Law Articles
2021-04-21
MLM
What laws might relevant personnel violate if a foreign direct selling company operates without establishing a local presence?
【Zhong Yin Law Firm, Partner Charlotte Wu / Attorney Li Dexuan】
charlotte.wu@zhongyinlawyer.com.tw
charlotte.wu@zhongyinlawyer.com.tw
Hypothetical Case
AA Company is established in Utah, USA, and is a company that sells health supplements. Its business model involves classifying the company's members into Basic, Advanced, and Gold levels. Participants pay a shopping credit (i.e., membership fee) to become members of different ranks and receive both passive and active income. Regarding passive income, members can receive regular operating dividends without needing to sell or promote products; regarding active income, members can earn referral bonuses and organizational bonuses by introducing others to join. Furthermore, AA Company has not established an office, branch, or subsidiary in Taiwan, nor has it reported to the Fair Trade Commission.
Furthermore, Mr. Jia is the Taiwan organizer for the U.S. company AA. He held information sessions in Taiwan with several members to introduce AA Company's multi-level marketing plan, company products, bonus system, etc. At the sessions, he claimed that becoming a member was equivalent to an investment, guaranteed a return of capital and profit, and that introducing others to participate could yield high returns. After attending the information session, Mr. Yi paid a shopping fee to become a member and subsequently set up a fan page to repost information regarding AA Company's background, products for sale, bonus system, etc., but in reality, did not successfully introduce anyone else to join.
What laws might the actions of AA Company, Mr. Jia, and Mr. Yi violate?
Case Analysis
1. AA Company, Mr. Jia, and Mr. Yi may have violated the provisions of Article 6, Paragraph 1 of the Multi-level Marketing Supervision Act, which requires multi-level marketing enterprises to report to the Fair Trade Commission before commencing operations.
(I) Conduct of Mr. Jia and AA Company
According to Paragraph 2, Article 4 of the Multi-level Marketing Supervision Act, a distributor or a third party of a foreign multi-level marketing enterprise who introduces or implements the multi-level marketing plan or organization of said enterprise shall be deemed a multi-level marketing enterprise.
In the current social context where the internet and communication devices are highly developed, the expansion of multi-level marketing enterprises is often transnational and mobile. Observing the legislative rationale of Paragraph 2, Article 4 of the Multi-level Marketing Supervision Act: "With the frequent exchanges of transnational commercial activities and the diversification of technological network development, the marketing tactics of multi-level marketing are constantly being renewed. In practice, foreign multi-level marketing enterprises often send distributors or third parties to our country to develop multi-level marketing organizations first; upon reaching a certain scale, they then establish a branch in our country and file a report. Furthermore, foreign multi-level marketing enterprises also conduct multi-level marketing activities via the internet, where members are mostly anonymous, do not know each other, and have cross-border referral relationships. In view of the above circumstances, which constitute engaging in multi-level marketing activities within the country in reality and necessitate management, Paragraph 2 stipulates that those who introduce or implement foreign multi-level marketing plans or organizations shall be deemed multi-level marketing enterprises." It is evident that the legislator, in order to regulate such situations, specifically designates those who introduce or implement foreign multi-level marketing plans as multi-level marketing enterprises, thereby resolving the issues of unclear subjects and the difficulty of managing transnational activities.
In the hypothetical case, AA Company establishes a multi-level organization to sell products by having members introduce others to participate, and is a multi-level marketing enterprise as regulated by Article 3 and Paragraph 1, Article 4 of the Multi-level Marketing Supervision Act. Mr. Jia held briefing sessions in Taiwan, introducing the background, products, and bonus system of AA Company and recruiting members; this constitutes implementing the multi-level marketing plan of the US-based AA Company. According to Paragraph 2, Article 4 of the Multi-level Marketing Supervision Act, Mr. Jia individually is also deemed a "multi-level marketing enterprise" as referred to in Paragraph 1 of the same Article.
Furthermore, according to Article 6, Paragraph 1 of the Multi-level Marketing Supervision Act, before commencing multi-level marketing activities, a multi-level marketing enterprise shall submit relevant documents and materials to report to the competent authority, namely the Fair Trade Commission.
Therefore, regarding the failure to report to the Fair Trade Commission before holding information sessions, the competent authority may, depending on the severity of the circumstances involving AA Company and Mr. Jia, impose a fine of not less than NT$100,000 but not more than NT$5,000,000 on each respectively pursuant to Article 32 of the Multi-level Marketing Supervision Act, and order them to cease, correct their behavior, or take necessary corrective measures within a specified period.
