Law Articles
2022-07-19
MLM
DISTRIBUTORS' ADVERTISING OBLIGATIONS IN SALES AND DOWNLINE RECRUITMENT (Part 1)
【Charlotte Wu, Partner Lawyer, Zhong Yin Law Firm】
charlotte.wu@zhongyinlawyer.com.tw
charlotte.wu@zhongyinlawyer.com.tw
The MLM business establishes a multi-level organizational network through the distributor's interpersonal relationships, and is able to save on marketing, personnel and other operating costs. At this time, the distributor is not only a consumer, but also a seller, and is able to earn commissions, bonuses or other economic benefits from the profits of selling goods or services or from introducing others to participate in the business. Therefore, the multilevel marketing industry places great importance on the "promotional ability" of distributors. The Multi-Level Marketing Management Act is the law that governs the management and regulation of multi-level marketing in Taiwan, and it provides for the responsibilities and obligations of the marketing industry and distributors. However, in addition to this law, distributors may also be involved in other laws and regulations in the course of implementing their marketing activities. This article will analyze whether distributors belong to the industry of false advertising under Article 21 of the Fair Trade Act, but because of the legal status of distributors, the question of whether they have or do not have consumer protection laws will be addressed. However, because it involves the legal status of the distributor, the applicability of the Consumer Protection Act should be explored, so it will be discussed first.
Are Multi-Level Marketing "Distributors" Consumers?
1. Definition of MLM[1]
Multi-Level Marketing (MLM) is a form of marketing in which multiple levels of organization are established to promote and sell goods or services through the introduction of others by Distributors. A multi-level marketing business is defined as a company, firm, organization or individual that coordinates the planning or implementation of a multi-level marketing program; a distributor or third party in a foreign multi-level marketing business that introduces or implements a multi-level marketing program or organization is considered to be a multi-level marketing business. A distributor is defined as a person who "participates in a multilevel marketing business and receives commissions, bonuses or other financial benefits for the promotion or sale of goods or services" and "may introduce others to participate in the multilevel marketing business and who receives commissions, bonuses or other financial benefits as a result of the introduction of such persons for the purpose of the promotion or sale of goods or services or the introduction of others to participate in the multilevel marketing business. A person who has entered into an agreement with a Multi-Level Marketing (MLM) business and is qualified to promote or sell goods or services and to introduce others to participate in the MLM business after the fulfillment of certain conditions is considered to be a distributor under the preceding paragraph as of the time of the agreement.
2. Definition of Consumer
According to Article 2(1) of the Consumer Protection Act, a consumer is a person who trades, uses goods or receives services for the purpose of consumption; accordingly, a person who trades, uses goods or receives services "for the purpose of consumption" belongs to the consumers referred to in this Article, and is opposite to the concept of a business operator[2]. The Consumer Protection Act does not have an explicit definition of "consumption", but according to the letter of the Consumer Protection Committee: Consumption is a kind of consumer behavior in factual life, and its meaning includes: (1) Consumption is the behavior to achieve the purpose of life, where it is based on the purpose of seeking survival, convenience or comfort in life, in terms of food, clothing, housing, transportation, education and recreation, to satisfy human desires in the behavior [3], that is, consumption; (2) Consumption is the behavior of direct use of goods or services, although there is no fixed pattern of consumption. Consumption is the opposite of production, and production is not consumption, therefore, the consumption referred to in the Consumer Protection Act refers to the "final consumption" under the circumstance of no longer being used for production. Moreover, if the purpose of purchasing goods is mainly for business use, not purely for consumption, it is inconsistent with the definition of consumption. However, whether this view is applicable to the consumption of all goods or services under the Consumer Protection Law should be determined on a case-by-case basis[4].
