Law Articles
2021-11-26
MLM
Case Study: Filing Does Not Equal Legitimacy — On Legally Registered MLM Businesses Promoting Unregistered Schemes and Products
【Partner Lawyer Charlotte Wu/ Lawyer Dan Yang, Zhong Yin Law Firm】
charlotte.wu@zhongyinlawyer.com.tw
charlotte.wu@zhongyinlawyer.com.tw
Case story:
Rencently, an multi-level marketing operator A was exposed by Internet celebrity B on a Youtube video platform with a video: the distributor team under the multi-level marketing operator A compares the degree of difficulty in making profits and the amount of profit by publicizing different MLM systems to other people, and the system that is highly profitable mainly involves inviting other people to join it. In addition, with respect to the MLM products, the MLM team claimed to others that by participating in the e-commerce platform, which had been well known in the industry for operating the multi-level marketing operator A, they could maximize their niche and refer to the team organization of this particular MLM system and product as the " Divine Clan," and as a result, many of their downline members were joining the "Divine Clan" expecting to generate additional income in the face of the pandemic. It was later discovered that the system did not appear to be the one reported to the Fair Trade Commission, the competent authority, and that the system's bonuses came mainly from referrals, and that the method of payment for joining the pyramid scheme was not official from the Multi-Level Marketing Organization, but rather from the provision of credit card information or direct remittance to the members of the upline, which is why the Internet celebrity asserted that the "Divine Clan" belonged to a degenerate multilevel marketing scheme that exploited its downline members. As a result, the Internet celebrity concluded that "Divine Clan" was a degenerate MLM that exploited its downline members, and that the entire organization may have been a scam, and many members terminated their contracts with MLM business A. This incident triggered a huge uproar in the online media and heated debates between both sides. Some people believe that this is the behavior of an individual in the team of a certain MLM distributor and is not under the control of the government, while others believe that this is a behavior tacitly permitted by the official MLM business A. Regardless of the argument, with the film being continuously re-posted on other online platforms and spaces, the Multi-Level Business A has been continuously questioned by the community, and its reputation in the society has undoubtedly been affected.
The above case is rewritten by the author from an incident that happened in the MLM industry this year. The author would like to use this case to analyze the legal relationship between the parties or interested parties of the act under various arguments, and hope that this case can make both the MLM industry and the distributors pay attention to the legal risks arising from the promotion of MLM system and the contents of the products.
A. Potential Legal Risks to Multi-level Marketing Operator (Company)
According to Article 6 of the Multi-Level Marketing Act (hereinafter referred to as the "Act"), a multi-level marketing business shall, prior to engaging in the practice of multi-level marketing, report to the competent authorities the marketing system, the conditions of participation of distributors, the contents of the participation contract to be signed with the distributors, and other documents and information that should be reported according to the law [1]. Multi-level marketing businesses should strictly carry out their business within the scope of the report and approval, and the competent authority may, in accordance with Article 32 of this Law [2], order them to stop, correct their behavior or take the necessary corrective measures, and impose a fine of not less than NT$100,000 and not more than NT$5,000,000; if a multi-level marketing business fails to make improvements, the competent authority may, in accordance with the law, impose consecutive fines and heavier penalties, and in serious cases, even order dissolution, order closure, and impose fines on the business. In the case of serious cases, it may even be ordered to be dissolved, ordered to cease business, or cease business for less than six months.
The facts of the above case involve an MLM team advertising to others about the MLM system and products, etc., and the content of the advertising may be related to the scope that has not been reported to the Fair Trade Commission, the competent authority. Assuming that, as mentioned in the internet celebrity's video, the "Divine Clan" system and its products, i.e., the e-commerce platform's operating rights (non-physical MLM products), are part of the official system of MLM operator A, and that the MLM operator A has not fulfilled the obligation of notification to the competent authorities, it is a violation of the Law, and multi-level marketing operator A may be subject to the corrective measures, fines, suspensions, and other penalties imposed by the competent authority, as described above. Therefore, multi-level marketing operators should still report this special system to the competent authorities. In addition, it should be noted that MLM products are not limited to physical commodities; non-physical commodities, such as courses, e-commerce platforms, and other non-physical services, still fall within the scope of the MLM business, and MLM businesses should pay attention to the legality of the non-physical products or services, and provide that the marketing methods of such commodities or services comply with the laws and regulations of the competent authority of the destination business or are approved by the competent authority of the destination business.