(II) The Conduct of Mr. Yi
The point of contention in the hypothetical case lies in how to interpret the "implementation" of a foreign multi-level marketing enterprise plan under Article 4 of the Multi-level Marketing Supervision Act, as well as the requirement to commence "implementation" of a multi-level marketing enterprise under Article 6, Paragraph 1 of the same Act; that is, whether Mr. Yi can claim that he did not "implement" a multi-level marketing enterprise plan on the grounds that he merely reposted information and did not successfully introduce others to join, and therefore did not violate the reporting requirement under Article 6, Paragraph 1 of the Multi-level Marketing Supervision Act?
Based on the disposition issued by the Fair Trade Commission[1] and the opinions stated in its past judgments, it is evident that the Fair Trade Commission currently adopts a very broad scope in determining the "implementation" of multi-level marketing activities. This includes behaviors at different stages, such as prior solicitation of multi-level marketers, entering into participation contracts, purchasing products, and distributing bonuses. Moreover, "if a distributor participating in a foreign multi-level marketing enterprise's plan or organization, or another person without the aforementioned qualifications, promotes or introduces the multi-level bonus system, products, or services of such overseas enterprises in our country by setting up websites, holding seminars, etc., this constitutes a part of the activity of recruiting distributors, and thus meets the requirements for implementing multi-level marketing behavior.[2]" Therefore, as long as one begins to promote or introduce a multi-level marketing enterprise plan by means such as websites or seminars, and involves discussions regarding bonus systems, products, or services, the requirements for "implementing" a multi-level marketing enterprise are already met. Whether one has successfully introduced others to join has no bearing on the determination of "implementation."
Therefore, since Mr. Yi set up a website and reposted information regarding the products and bonus distribution system of the U.S. AA Company, he is required to report to the Fair Trade Commission in accordance with Paragraph 2, Article 4 and Paragraph 1, Article 6 of the Multi-level Marketing Supervision Act. He cannot use the defense that he did not introduce others to join. At most, when the competent authority imposes a penalty, he can request that the competent authority consider that the impact of violating this obligation is minor, and impose a lower amount of fine.
II. AA Company, Mr. Jia, and Mr. Yi may have violated Article 18 of the Multi-level Marketing Supervision Act regarding the prohibition on disguised multi-level marketing.
According to Article 18 of the Multi-level Marketing Supervision Act, "A multi-level marketing enterprise shall ensure that the income source of its distributors is primarily based on promoting or selling products or services at reasonable market prices, and shall not make the introduction of others to join the primary source of income." The reason is that if a multi-level marketing enterprise causes the primary income source of its distributors to derive from introducing others to join, rather than based on the reasonable market price of promoting or selling products, subsequently joining distributors will suffer economic losses due to being unable to find enough "heads" (recruits), while the organizers bear no risk and reap illicit profits. The legislator has therefore expressly prohibited this illegal situation of disguised multi-level marketing.
In practical interpretations, regarding how to determine "primary" source of income, reference has been made to the standard used by U.S. courts of 50%. Furthermore, if the source of a participant's profits cannot be clearly divided into how much comes purely from referring others and how much comes purely from promoting or selling goods or services, it should be determined based on whether the selling price of the goods is a reasonable market price; "reasonable market price" refers to when there are similar competing goods in the market, taking the selling price and quality of similar products as the primary reference basis.[3] Additionally, in practice, reviews have also been conducted using the concept of "commoditization," holding that the core meaning of "commoditization" is that "participants purchase the goods in question not based on the use value or exchange value of the goods, but to join the organization and receive bonuses," causing the multi-level marketing goods to become a mere formality or a tool to circumvent the law, and whether they are obtained or how they are used is irrelevant.[4]
In the hypothetical case, if AA Company collects high membership fees, such that the fees paid by the company to the multi-level marketers come primarily from the membership fees paid by the downlines referred by the multi-level marketers; or if the selling price of the nutritional solution is far higher than similar competing goods on the market; or if there is any system that causes the multi-level marketing goods to become a mere formality, with the purpose of attracting participants to join the organization and receive bonuses, then AA Company is at higher risk of being identified as this type of illegal, altered multi-level marketing. As the perpetrator, Mr. Jia may face criminal liability under Paragraph 1, Article 29 of the Multi-level Marketing Supervision Act, while AA Company as a juristic person may face a fine under Paragraph 2 of the same Article.