3. Whether a distributor is a consumer depends on the purpose of the purchase.
The legislative purpose of the Consumer Protection Act is to protect the rights and interests of consumers, to promote the safety of national consumer life and to improve the quality of national consumer life, while the Multi-Level Marketing Act is to improve the order of multi-level marketing transactions, and the two belong to the same level of law, and each has its own legislative purpose of special protection and is not mutually exclusive. According to the Fair Trade Commission's letter No. 0940009209 in year 2005, in the practice of multi-level marketing, participants[5] have multiple identities as operators, managers, and consumers; in the legal definition, participants are not mutually exclusive or incompatible with consumers, and participants even have experience in the promotion and sale of goods by consumers. Therefore, this article believes that whether a distributor is a consumer as defined by the Consumer Protection Act depends on the purpose of the distributor's purchase of the distributed products or services. If the distributor's purchase is a direct transaction for the purpose of using the goods or receiving the services for the purpose of personal or family needs, this is different from the transaction for the purpose of business, which means that it is a consumer. On the other hand, if the main purpose of the transaction is for the purpose of engaging in production, performing business, or selling goods, the Consumer Protection Law shall not be applicable because it is not a final consumption [6].
Advertising Responsibilities of "Distributors" in a Multi-Level Marketing (MLM) Business?
I. Multi-Level Marketing Management (MLM)
The MLM Act imposes some of the same responsibilities on distributors and their MLM businesses for their marketing practices. For example, pursuant to Section 10(2) of the MLM Act, a distributor shall not make false and misleading representations with respect to Section 1 of the same Act when he/ she introduces another person to participate in the program. In addition, regarding the recruitment method of distributors, according to Article 11 of the same law, when a multi-level marketing business or distributor recruits distributors "by advertising or other methods", the distributor should indicate that he/she is engaging in the act of multi-level marketing, and shall not do so by recruiting employees or by pretending to be something else; and according to Article 12 of the same law, when multi-level marketing businesses or distributors who promote or sell products or services and introduce others to participate in them "by means of successful cases" must not make false statements or misleading indications regarding the period of time, benefits and development history of such cases. Therefore, no matter what advertisements or other promotional acts the MLM business or its distributors do when recruiting distributors, they should show that they are engaged in multi-level marketing and should not intentionally hide the fact that they are engaged in marketing, and they should not be false or misleading when promoting and selling goods or services or introducing others to participate in the success stories they share [7], and violators may face administrative responsibility as stipulated in Article 34 of the same law.
In fact, there are cases in which MLM distributors were penalized by the Fair Trade Commission for misrepresenting the truth in their advertisements. For example, a participant claimed in an online advertisement that he could earn a minimum of $132,000 to a maximum of $825,000 per month, but in fact he/ she did not earn more than $132,000 per month; a participant claimed that he could earn $20,000 to $200,000 per month by working on the Internet for 3-4 hours a day, but in fact he could not earn more than $20,000 per month.. In order to promote multi-level marketing, some distributors, while serving as lecturers at seminars, claimed that "nearly $50 million in bonuses are paid out in two weeks, with a turnover of $100 million", "if you spend money once, you will receive bonuses for the rest of your life", and "re-selling bonuses are automatically dialed without having to do anything". The above advertisements were found to be false, untrue, or misleading, and in violation of Article 20 of the now repealed Multi-Level Marketing Regulations[8] or Article 12 of the Multi-Level Marketing Act. [9] In addition, if a Distributor publishes a newspaper advertisement with the headline "8 hours per week, $60,000 per month", or if a Distributor establishes its own workplace and recruits its downline by distributing recruitment flyers and placing recruitment advertisements on websites, the above situations are indicative of engaging in a multilevel marketing practice, which is a violation of Article 19 of the now repealed Multi-Level Marketing Act [10] or Article 11 of the Multi-Level Marketing Management Act. [11]
II. Section 21 of the Fair Trading Act
(1) A distributor is a trade within the meaning of the Fair Trading Act and is a regulated entity for the purposes of this section on false advertising.
