shall make the relevant changes to the participation agreements and inform their Distributors by written notice of the changes.
4) In response to this provision, all MLM Enterprises are recommended to review and revise their participation agreements and to file authority all relevant documents and information with the competent before the deadlines in order to avoid punishments and fines.