HOW TO GET SUED
By: D. Jack Smith, MLM Attorney
I have been practicing law for many years and specializing in multi-level marketing law and litigation for the last twenty five of them.
After all this time, it is still surprising to me how many people set about the ambitious project of founding and attempting to build a nationwide or worldwide multi-level marketing company who must have a powerful death wish.
All of us know that multi-level marketing law is relatively new when compared to all of the other traditional bodies of Anglo-Saxon jurisprudence which have been in existence for hundreds of years and that, because of that, its principles and the interpretations of its statutes are still in flux and developing as time goes on.
Multi-level marketing law is far from static or "jelled" even though, after forty years of existence, it has finally attained universal recognition and legitimacy among the regulatory authorities and, at least, its basic precepts and principles are now becoming commonly recognized and accepted. Put another way, the law of multi-level marketing is changing and growing each year from a virtual start from nothing in the early 1950s.
In spite of this newness, and the vagaries that go with any newly-developing body of law and one that superficially bears a physical resemblance to “pyramids”, which have everywhere been outlawed, I am continually surprised at the casual approach some take to starting an MLM business operation. As I say – consciously or subconsciously or just plain stupidly, they do manifest a desire to be sued out of existence.
This being the case, I thought I would write a simple primer to make life easy for those who subconsciously, compulsively, or just through blind ignorance clearly manifest on the surface of things a desire to be attacked and sued in the court system.
I can make life easier for them by setting forth ways which will almost guarantee a legal challenge and judicial destruction of all of one's work and efforts and all of the work, money and efforts of those he or she has led down the path.
First, I would recommend that one go into business without consulting the services of an MLM legal specialist.
Everyone who passes a bar exam is capable of writing a contract, presenting evidence in a courtroom in a variety of claims situations involving general law and the older and more traditional and well-defined legal areas.
Virtually any one of these can draft a simple will, probate an estate, and, with a little coaching, close a real estate transaction. Multi-level marketing is far, far different. This is a new and unsettled legal specialty which in the United States crosses all 50 states' lines and basically in each of these 50 states can overlap and blur into eight separate bodies of that state's jurisprudence – anywhere from pyramid prohibitions to lotteries to securities to fraud to referral sales acts to business opportunities to buyer's clubs and on and on.
These are just the basic considerations and simple multiplication of 9 different bodies of law that MLM overlaps in 50 separate states tells one that these simple things in and of themselves number approximately 450.
The point of this is to make clear that no attorney can guide an entrepreneur with any degree of confidence who has not had a lucky break or some other means of learning the law in 50 states as it deals with nine separate bodies of law applied to multi-level merchandising efforts.
Most attorneys by training and practice are locally-oriented and, at most, have a vision that does not extend legally beyond his or her own state lines and statutes and developed body of case holdings and judicial principles since about the time that his or her state was admitted to the Federal Union.
In short, I can virtually guarantee a lawsuit for anyone who attempts to enter this area of marketing without consulting someone who is learned in this particular rapidly changing and developing area of legal specialty.
It is simply suicidal to attempt to build a nationwide marketing company without the help of an MLM specialist attorney.
The second-best avenue to doom is to fail the "Oregon smell test ". There may be more delicate ways to put this, but none more effective and/or blunt. As stated before, I have been practicing MLM law for many, many years and without any hesitation, state that the single best piece of advice I was ever given came from the assistant attorney general in charge of consumer protection for the State of Oregon.
I was extremely fortunate in that my very first multi-level marketing corporate client could afford to send me to twenty-six state capitols to actually meet with the consumer protection people and make sure that my beginning and rudimentary knowledge of MLM law around the United States did not inure to the punishment of my corporate client. In an abundance of caution, my client flew me to all these capitols to discuss the law and its particular marketing plan with consumer protection officials to make sure that nothing had been overlooked.
One cold morning, I was seated in the Consumer Protection Department of the Attorney General's office in the State of Oregon and had briefly gone over the Oregon statutes and my client's particular marketing features with an unusually patient regulator who, in spite of his workload, was in sympathy with my beginner's status and sincerity. When the discussion of legal technicalities had about come to an end, this gentleman picked up a book, held it under his nose, and flipped all the pages while he inhaled.
He put down the book and explained to me that I had just witnessed the Oregon Smell Test. Naturally. I was mystified and amazed.