According to Article 21, Paragraph 1, Subparagraph 4 of the Fair Trade Act, an enterprise shall not make false or misleading representations or expressions on merchandise or advertisements, or by any other means that can be made known to the general public, regarding matters related to merchandise that may affect trading decisions. Matters related to merchandise that are sufficient to influence trading decisions as defined in the preceding paragraph include the price, quantity, quality, content, method of manufacture, date of manufacture, expiration date, method of use, application, place of origin, manufacturer, place of manufacture, processor, place of processing, and other related matters that have an effect of touting for business[12]. Businesses are prohibited from selling, transporting, exporting, or importing products that contain falsehoods, inaccuracies, or misleading indications as described in the preceding paragraph. The above three regulations shall apply to the services provided by the company. Violators shall be subject to administrative liability in accordance with Article 42 of the same law. The term "business" as used in this Article refers to companies, sole proprietorships or partnership firms, and other persons or organizations that provide goods or services for trading purposes in accordance with Article 2, Paragraph 1 of the same law.
However, it is doubtful whether distributors fall within the scope of this section. According to the Fair Trade Commission's Interpretation [13], “Given that the fact that the purpose of the regulation of the Multi-Level Marketing Act of the Fair Trade Act is to protect the rights and interests of the participants, and in order to ensure that participants engaging in the behavior of the Multi-Level Marketing Act are subject to the regulation of the Fair Trade Act (which is limited to the scope of the Act to be "undertakings"). In this regard, the Fair Trade Commission of the Executive Yuan has adopted Article 2, Paragraph 4 of the Fair Trade Act, which stipulates that "other persons who provide goods or services to engage in transactions" as the basis for interpreting the provision that a participant is a business. In addition, the Fair Trade Commission also has a penalty statement[14] stating that the term "other persons or groups engaged in trading of goods or services" refers to persons or groups that do not have the form of business organization as stipulated in paragraphs 1, 2, and 3 of the Act, but are engaged in economic transactions on an "independent" or "regular" basis. The participants in this case have set up a website. The website built by the participant in this case claimed that the AUTOMAX Nanotechnology Eco-Fuel Saving Agent "saves up to 28% of fuel", etc. Since the participant was unable to provide relevant supporting documents, or since it did not appear to be consistent with the facts, the participant had the right to claim that the quality and content of the product were false, untrue, and misleading, and violated the Fair Trade Act. Therefore, the Company has violated Article 21, Paragraph 1 of the Fair Trade Act by misrepresenting the quality and content of the products.
In summary, from the operation of the organization in practice, we can see that distributors and the MLM business are independent entities. Distributors receive financial benefits such as commissions and bonuses through promotion, sales, and referrals, and, as mentioned above, distributors purchase MLM products or services for the purpose of business execution rather than for final consumption, so this article believes that, in order to uphold the legislative purpose of the Fair Trade Act, distributors of the Multi-level Marketing Business are considered businesses within the meaning of the Fair Trade Act and are subject to the regulation of misrepresentation under Article 21 of the Act. This article argues that, in order to uphold the legislative intent of the Fair Trade Act, a distributor of a multilevel marketing business is a business within the meaning of the Fair Trade Act and is subject to the misrepresentation provisions of Section 21 of the Act.
(2) Responsibility of distributors as endorsers of advertisements
According to Article 21, Paragraph 4 and its proviso, and Paragraph 5 of the Fair Trade Act, an advertisement endorser who knows or has the ability to know that his/her recommendation is likely to be misleading and who still recommends the advertisement shall be liable to the advertiser for joint and several damages. However, if the advertiser is not a well-known public figure, professional or organization, the advertiser shall be liable to the advertiser for consequential damages only to the extent of ten times the advertiser's remuneration and shall be subject to the administrative liability as provided for in Article 42 of the same law. The so-called advertisement endorsers refers to a person or organization other than the advertiser who reflects in the advertisement his/her opinions, beliefs, discoveries, or results of his/her personal experience of the goods or services. This article was added in year 2010, and its legislative purpose is to enable the Fair Trade Commission, in addition to relying on the "Fair Trade Commission's Regulation on Advertising Endorsement", to have a legal basis when adjudicating on cases of inaccurate endorsement by endorsers, so as to avoid the endless disputes over false advertisements. Adhering to the above, although MLM distributors belong to the business scope of the Fair Trade Act, if there is any false advertising behavior should bear the responsibility of the advertisers of the business. However, this article is of the opinion that if a distributor knows or can be expected to know that his or her testimonials may be misleading, and yet he or she still endorses them, because distributors have their own independent sales networks, if the purpose of the testimonials is to assist other distributors in their promotions, or if the related expenses are borne by other people, he or she may still be held responsible for the responsibility of the advertiser who endorsed the advertisements and the advertiser may be held responsible for the collateral damages.
