Law Articles
2021-04-21
MLM
A Discussion on the Filing Obligation of Individuals Prior to Engaging in Multi-Level Marketing Activities
【Partner Lawyer Charlotte Wu/ Lawyer Ya-Ping Chen, Zhong Yin Law Firm】
charlotte.wu@zhongyinlawyer.com.tw
charlotte.wu@zhongyinlawyer.com.tw
【Case】
After graduating from S University, Jack went to the United States for further studies. Through a friend’s introduction, he became a distributor for the American health supplement company “ABC.” Upon returning to Taiwan, seeing great potential for ABC’s products in the local market and hoping to develop a second source of income, he began promoting and selling ABC’s products in his spare time. To do so, he posted information about ABC’s products, registration for activities, and contact details in a Line group, making them available for members to browse and respond. Among the members, Ms. Chun-Chiao even requested more information about ABC’s business opportunities from Jack through the group.
Just as Jack was feeling proud that his business was taking off and that he was about to secure a promising second income, he unexpectedly received a penalty notice from the Fair Trade Commission (hereinafter, the “FTC”). The notice stated in summary:
- Jack engaged in multi-level sales activities without filing the required documents and information with the FTC prior to implementation, in violation of Article 6(1) of the Multi-Level Sales Act (“MLSA”).
- From the day following receipt of this decision, Jack must immediately cease the above unlawful conduct.
- A fine of NT$ ○○ is imposed.
Unfamiliar with the law, Jack—wishing to avoid further penalties and hoping to continue his business—paid the fine and began researching how an individual distributor should comply with the reporting requirement under Article 6. After extensive study, he discovered Article 4 of the Regulations on the Filing and Amendment of Multi-Level Sales Enterprises, which states:
“An enterprise may log into this management system by one of the following methods: … (2) Account login: by applying in writing to the competent authority for a user ID and password. The application shall use the prescribed application form, affix the seals of the enterprise and its representative or responsible person, and attach proof of company or business registration.” In other words, Jack would need to complete business registration or establish a company before he could apply for an account and password with the FTC, and thus fulfill the reporting requirement under Article 6 of the MLSA.
This placed Jack in a dilemma: If he wished to continue operating ABC’s business, he was legally required to file; but if filing required establishing a company, he lacked the financial means and experience to do so. On the other hand, if he chose not to file, he would have to cease operations, or risk further penalties. What should Jack do?
【Issues Involved in This Case】
The central problem Jack faces concerns the conflict between the MLSA and administrative practice. The MLSA clearly designates “individuals” as possible reporting subjects, imposing upon them a statutory filing obligation. Yet, due to the FTC’s regulatory framework, individuals are effectively unable to file and are penalized for “failing to file.”
The key question is: Since the MLSA explicitly provides that individual multi-level sales businesses bear a filing obligation and are valid reporting subjects (without requiring company or business registration), but the competent authority has not established procedural rules to enable individuals to file—or has imposed requirements that make it impossible—should individuals nonetheless be held liable for failure to comply?
In other words, the realization of this statutory obligation, under the MLSA, depends to some degree on the competent authority promulgating implementing rules. If the authority, whether intentionally or unintentionally, fails to establish rules for individuals, what is the practical meaning of imposing a filing obligation on them? Should individuals bear the legal consequences of such regulatory gaps? Is it proper to impose fines under Article 32 of the MLSA in this situation, or should the law be amended to better reflect legislative intent?
【Analysis】
I. Statutory Reporting Obligations under the MLSA
According to the Multi-Level Marketing (MLM) Act, an individual is also deemed a reporting subject under the Act and is therefore obligated to fulfill the statutory reporting requirement. Article 6 of the Act expressly provides that a “multi-level marketing enterprise” is the reporting subject. Furthermore, based on the wording of Article 4, regarding the definition and organizational form of such enterprises, it is clear that they are “not limited to corporations or legal entities.” Accordingly, individuals (i.e., natural persons) may also qualify as MLM enterprises under the Act.