He wisely went on to explain that, given the workload of any government agency, appearances very often were even more important than the reality in terms of getting the company unwanted and perhaps unnecessary legal attention. He stated that his first job was to form a subjective opinion of management's true intentions and that this could only be gleaned by the documents and materials that he had before him.
He said, "Mr. Smith, I ask myself - what are these people really trying to do? Are they really trying to merchandise legitimate goods and services at fair prices to the general public, or are they merely trying to gather and move people around for money".
"In other words, Mr. Smith, what I have before me, whether it comes from you, from any other professional, or even from the street, better walk like, talk like, act like, and smell like a ‘marketing company’."
If a company has the appearance of being an empty recruitment scheme, it probably is an empty recruitment scheme, and not a marketing company recognized everywhere by law.
As adults, we learn that appearances are as important as the reality, and nowhere is this more true than in the area of multi-level marketing law. The longer I have practiced this legal specialty, the more I appreciate the advice I was given in Oregon.
Assuming company management has hired capable MLM specialist legal counsel, and put forth a multi-level marketing plan which is in compliance with generally accepted rules and principles, how else can one guarantee that he or she will be sued?
Answer: Commit or permit fraud. Fraud is any form of dishonesty, whether stealing, cheating, lying, or obtaining an advantage by misrepresentation, trickery, exaggeration, or misleading.
Fraud is the "biggie"
Dishonesty properly is everywhere despised, prosecuted and punished. Not only may this be deliberate or conscious fraud on the part of management, but it also frequently involves management's failure to police its sales force and, in its most innocent but still dangerous form, to tightly control and prohibit the exaggerations, distortions, or misrepresentations of overenthusiastic otherwise innocent distributors.
In this area, one's heart can be proverbially as pure as snow, but management will reap the wrath of any constituted government authority that perceives fraud or deceit being practiced in any of its forms.
As multi-level marketing law has developed since the 1960s many features of a plan which formerly brought litigation have become commonly recognized and are not so fertile of government assault as they were formerly.
These include basing rewards on recruiting people and not exclusively on product sales, that is, paying "headhunting" fees merely for body-gathering; charging high prices to be a distributor which monies go into the hands of the one doing the recruiting .
We do not see much of product “loading” any more…..that is forcing distributors to buy product they cannot sell or use in order to be eligible for commissions. Largely as a result of a non binding expression of opinion in a case known as Omnitrition , in which a Judge stated that he felt that companies whose sales were not 70% to the public at large and not to distributors were pyramid schemes, we don’t see “loading” of distributors with the frequency of the past.
As a number of regulatory authorities have tipped their hats in the direction of Omnitrition and now purport to look to see if 70% of a company's products fall outside the down lines, this percentage is certainly a worthwhile goal for every MLM company to press for. At the very least a strong emphasis on “retail sales” – sales to other than distributors – should be present in every marketing plan.
Suffice it to say, for those hoping to be sued, to improve ( guarantee)their chances, they can pay for recruitment of distributors, do not pay on product sales, do not have any plan emphasis on selling to the public at large, and have a plan that just crams unwanted product down the lines onto the sales force.
D. Jack Smith is a graduate of Vanderbilt University and Harvard Law School.
In the past 25 years, he has developed an international specialty in direct selling and multi-level marketing law, and is a member of the Tennessee and Washington, D.C. bars appearing in courts and negotiations in behalf of direct selling and multi-level marketing companies in all US states and the US Federal Trade Commission. He has set up new companies continually and handled over 3500 MLM legal matters in the quarter century span of his career.
Mr. Smith’s practice now spans the globe with clients from the Union of South Africa, Germany, and the United States and Canada to the Far East and Malaysia.
Mr. Smith is a member of the Board of Directors of the Multi-Level Marketing International Association a recipient of its “Attorney of the Year” award, and is on the Lawyer’s Council of the Direct Selling Association in Washington, D.C.
Recently, he was named one of the Top 50 “Most Powerful/Most Influential” persons in Direct Selling and MLM and was the highest ranked practicing attorney on the list.
In April 2010, he was given a “Best of the Best Award” by the Multi Level Marketing International Association.
He may be reached at his offices in Memphis, Tennessee, at 901-292-5225. His fax number is 901-763-2976 and his email address is [email protected].