Additionally, regarding whether Mr. Yi also violates Article 18 of the Multi-level Marketing Supervision Act, this article believes there is still room for discussion. Since Paragraph 2, Article 4 of the Multi-level Marketing Supervision Act also views Mr. Yi as a multi-level marketing enterprise, if Mr. Yi knows that AA Company's multi-level marketing system is not intended to make multi-level marketers promote products, but to attract participants to join the organization and receive bonuses, under the literal interpretation of the legal provisions, he may also be a subject of the illegal, altered multi-level marketing under Article 18 of the same Act. However, observing the legislative purpose of Article 18 of the Act, it should be to regulate those who initiate or lead illegal multi-level marketing systems, whereas the behavior of mere downline multi-level marketers should not be within the regulatory intent of the provisions. From this, it can be seen that when regulating foreign multi-level marketing enterprises, legislators treat all multi-level marketers and third parties who implement or introduce the system as multi-level marketing enterprises, imposing on them the same legal obligations as those who "plan and coordinate" multi-level marketing behaviors; this legislative technique seems somewhat rough and leaves room for refinement.
III. AA Company and Mr. Jia may violate the provisions in Article 29 and Article 29-1 of the Banking Act that non-banks shall not accept deposits.
According to Article 29 of the Banking Act, unless otherwise provided by law, non-banks shall not engage in the acceptance of deposits. Furthermore, according to Article 29-1 of the same Act, any person who accepts funds or absorbs capital from the general public or unspecified persons under the guise of loans, acceptance of investments, admission as shareholders, or other names, and agrees to pay or pays dividends, interest, shareholder dividends, or other remuneration that is clearly disproportionate to the principal, shall be deemed to be accepting deposits.
Practical judicial opinions hold that the provision in Paragraph 1, Article 29 of the Banking Act stating that "non-banks shall not engage in the business of accepting deposits" targets those who accept deposits from the general public or unspecified persons. The offense focuses on deterring the illegal absorption of funds and protecting the order of the national financial market, which is distinct from the crime of usury under the Criminal Law that protects personal property interests and punishes lenders, or from civil lending which emphasizes the relationship of trust between the borrower and the lender. Therefore, the term "dividends, interest, shareholder dividends, or other remuneration that is clearly disproportionate to the principal" in Article 29-1 of the same Act should be determined by referring to the economic and social conditions at the time and the interest rate levels regarding deposits at general financial institutions, and observing whether there is a significant excess sufficient to foster the growth of illegal fund-absorption behavior. [5]
In the hypothetical case, regarding the item of "business dividends," the members of AA Company have no obligation to sell any goods; they need only pay membership fees to join to receive dividends. Furthermore, Mr. Jia used terms such as "guaranteed profit and return of principal" at the briefing to recruit members. Observing that the annual interest rate for general bank deposits is currently between 1% and 2%, if the profit from such business dividends significantly exceeds this standard, it is highly likely to be deemed a dividend agreed to be clearly disproportionate to the principal. Consequently, as the actor absorbing funds, Mr. Jia may face criminal liability under Paragraph 1, Article 125 of the Banking Act; and AA Company may also face relevant fines.
IV. Mr. Jia may have violated the provision in Paragraph 1, Article 371 of the Company Act, which states that a foreign company shall not operate business within the territory of the Republic of China without having registered a branch.
(I) According to Paragraph 1, Article 371 of the Company Act, "A foreign company shall not conduct business within the territory of the Republic of China in the name of a foreign company unless it has completed the registration of a branch." Violators will bear relevant criminal and civil liabilities.
(II) Regarding "conducting business," the Ministry of Economic Affairs has previously issued an interpretation stating that the term "business" generally refers to the regular and repetitive commercial activities engaged in by a company.[6] However, courts have offered different interpretations of conducting business. One view holds: "Whether an act constitutes business should be viewed in its entirety; it cannot be determined solely based on the location where the contract is finally signed. Activities such as business negotiation, discussion, contact, bargaining, payment, remittance, and after-sales service within the territory of our country should all be considered as a whole.[7]" Another view states: "According to our country's Company Act, if a company has not completed establishment registration, it does not possess an independent legal personality and cannot be the subject of juristic acts. Therefore, to reduce the burden of verification on counterparties in transactions, ensure the effective formation of juristic acts, and safeguard transaction security in modern industrial and commercial society, Article 19 of the same Act stipulates relevant penalties. Thus, the so-called 'conducting business' or 'engaging in other juristic acts' refers to a person, without the company's establishment registration, arbitrarily engaging in business activities related to the company's business items or initiating acts that objectively suffice to establish a predetermined legal relationship with others in the name of the company. This is unrelated to whether the company is indeed for profit.[8]"
(III) Regarding acts that are "not conducting business," reference to the Company Act before its amendment on July 6, 2018[9] indicates that if a foreign company only engages in "juristic acts related to business," such as signing contracts, bidding, quoting, purchasing, or bargaining[10], establishing an office is sufficient, and there is no need to establish a branch. Although the amended Company Act[11] deleted the wording "for juristic acts related to business," the reasoning for the amendment states: "Considering that the acts of an office need not be limited to juristic acts related to business; even engaging in factual acts such as collecting market information is permissible, the wording 'for juristic acts related to business' is deleted." It is thus evident that the amended provisions actually relax the definition of acts that are not conducting business; in addition to the original juristic acts related to business, factual acts such as collecting market information are also included.
