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Selling Service Type Products via MLM channels in Asia

【Charlotte Wu, Partner, Zhong Yin Law Firm】

While the vast majority of Multi-level Marketing (“MLM”) enterprises globally sell physical products, we are witnessing an increase in the diversity of products that MLM enterprises sell. MLM companies are increasingly starting to sell “service” products, or non-physical products, in addition to their physical products, while some MLM enterprises are now completely based around a service product or products. This can cause problems in countries such as Taiwan, China, and other Asian countries as the MLM laws in these countries were primarily written with physical and perishable goods in mind. It is much easier to track the ‘usage’ and demonstrate the perishability of physical products, which allows MLM enterprise to deny refunds for physical products after a certain period of time (the product has expired). But what about the more “service” oriented products such as monthly memberships? Or online points? Or access to an application? This creates a big problem that service oriented MLM companies must answer: what exactly is their product? Are the service type products priced reasonably? Do their distributors or customers really “use” the service type products and if so how, does the company track their usage?

It is interesting to note that service type products (not sold via MLM channels) are widely accepted in society. In most developed countries, including Taiwan, memberships for gyms, yoga classes, dancing classes, or certain brand memberships are quite common. For these “service products”, people and governmental institutions are generally fine with individuals paying certain fees or monthly fees for these non-tangible products. It is likewise generally accepted that the value paid for these products deteriorates over time, regardless of whether or not the customer takes advantage of the “service product” (whether or not the customer goes to the gym or not, they cannot receive a refund of their gym membership for that month). The reasoning behind this is that companies sell memberships or service products expecting the customer to use them, they must be ready to provide the customer with the product that they paid for. If the customer then decides not to use the service product, the company is not required to refund the monthly fee or listed fee for the service product as the company has put considerable time, money and resources forward to provide that service.

A great example of this is InterContinental Hotels Group’s “Ambassador” program. InterContinental Hotels Group is a multinational hotel company, with many brands around the world. They allow individuals to pay an annual fee to become an “Ambassador”, thus allowing them to receive many benefits when they stay at one of InterContinental’s properties. These benefits include a “gift” in their room on arrival, extended check out times, and guaranteed room upgrades. If an individual joins the program as an “Ambassador”, but never avails themselves to any of the benefits provided by their membership, they are not entitled to a refund. Programs of this type are quite common. It begs the question of why service type products are widely accepted in developed economies, but not when it comes to the MLM industry?  This is not an easy question to answer. Some countries have a more conservative attitudes towards MLM companies with service products, while others simply have not updated their direct selling laws to properly regulate the rights and obligations  for “service products” for MLM companies and their distributors or customers.

In Taiwan, for example, the Multi-level Marketing Supervision Act (the “MLM Act”) governs the activities of MLM companies and was primarily written with physical and perishable goods in mind. This creates problems for MLM service companies, as they must carefully identify their product when they file their operational plan with the Taiwan Fair Trade Commission (the “FTC”). A major issue that usually comes up is the refundability of service products. Under the MLM Act, companies are required to refund 90% of the amount of the product, less any bonuses or commissions paid, and less the decreased value of the product. “The decreased value of the product” is much easier to prove with physical products than with service products. Requests to refund perishable items such as food or drinks are more easy to deny over a certain period of time, as MLM companies can claim the perishable items are expired, even if they are unused. Unfortunately, for service products, the answer is not so black and white. Service products must be carefully selected with the idea in mind of crafting an argument to deny refunds to participants after time has elapsed. This can be tricky when a MLM company offers something like a ‘membership’ or ‘tokens’ as a product. If a MLM participant never uses the service product, has the value of the product decreased? This point is something that a MLM company must consider and address in their operational plan. Operational plans must be “recognized” and “accepted” by the FTC, which usually always takes a consumer-friendly position against MLM companies. The MLM Act does not provide much guidance on the decreased value element for “service products” and the FTC has likewise not provided any regulation addressing such a problem. This means that each MLM company must go through a case-by-case situation of getting their operational plan and compensation plan approved by the FTC.

In China, MLM companies with service products must rethink their strategy as China limits what products can be sold by MLM companies. In fact, according to current laws and regulations, China only allows MLM entities to sell products relating to cosmetics, health food and nutrition, sanitation articles, healthcare appliances and kitchen appliances. China has a very strict policy on this, and many companies that wish to do business in China must add new products or stay out of China all together.

Another problem that we often see with MLM service products is how MLM companies generally “globalize” their products. Because services can be provided quickly and efficiently via technology (compared to physical products where other issues such as transportation, stocking, manufacturing and preservation dates must be considered), companies that offer “service products” often try to  ‘globalize” their service and offer a “one size fits all” business model.  When a company sells a physical product (like a nutrition product), they may need to adjust the formula based on the standards that the country they are conducting their operations in requires. They likewise may try to find a formula or a standard that is commonly accepted by all countries. When it comes to service products this can be difficult as what countries allow for “service products” varies greatly among countries. Therefore, unless a company can somehow find a commonly accepted standard for their service product that can be adopted by many countries, the MLM company may need to consider modifying (localizing) the “service product” for each country. This is made especially difficult by the lack of direct selling laws and court precedents clarifying how MLM service products are to be handled. This can create a real challenge for MLM companies with global service products.

While there are great challenges, there are also great rewards. While the path may be more difficult, service product oriented MLM enterprises generally can offer their customers a great product very quickly, on a very wide geographic scale. This explains the rapid growth of service products that we are seeing. It is important for MLM enterprises to be aware of the intersecting issues facing them, and to take the necessary steps to craft their “service product” carefully before entering the market. By doing this companies can reduce their legal and operational risk. It is important to have the right legal counsel that can identify and problem solve any issues that may arise. Zhong Yin Law Firm has an experienced team, and an extensive network in Taiwan dedicated to assisting MLM enterprises get their start in Taiwan, greater China, and Asia. If you have any questions, please do not hesitate to contact us



If you should have comments or further interest in the above article,
please kindly contact Charlotte Wu, Esq.
TEL +886 2 2377 1858 EXT 8888