Madras High Court raps Apple FMCG like AP High Court to Amway India

Now let us look at another multilevel marketing company M/s Apple FMCG Marketing (Pvt) Ltd which filed a writ petition in the Madras High Court appealing to declare that its business model of selling products through the network marketing system is legal and not in contravention of the provisions of the Prize Chits & Money Circulation Schemes (Banning) Act, 1978 or any other law. This was way back in 2004.

The Madras High Court held: It is true that several companies including multinational companies carry on the business of the 'multilevel marketing' and ti is also true the the Executive and the law enforcing authorities keep a blind eye on such activities. This also does not make an illegal act legal. It is always a fact that the law enforcing authority would try to close the stable only after the horse had escaped (para 22).

The petitioner is a company marketing various products including shampoo, tea, coffee powder, after-shave lotion etc. under the brand name 'Joy Eternal' through network marketing. Several unemployed youth have taken up the marketing of these product and have earned satisfactory incomes depending on their talents and efforts.

No complaints have been received from any consumer about the quality of goods sold. Under the scheme of network marketing the company sells products to the customers and the consumers in turn can sell the products to their peers and earn commission out of the sale. In fact it avoids many middlemen and cost of advertisement, etc. The marketing process is carried out directly by recruiting the customers themselves as distributors of the products and services; the company regularly organises business development meetings and seminars, distributor meetings, etc. The participants of the meetings are encouraged to take up the distributorship of the products and are suitably registered if they so desire. There is no service fee for registration as distributor. Any person who is interested is given a product for the price fixed. The distributors are encouraged to enroll more distributors. The commissions are given only as per the volume of the sales made by the individual distributor and his team. This system ensures that intermediate distributors are not like a chain leading to the customer and the company.

There are only two stages-- stockist and distributor. The distributor can introduce another person as a distributor and he will also get commission. The distributor has to put in his effort in selling the products and then only he will get the commission. The company also takes care of the risks involved in the trading activities; there is no deposit of money by the consumers and the products are given to the person who pays the money for the same. The distributors are paying the price for the products they purchase. (Rings any bell. This is the same modus operandi employed by Amway India- Editor)

The petitioner (Apple FMCG) submitted that earlier 45% of the sale amount was distributed as commission but presently it is increased to 65% of the sale price. That means the goods which are worth Rs. 35 are sold at Rs. 100 and this Rs. 35 covers not only the price of the goods but also expenditure involves forth administration of the company. Of course the court cannot interfere with the fixation for the price. Anybody is free to fix any price and it is for the customers to accept or not. But it is not an ordinary sale of goods. The persons are lured to become a distributor only on the hope of expectation that he may get more commission if he sells the products similarly to others. Of course, many persons are earning lot of commission in this manner. This chain is likely to progress for some time. At one point of time the progress of the chain will stop. On that day persons who buy the products may not find any further distributor to purchase from them. By the time the company would have earned enormous profit. But a very large number of persons would be left cheated.

The main contentions of the petitioners are as follows:

1) So far no complaints have been received against them from any distributor. Therefore, this multilevel marketing has not caused any loss to any of the distributors.

2) There is no 'service fee' for registration as distributor.

3) Every distributor gets commission on the basis of the volume of business that is generated by him.

4) No chain of customers in the process.

5) The distributors and the purchaser pay the value of the product that is purchased, therefore, they are not paying any excess amount.

7) They collect only nominal service charge for the service rendered.

8) The surveillance by the respondents (the Police) violates the petitioners' fundamental right provided under Articles 19 (1) (a) and 19 (1) (g) of the Constitutions of India.

9) Further the Union of India has also clarified that the multilevel marketing does not infringe the Prize Chits and Money Circulation Schemes (Banning) Act, 1978.

Mere fact no complaints were received does not make an act legal, if it be otherwise illegal.

The contention of the petitioners is that there is no chain of customers. This contention appears not acceptable. The scheme creates chain of customers and only when the chain progresses without any break in any of the links, the principal distributor gets more commission.

The contention that no service charge is collected also does not appear to be correct.

The progress of the chain of customers, at some point of time, would get saturated and the distributor, who purchases the goods will not find any purchaser/sub-distributor to sell or enroll afresh. Therefore lakhs or even millions of people are bound to lose their entire money.

There cannot be any doubt by enrolling new members and by the process of selling the goods to new distributors this chain progresses; the person who became such member earlier get commission without doing any work; getting such a commission is nothing but getting quick or easy money. Therefore such schemes the so called 'multilevel marketing' definitely falls within the definition of money circulation scheme.

Regarding the Union of India making a clarification that multilevel marketing does not violate or offend the provisions of the Act, it is to suffice to say that it is not for Union of India or any Member of Parliament to interpret the provisions of any Act. The power to interpret the Act is only vested in the judiciary and that power is not given to the Executive. The statement given by the Union of India or its Officers that multilevel marketing does not attract the provisions of the Act cannot legalise an illegal act.

It is always a fact that the law enforcing authority would try to close the stable only after the horse had escaped. That is the law enforcing authority do not take preventive action to enforce the provisions of the existing law.

For all these reasons the scheme of so called multilevel marketing cannot be said not to violate the provisions of the PCMC Act.

Apart from that this multilevel marketing results in exploitation of the personal influence of each and every distributor or his close relative. Though it may not amount to in violation of this Act, it would attract some other laws; it may result in undue influence, coercion, extortion, etc.

It is true that the petitioners are comparatively a small fish in the business of the so called MLM. There are other comparatively bigger associations or institutions or companies which adopt similar schemes. (Probably, the Madras High Court was thinking of Amway India). It is for the enforcing authorities to have a watchful eye on all such activities.