Since the source of bonuses in the "Divine Family" system is mainly from referrals, in addition to the legal risks mentioned above, there is also the legal risk of Article 18 [3] of this Law for multi-level marketing in disguise, and criminal liability under Article 29 [4] of this Law. MLM companies should pay special attention to the fact that, if a representative, agent, employee or other practitioner of a MLM company violates Article 18 of this Law by carrying out their business, the MLM company will be fined up to NT$100 million in addition to the penalties imposed on them. If the representative, agent, employee or other practitioner violates the provisions of Article 18 of the Act, in addition to fining the perpetrator of the violation, the MLM will be fined up to $100 million. This regulation is based on the perpetrator as the core of the regulation. According to the current interpretation of judicial practice, in addition to the main person in charge of the MLM business, the perpetrator may be the participant of the introduction, promotion, or sales business, or the person who has not participated in it but has taken up an important position in the MLM business or the person who has jointly decided on important matters, etc. As long as it can be determined that the perpetrator of the above mentioned act and the main person in charge of the MLM business have a criminal intent to commit the violation of the lawful acts of multilevel marketing. If it can be determined that the perpetrator and the person in charge of the MLM business have a criminal intent to communicate and share in the illegal multilevel marketing behavior, it should be recognized as a constituent element of the "perpetrator" in the above provision[5].
Assuming that the person in charge of Multi-Level Marketing (MLM) Business A had knowledge of the operation of the "Divine Clan" and intended for it to occur, or foresaw it to occur and it did not occur against his or her intent, it constitutes willfulness under criminal law, and both the perpetrator and Multi-Level Marketing (MLM) Business A pose a high risk of being subjected to criminal liability under Section 29 of the Act. That is, if the MLM company knowingly and "acquiescently" permits its team of distributors to engage in promotional behavior that violates the law, it may also be liable. Another scenario is to assume that the person in charge of Multi-Level Marketing ("MLM") Business A has no knowledge of the operation of the "Divine Clan" and has done his/her best to avoid misrepresentation of the MLM system, or has warned or disciplined the distributors who have misrepresented the MLM system in order to avoid such behavior, then, according to the above judicial practice, since there is no connection of intent and sharing of behavior, Multi-Level MLM Business A and its person in charge of MLM Business A constitute a relatively low risk of criminal liability as per Article 29 of the Basic Law.
In summary, in addition to the obligation to report unreported "Divine Clan" systems and products, Multi-Level Marketing (MLM) business owners should also pay attention to whether the contents of the "Divine Clan" system violate the risk of degeneration of Multi-Level Marketing (MLM). Therefore, the MLM industry should ensure that distributors are educated and trained on the correct MLM system and product promotion to avoid the legal risks associated with both the MLM industry and distributors.
B. Potential Legal Risks to Individual MLM Leaders and Team Members
As mentioned above, since the "Divine Clan" system involves the legal risk of degeneration of multi-level marketing, under the premise that the main person in charge of the marketing business intentionally promotes the "Divine Clan" system, is it possible that an individual in the marketing team responsible for publicizing the "Divine Clan" system may become a perpetrator of the Act under Article 29 of the Act and be held criminally liable? This should be viewed based on whether the individual's actions, within the overall promotion of the system, have intentional connection and shared responsibility with the expansion of the entire organization, and whether they play an indispensable role within the entire system. The more important their role, the higher the risk of criminal liability for violating Article 29 of this law. On the other hand, if the distributor is already a downline and his role is not essential to the overall promotion of the system, and he/she may even be a victim who simply pays money, then he poses a lower criminal risk of violating this section.
In addition, there is a situation where the multi-level marketing system is not known by the MLM business or its responsible person, but is instead a distorted multi-level marketing system created independently by a senior distributor. Does this constitute criminal liability under Article 29 of this law? According to judicial practice, the principal responsible person of the MLM business seems to be an indispensable part of constituting the overall crime. Therefore, based on the above judicial practice, the senior distributor in this situation, since they are not the responsible person of the MLM business, apparently cannot be considered the "perpetrator" and thus cannot be charged with this crime. However, it should be noted that according to Article 4[6] of this law, the subject who plans or implements MLM activities includes individuals. Therefore, when the senior distributor independently creates a distorted multi-level marketing system, they have effectively become, as an individual, the principal responsible person of another multi-level marketing business. From an interpretative standpoint, they can be considered the principal responsible person of the multi-level marketing business under Article 29 of this law and should be charged accordingly.
Conclusion
In summary, because of the heated discussion of the movie on the Internet, the multi-level marketing business A has been discussed and questioned, and how to regain brand trust and goodwill is one of the challenges facing the multi-level marketing business. This incident has undoubtedly caused many multi-level marketing companies to re-examine whether their MLM system has been misrepresented, and to reflect on the implementation and operation of the MLM system to see if there is any part of the system that has escaped the scope of the original report, or has even violated the provisions of Article 18 of the MLM Act, which has transformed the nature of multi-level marketing, and puts the MLM business in danger of being subjected to the relevant legal risks. The above issues should be noted by multi-level marketing business owners and distributors, as well as potential participants who wish to participate in and build their own businesses. In addition to properly publicizing the MLM system, when joining a multi-level marketing business, you should also consider whether the multi-level marketing system is a sound system to avoid any incidents of degeneration or fraud, etc., and to be guarded by the MLM industry from a variety of perspectives. This will help the industry to develop in a positive and healthy direction.