Conclusion
In the United States, it is unlawful for any person, partnership, or corporation to disseminate or cause to be disseminated, by any means, any untrue advertisement that induces or may induce, directly or indirectly, the purchase of food, drugs, devices, services, or cosmetics, or that has an effect on its industry [15]. In Taiwan, the liability for false advertisements is mainly regulated by Articles 11 and 12 of the Multi-Level Marketing Act and Article 21 of the Fair Trade Act, and in practice, there are cases where distributors are reported and penalized for false advertisements, and most of their behaviors are through online advertisements. Although the Internet has made it faster and more convenient for distributors to promote or advertise their businesses, the relative risk of violation of the law has also increased. As distributors become more aware of legal compliance, the purpose of this article is to encourage distributors to be aware of the legal advertising responsibilities they may face, and to pay attention to and avoid any related violations of the law.
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] Sections 3, 4 and 5 of the Multi-Level Marketing Act.
[2] According to article 2, paragraph 2, of the Consumer Protection Act, a business operator is a person who designs, produces, manufactures, imports, distributes goods or provides services as a business.
[3] The Taiwan Taipei District Court's Civil Judgment No. 2326 of year 2010 and the Taiwan High Court's Civil Judgment No. 955 of year 2015 have the same opinion.
[4] Consumer Protection Law No. 00351 of year 1995, Consumer Protection Law No. 0910001063 of year 2002, and Hospital Taiwan Consumer Protection Law No. 1090088401 of year 2020.
[5] The so-called participants are those who have joined a multi-level marketing scheme or organization to promote or sell goods or services and to introduce others to participate in the scheme or organization," according to Article 8, Paragraph 5 of the former Fair Trade Act (now amended and deleted). A participant who has agreed with a multi-level marketing business that he or she will acquire the right to promote or sell goods or services and to introduce others to participate in the business after paying a certain amount of money.". The difference between a distributor under the current law and a participant under the old law is that there is no longer a requirement of "payment of a certain consideration" for a distributor.
[6] The Supreme Court's Taishang Zi No. 2323 in year 1997, 88 Consumer Protection Law No. 00548 in year 1999, Taishang Zi No. 1001 in year 2002, Taishang Zi No. 2517 in year 2002, the Executive Yuan's Consumer Protection Commission's e-mail dated 2004/2/5, and Taishang Consumer Protection Law No. 1068686844 in year 2017, have similar opinions.
[7] (89) 公處 No. 8902494-001.
[8] When a multi-level marketing business or its participants promote, sell goods or services, or introduce others to join the business by claiming to be successful cases, the facts of such cases, such as the period of time during which the business has been conducted, the benefits obtained, and the course of its development, shall be described in specific terms, and there shall be no falsehoods, inaccuracies, or misleading statements.
[9] For details, see 公處 No.101070 and 101071.
[10] When a multi-level marketing business recruits participants by means of advertisements or other methods of making themselves known to the general public, they should identify themselves as engaging in multi-level marketing and should not be recruiting employees or pretending to do so under any other name. The foregoing shall also apply to participants.
[11] 公處 No. 090027 and FTC (90) 公處 No. 037.
[12] According to the second point of the Fair Trade Commission's principles for handling cases under Article 21 of the Fair Trade Act, the term "other relevant matters with touting effect" refers to all other matters of economic value that are not directly attributable to the subject matter of the transaction and are sufficient to influence the decision on the transaction, such as the identity, qualifications, business status of the business, the relationship with other businesses, public welfare organizations or government agencies, the gifts or prizes offered by the business in connection with the transaction, and the comparative items of goods (services) provided by other businesses.
[13] 公參 No. 0940009209.
[14] 公處 No. 100230.
[15] 15 u.s.c. § 52.