Article 6, Paragraph 1 of the Act stipulates that a “multi-level marketing enterprise” must submit the statutory documents and materials to the Fair Trade Commission prior to commencement of its operations. This indicates that the obligated reporting subject is the MLM enterprise itself.
As to what constitutes a “multi-level marketing enterprise,” Article 4 provides two scenarios:
A company, business entity, association, or individual that organizes or carries out MLM activities; or A distributor or third party of a foreign MLM enterprise that introduces or implements its MLM plan or organization in Taiwan, which shall likewise be regarded as an MLM enterprise.
With respect to the organizational form of an MLM enterprise, the foregoing provisions make it clear that such an enterprise may take the form of a corporation (legal entity), a business entity or association (non-legal entity), or even an individual (natural person), who by legal fiction is deemed to be an MLM enterprise.
II. Absence of Administrative Procedures for Individual Reporting
However, when examining the FTC’s administrative regulations, it becomes clear that no filing procedures exist for individuals. Since the new law took effect in 2014, no implementing procedures have been established for individual distributors. In practice, individuals must instead adopt another organizational form, such as a company or registered business, before they can apply for filing.
Article 8 of the MLSA authorizes the FTC to prescribe the “manner” and “format” of filing. Pursuant to this authorization, the FTC promulgated the Regulations on the Filing and Amendment of Multi-Level Sales Enterprises. Article 2 requires filing to be made electronically via the FTC’s online system.
Article 4, however, limits login methods to: Certificate login: using a Ministry of Economic Affairs business certificate; or Account login: applying to the FTC with an application form affixed with enterprise and representative seals, and attaching proof of company or business registration.
Accordingly, individuals must first complete business or company registration before they can qualify for a user account. Compared with companies, individuals face de facto disadvantages or restrictions because of regulatory gaps.
Moreover, Article 8 only authorizes the FTC to prescribe the “manner” and “format” of filing, not to restrict which organizational forms may file. Thus, Article 4 of the Regulations arguably exceeds legislative intent and warrants review or amendment.
【Conclusion and Recommendations】
Although the MLSA does not require reporting subjects to be corporations, in practice only companies are accepted. This is evident from the FTC’s published list of filed enterprises.[1] Moreover, the Regulations are drafted only for enterprises in corporate form, with no operational framework for natural person distributors.[2]
Nevertheless, according to the FTC’s interpretation, individuals may still be penalized under Article 32 of the MLSA for violating Article 6’s filing requirement, even though they have no practical means of compliance.[3] This approach raises serious doubts.
As illustrated in this case, the foreign MLM distributor, Jack, if he still intends to continue operating a multi-level marketing business in Taiwan, may find himself facing a dilemma. Should this situation be attributed to Jack’s own actions, or rather to the oversight of the competent authority in formulating administrative guidelines? Moreover, in regard to the legal risks arising from such regulatory gaps, are they risks that Jack, as an individual actor, is reasonably capable of foreseeing and eliminating, or are they risks that only the competent authority could have prevented unilaterally? Consequently, would it be excessively harsh to impose an administrative penalty on Jack for violation of the reporting obligation? These are issues that warrant careful reflection.
These are the author’s preliminary views, intended to stimulate further discussion and reflection among legal scholars and practitioners regarding the regulation of multi-level sales in Taiwan.
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
Reference
[1] Fair Trade Commission, Multi-Level Sales Management System, List of Reported Enterprises, available at: https://www.ftc.gov.tw/fair/report/report_13.aspx
(last visited: Aug. 16, 2018).
[2] Fair Trade Commission, Regulations on the Filing and Amendment of Multi-Level Sales Enterprises, available at: http://www.ftc.gov.tw/internet/main/doc/docDetail.aspx?uid=62&docid=13488
(last visited: Aug. 16, 2018).
[3] Relevant administrative decisions, see FTC Decisions No. 105122, 106043, 106047, 106048, 106063, 106098, 107003, 107017, 107025, 107026, 107049, 107050, 107051, 107052, 107053, and 107054.