(IV) In light of the above views of the competent authority and the courts, as well as the reasons for the amendment to the Company Act, the so-called "conducting business," after excluding juristic acts related to business and factual acts of collecting market information, should at least possess the nature of being "regular and repetitive," and judicial practice adopts the standard of "viewing as a whole" as a criterion for judgment. As for practical application, although there is a lack of more detailed legal interpretations and judicial rulings, leaving room for ambiguity, it can be interpreted that, without the establishment of a company legal personality in Taiwan, the greater the involvement of activities in various stages of a foreign company's business model that are associated with Taiwan, the higher the relevant legal risks.
(V) Therefore, since US Company AA has not established a branch office in Taiwan, if Mr. Jia holds briefing sessions or recruits members in the name of US Company AA, and his behavior is repetitive and regular, and the commercial activities such as contract signing by participants, delivery of goods, payment of prices, and distribution of dividends involve a higher degree of connection with our country, it is more likely to be determined as operating a business and violating Article 371 of the Company Law.
V. Conclusion
In order to regulate transnational multi-level marketing situations, our country specifically treats multi-level marketing distributors who introduce or implement transnational multi-level marketing plans, as well as third parties without such status, as multi-level marketing enterprises, and imposes on them the same legal obligations as those subjects who "plan and coordinate" multi-level marketing activities domestically. Under this regulation, whether it is a foreign company, or a distributor or third party who implements or introduces the foreign multi-level marketing activities, they are highly likely to violate the law for failing to comply with relevant multi-level marketing management regulations. This article believes that this legislative technique is somewhat rough and leaves room for refinement.
In addition, if a foreign multi-level marketing company wishes to develop business in our country, it must pay attention to the regulations on illegal fundraising regarding the prohibition on accepting deposits by non-banks, and must also comply with the provisions of our country's Company Law to establish a branch office or a subsidiary, so as to avoid relevant criminal liabilities.
If you have any opinions on the above content or are interested in learning more, please feel free to contact us.
Charlotte J.H. Wu, Partner
charlotte.wu@zhongyinlawyer.com.tw
TEL +886 2 2377 1858 EXT 8888
[1] Fair Trade Commission Disposition No. 107051 dated June 26, 2018.
[2] Taipei High Administrative Court Administrative Judgment No. 248, 2017.
[3] Criminal Judgment No. 27 of the 104th Year, Jin-Chong-Su, by the Taiwan Taipei District Court
[4] Criminal Judgment No. 703 of the 105th Year, Shang-Su, by the Taiwan High Court, Taichung Branch
[5] Criminal Judgment No. 3796 of the 103rd Year, Tai-Shang, by the Supreme Court
[6] Letter No. 09202221350 dated October 29, 2003, issued by the Ministry of Economic Affairs.
[7] Criminal Judgment No. 2625, Shang-Yi, 2002, of the Taiwan High Court.
[8] Criminal Judgment No. 12, Xuan-Shang-Su, 2011, of the Taiwan High Court.
[9] Articles 1 and 2, Article 386 of the Company Act prior to the amendment on July 6, 2018: "Where a foreign company has no intention to establish a branch office to operate business within the territory of the Republic of China, and dispatches its representative to perform juristic acts related to business within the territory of the Republic of China without applying for recognition, it shall report the following matters and apply to the competent authority for recordation: 1. The company's name, type, nationality, and location. 2. The total capital of the company, and the year, month, and date of its establishment and registration in its home country. 3. The business undertaken by the company and the juristic acts related to business performed by its representative within the territory of the Republic of China. 4. The name, nationality, domicile or residence of the agent designated for litigation and non-litigation matters within the territory of the Republic of China.", "Where the representative referred to in the preceding paragraph is required to reside within the territory of the Republic of China on a regular basis, a representative office shall be established, the location of the office shall be reported, and the matter shall be handled in accordance with the provisions of the preceding paragraph."
[10] Supra note 3.
[11] Article 386, Paragraph 1 of the Company Act as amended on July 6, 2018: "Where a foreign company has no intention to establish a branch to operate business within the territory of the Republic of China, and dispatches its representative to set up an office within the territory of the Republic of China without applying for branch registration, it shall apply to the competent authority for registration."