Law Articles
2022-09-12
MLM
Direct Sales Ownership Transfers and Inheritance? What does the law say? (Part 1)
Charlotte Wu, Partner Lawyer, Zhong Yin Law Firm
charlotte.wu@zhongyinlawyer.com.tw
charlotte.wu@zhongyinlawyer.com.tw
According to the World Federation of Direct Selling Association (WFDSA), Taiwan is one of the top ten direct selling markets in the world [1]. The direct selling industry in Taiwan has developed for over 40 years. Besides most direct sellers who have devoted the majority of their lives and efforts already planning for retirement[2], many direct sellers also wish to change career paths due to career planning. Moreover, these direct sellers have invested their own efforts, making their direct selling business rights different from the original state when they joined, and instead possessing considerable exchange value. Therefore, there is a considerable demand for transactions in the market, i.e., "transfer and inheritance of direct selling rights", "transmission of direct selling franchise", etc. In the face of such demand, how should the law evaluate and appropriately balance the interests of the parties, which is an increasingly important issue, the author would like to take the opportunity of this article to explore this issue with all of you and to share our thoughts with you.
What we refer to as the direct selling franchise is an important element in describing the legal relationship between a distributor and a direct selling business, which is undoubtedly based on the participation contract that the distributor signs with the direct selling business when he joins the business[3]. The participation agreement contains the rights of the distributor, such as the distributor's right to promote the sale of goods or services, the right to introduce others to the program, and the right to receive economic benefits based on the first two; and the obligations of the distributor based on the participation agreement, including the obligation to promote the sale of goods, the obligation to develop the organization, the obligation to counsel the organization, the obligation to comply with the participation agreement and the Multi-level Marketing Act, and other relevant regulations. Obligations to comply with the provisions of the Participation Agreement and the Multi-Level Marketing Act, and other obligations arising from the Participation Agreement, such as prohibitions on competing for business based on the duty of loyalty. [4].
If you think that the transfer of the right to participate in direct marketing business is a general abstract rights and obligations contained in the contract, it is not quite in line with the reality of the transaction, because there is an exchange of value in the market, should not be just the so-called general abstract rights and obligations, otherwise the general public can simply rejoin, without the need to conduct transactions with others. Therefore, when we discuss the so-called transfer of the right to operate a direct selling business, it should be the part of the direct seller has invested efforts and efforts to build, some scholars call this "marketing rights", as opposed to the general abstract "marketing rights" based on the participation in the contract [5]. In other words, if the scene is shifted to an online game, what is to be transferred should be "characters of a certain level" and "valuable game treasures and equipment" based on the game account, not just the account. In the direct selling industry, the market is interested in the size of the organization that the distributor has developed and the right to receive economic benefits based on it. Therefore, the so-called direct selling franchise should include the general abstract "marketing rights" and the specific development of "marketing rights"[6], or the original complete qualification and status of the participant in the contract transferor, and all the rights and obligations based on the qualification and status (hereinafter, for the sake of simplicity of reading, we still use the expression "direct selling franchise" as the way of expression).
After recognizing the content of a direct marketing right, the next question to evaluate is whether the direct marketing right can be the subject of an assignment or inheritance. In this regard, it is important to consider whether the nature of the legal relationship is of a personal nature or is merely property in nature. In the former case, because of the importance of interpersonal trust, unless there are exceptional circumstances, a contract of a personal nature should in principle be construed as not being subject to assignment or inheritance, such as a contract of appointment[7] or a labor contract[8]; in the latter case, because of the jurisprudence of the principle of the freedom of property transactions, it should be permitted to be the subject of assignment or inheritance.
The direct selling business model focuses on interpersonal interactions, whether face-to-face or through social networking, which gives the legal relationship created by the participation contract both a personal and a property nature. For example, the right and obligation to promote the sale of goods or services and the development of an organization may cause the direct seller to go beyond the mere sale of direct selling goods and may provide labor to assist the direct seller in the development of a business, which should be considered to have the characteristics of an appointment or an intermediary contract [9]. At the same time, however, it should also be noted that the direct selling franchise also has an exchange value in the marketplace due to the labor and effort invested by the direct seller, which gives the legal relationship a property character.
From the perspective of the dual nature of the direct marketing franchise, some scholars have taken the development of the direct marketing franchise as an observation point, arguing that with the degree of promotion of the organization, goods or services, the nature of the direct marketing franchise will gradually change from a purely property-based nature to a property-based nature [10]. In view of the market demand and the flexibility of the system to maintain the direct selling business, if the direct selling franchise reveals its property nature, it should be considered as the subject of transfer at this time, and the author agrees with this view.
After confirming whether the direct selling business right can be the subject of transfer or succession, the interested parties involved in the transfer or succession are the direct selling business owner, the transferor, and the transferee. We will continue to explore the relevant issues in the next article to see how the interests of the above interested parties are structured, and how the law can assist in reconciling the relevant rights and obligations.
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] World Federation of Direct Selling Association, 2022, Fact Sheet, https://wfdsa.org/wp-content/uploads/2022/06/Fact-Sheet-2021-A.pdf (Last visit on 2022/8/31)
[2] A Direct Seller is defined herein as a Distributor within the meaning of the Multi-Level Marketing Management Act (MLMMA).
[3] Lin Tiancai, 2017, Current Situation and Theoretical Breakthroughs of the Transfer of MLM Rights(傳銷權轉讓之現況探討與理論突破) - Discussing the Distinguishing of MLM Rights from the MLM Rights to Participate in Contracts, The Taiwan Law Review magazine, No. 270, pp. 141-159 The participation contract is also one of the matters that should be reported to the competent authority by the direct selling industry in the Article 6, Item 1, Clause 3 of the Multi-Level Marketing Management Act.
[4] Ibid. note, in Lin Tiancai’s article.
[5] Ibid. note, in Lin Tiancai’s article.
[6] Ibid. note, in Lin Tiancai’s article.
[7] Article 550 of the Civil Code: "An appointment relationship shall be extinguished by the death, bankruptcy or incapacity of one of the parties, unless otherwise provided for in the contract or unless it cannot be extinguished by reason of the nature of the appointment business".
[8] Because in labor relations, the employee gives labor based on his or her own physical strength and professionalism, and because of his or her personality and tacit agreement with the employer, the labor contract should in principle be terminated upon the death of the employee, and there should be no reason for the employee's successor to inherit the original labor contract, but if the employer agrees to continue to provide the labor by the employee's successor, then it should be considered that a new labor contract has been established between the employer and the employee's successor. The Employer and the Employee's successor shall be deemed to have established a new labor contract.
[9] Lin Tiancai, ed. 2015, Direct Selling Law《直銷法律學》, Wu Nan Publishing Co.
[10] See note 3, in Lin Tiancai’s article.