If you have any comments or are interested in learning more about the above, please feel free to contact us.
Charlotte J.H. Wu
charlotte.wu@zhongyinlawyer.com.tw
tel +886 2 2377 1858 ext 8888
[1] Prior to the commencement of a multilevel marketing program, a multilevel marketing business shall submit to the competent authority a report containing the following documents and information:
Basic information about the MLM business and the business premises.
MLM System and Conditions of Participation of Distributors.
The contents of the participation contract to be signed with the distributor.
The item, price and source of the goods or services.
If other laws and regulations provide for the marketing of goods or services or require the permission of the competent authority of the intended business to promote or sell them, the marketing method shall comply with such laws and regulations or be certified as having obtained the permission of the competent authority of the intended business.
The calculation method, basis, and reasons for deducting the impairment value of goods or services purchased by a multilevel marketing business in accordance with the latter part of Article 21(3) or Article 24.
Other matters designated by the competent authorities.
If a multilevel marketing business fails to submit documents and information in accordance with the preceding provisions, the competent authority may order the business to make corrections within a certain period of time; if the business fails to make corrections within that period of time, it is deemed to have failed to file a report, and the competent authority may return the original documents to the business and require the business to complete them and then file a report again.
[2] The competent authorities may, in the event of a violation of Articles 6(1), 20(2), 21(2), 22, or 23, order a person to cease, correct, or take necessary corrective measures within a specified period of time and impose a fine of not less than NT$100,000 and not more than NT$5,000,000; and in the event that a person fails to cease, correct, or take necessary corrective measures within the specified period of time, the person may be subject to an additional fine of not less than NT$200,000 and not more than NT$10,000,000 per violation until the person ceases, corrects, or takes necessary corrective measures. In case of failure to cease, correct or take necessary corrective measures, a fine of not less than NT$200,000 and not more than NT$1,000,000 may be imposed until the cessation, correction or taking of necessary corrective measures; in serious cases, the company may be ordered to be dissolved, or may be ordered to close down or cease operation for not more than six months.
The foregoing provisions shall also apply to any violation of the provisions of Article 20(2), Article 21(2), Article 22 or Article 23 in accordance with Article 24.
The competent authority shall impose penalties in accordance with the provisions of the first paragraph on the protection organization that violates the business handling methods or supervisory and management matters in Article 38, Paragraph 5.
[3] A multilevel marketing business shall cause its distributors to base their source of income on the promotion and sale of goods or services at a reasonable market price, and shall not base their main source of income on the referral of others to participate in the business.
[4] Anyone who violates the provisions of Article 18 shall be punished by imprisonment for not more than seven years and may also be fined not more than NT$100 million.
If a representative, agent, employee or other practitioner of a legal person violates the provisions of Article 18 in the execution of business, the legal person shall be fined according to the provisions of the preceding paragraph in addition to the penalty imposed on the perpetrator of the act.
[5] "Article 29 of the Multi-Level Marketing Act regulates the "perpetrators" of an illegal multi-level marketing business. Multi-level marketing is a business that spreads in parallel through the introduction of other people by distributors to join the multi-level organization, which is difficult to be established without the cooperation of more than one person, and is essentially a necessary complicity. Therefore, in addition to the main person in charge of the MLM business, participants who are engaged in the introduction, promotion, and sales business, or those who have not participated but have assumed important positions in the MLM business, or those who have jointly decided on important matters, etc., and those who can be recognized as having a connection of intent with the main person in charge of the MLM business and who have shared in the commission of the offense with regard to the illegal multi-level marketing acts should be considered to be the "perpetrators" of the above stipulation. The meaning of joint criminal contact is not limited to direct contact between several people, i.e., those who have indirect contact are still included. Then, there may not be a need to have direct meaning contact between the participants of the illegal multi-level marketing business and the person in charge of coordinating and designing the marketing system at the senior level, but only a need to form the meaning of joint criminal contact through indirect contact, and to take advantage of each other's behaviors, and to divide the work and cooperate under the domination of the function to complete the illegal marketing behaviors. They should be held jointly liable for the offense if they take advantage of each other's acts and cooperate under the control of their functions to accomplish the illegal marketing acts.". The Supreme Court's Criminal Judgment No. 2560 of year 2020.
[6] For the purposes of this Act, a multilevel marketing business is defined as a company, industrial or commercial firm, organization or individual that coordinates the planning or implementation of the marketing practices described in the preceding paragraph. A distributor or third party of a foreign multilevel marketing business that introduces or implements a multilevel marketing plan or organization of the business is considered to be a multilevel marketing business for the purposes of the preceding paragraph.