Introducing the New Multi-Level Marketing Governing Act

by K&L Gates LLP
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Background

Taiwan has approximately 369 multi-level marketing (MLM) companies and a total of 3.09 million MLM participants, as of December 31, 2012. Adjusting for people who participate in more than one MLM company, almost 12% of Taiwan’s total population participates in at least one MLM business.

Although Taiwan’s MLM industry is robust and thriving, Taiwan does not have any law specifically aimed at regulating it. Instead, the MLM industry is regulated by certain provisions of Taiwan’s Fair Trade Act (FTA) and a set of regulations issued under the FTA, the Supervisory Regulations Governing Multi-Level Marketing (MLM Supervisory Regulations).

Taiwan's Fair Trade Commission (FTC) has announced a draft Multi-Level Marketing Governing Act (MLM Act), which has recently passed its first reading in the Legislative Yuan. When the MLM Act is passed by the Legislative Yuan and becomes law, it will supersede the current provisions of the FTA as they relate specifically to the MLM industry.

The MLM Act will introduce critical changes to Taiwan’s MLM industry, including the following.

Change of the Definition of 'Multi-Level Marketing'

The FTA defines MLM as a 'promotion or sales plan or organization pursuant to which the participants pay a certain consideration to obtain the right to promote or sell goods or services and the right to introduce other persons to participate in the plan or organization, thereby receiving a commission, bonus, or other economic benefit.'

The MLM Act will change this definition to 'a way of marketing by which [a company] acts through its distributors (MLM participants) to introduce others to participate in the business and create a multi-level organization so as to promote or sell certain goods or services".

Under this broader definition, it will no longer matter whether a participant pays an MLM company for the right to participate. If the company recruits new participants through existing participants and establishes a multi-level organization, it will be covered by the MLM Act. However, we expect a clearer definition or test of 'multi-level organizations' to be established through court decisions and FTA rulings, after the MLM Act is passed.

Impact of Expanded Coverage of the MLM Act

Requirement of FTC Registration

The MLM Supervisory Regulations require MLM companies under the FTA to register with the FTC before they begin to transact business. After the expansion of the definition of 'multi-level organizations', the MLM Act will require MLM companies not currently covered by the FTA to register with the FTC as an MLM company within three months of the effective date of the MLM Act.

Requirement of Written Participation Agreements with Compulsory Provisions

The MLM Supervisory Regulations require MLM companies to enter into written participation agreements with their participants incorporating certain mandatory provisions, and requires that such agreements are not made electronically. The MLM Act will also require those MLM companies not covered by the FTA definition to enter into written participation agreements within six months of the effective date of the MLM Act.

Furthermore, the MLM Act will grant MLM participants of an MLM company the option to rescind or terminate their participation agreements within 30 days from the date that a written participation agreement is entered into.

Expansion of the Compulsory Provisions in the Participation Agreement

As mentioned above, the MLM Supervisory Regulations set compulsory provisions to be included in MLM participation agreements. In addition to keeping the existing compulsory provisions under the MLM Supervisory Regulations, the MLM Act will require MLM participation agreements to contain the following terms:

  • operation plans 
  • qualifications to become a participant 
  • the formula, standards and reasons for the MLM company to estimate the depreciation of the goods or service returned by the participant after the cooling-off period 
  • the events of default of participants and the procedure 
  • the method to deal with a participant’s request to return goods or services in the event that termination or rescission of the participation agreement is attributed to the participant’s breach of contract or regulations.

The MLM Act will require those MLM companies subject to the FTA to revise their existing participation agreements within two months of the effective date of the MLM Act and to deliver the original copies of the revised participation agreements to existing participants.

Foundation of a Participant Protection Institute Funded by MLM Companies

The MLM Act will also require the FTC to establish an MLM Participants Protection Institute.

MLM companies registered with the FTC will be required to join, and to contribute toward the funding of the Institute.

According to the transcript of the legislative discussion, the purpose of the Institute will be to protect MLM participants, though only when the FTC enacts rules or guidelines for the Institute will these details become clear.

Extended Cooling-Off Period

The FTA grants every MLM participant a 14 day cooling-off period starting from the date that he/she enters into a MLM participation agreement with a MLM company. Within this period, a participant may rescind the participation agreement by giving written notice to the MLM company.

The MLM Act will increase this cooling-off period to 30 days, during which a MLM participant will have the option to choose whether to 'rescind' or 'terminate' the participation agreement. Under Taiwanese law, upon 'rescission' of an agreement, the agreement is deemed not to have been made and, therefore, each party shall restore the other party to its status quo ante (the way things were before). Upon 'termination', the agreement is deemed valid until terminated and the parties, therefore, are still obliged to perform their respective obligations arising from the agreement prior to termination.

The MLM Act will require MLM companies to accept a request to return goods or services (if applicable) made by an ex-participant within 30 days of termination or rescission, and to refund 100% of the original purchase price, plus all other payments made by the ex-participant, excluding depreciation that may be attributed to the participant and any bonus/incentives that have already been paid to the participant. This requirement seems intended to protect MLM participants; however it blurs the distinction between the existing legal consequences of termination and rescission.

New Six-Month Limit on Buy Back of Goods Upon Termination of Participation Agreement

Under the FTA, an MLM participant may terminate the participation agreement at any time after the cooling-off period and the MLM company is obliged to buy back all the goods and services (if applicable) in the participant’s possession. The buy back consideration must be 90% of the original purchase price (as opposed to the 100% of the original purchase price that applies during the cooling-off period), excluding depreciation (regardless whether such depreciation is attributed to the participant) and any bonus and/or incentives that have already been paid to the participant.

The MLM Act will maintain a MLM participant’s termination right and the right to compel the MLM company to buy back goods and services, however, under the MLM Act, an MLM company will have no obligation to buy back goods that have been available for the participant to pick up for over six months. The buy back price will remain the same. However, the six month limit only applies to goods, not services.

Implications

The MLM Act will affect different companies in different ways depending on whether they are subject to existing MLM regulations.

Some companies not currently subject to the MLM Supervisory Regulations (because they don’t charge a participation fee) will become subject to the MLM Act. Those companies will need to register with the FTC and ensure their participation agreements comply with all of the compulsory requirements of the MLM Act.

Companies entering the Taiwan market for the first time may consider whether they are able to adopt a single-level rather than multi-level business model, and refrain from collecting participation fees from participants. By doing so, they may avoid both the MLM Supervisory Regulations and the upcoming MLM Act.

Companies that are already subject to the MLM Supervisory Regulations and will be also subject to the MLM Act and will be required to:

  • revise their existing participation agreements within two months of the effective date of the MLM Act
  • deliver the original copies of the revised participation agreements to existing participants 
  • update their filings with the FTA to comply with the new filing requirements within one month of the effective date of the MLM Act.

We expect that more supplemental rules, guidelines, or model terms will be released once the MLM Act is passed. At this stage, it is too early for these MLM companies to take detailed or specific actions to prepare.

Since the MLM Act provides tight timeframes for MLM companies in this situation to comply, to avoid being fined for late revision or registration, we recommend that they stay alert for the passage of the MLM Act. We also encourage these MLM companies to take into account the potential increase in their operational costs caused by the MLM Act during their annual pricing review.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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