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Spencer Reese Weighs in on MLM Law, Civil Suits, and Public Perceptions

Podcast episode 39

April 1, 2019

It’s no secret that MLMs exist in a bit of a grey area. There is no federal definition of a pyramid scheme. Over the years, regulators’ objectives and strategies change—sometimes in a major way. But have you noticed all’s quiet on that front?

There hasn’t been a major government action against a well-established MLM since 2016. No doubt, some of you are holding your breath and biting your nails.

The simple truth is things are changing. Independent MLM distributors have growing reach. So do the anti-MLM crowd.

Your ability to do business is all about the public’s perception of your brand. If a reputable source calls you a pyramid scheme, the label itself can cause lasting damage. And right now, that allegation is cropping up everywhere. What can you do about it?

We’re here with another podcast aimed at helping you as you make good choices as you think through your current strategy. We sat down with Spencer Reese to talk it out. Spencer gave us his insights on current trends, common mistakes, and best practices. Listen in to learn:

  • What you can do to avoid the reputational harm of class action pyramid suits
  • Why it’s deadly to change terminology without changing practices
  • How to tackle pricing problems that drive bad behavior
  • Where you can find your real competitor (hint: it’s not an MLM)
  • What it means today to have an opportunity-driven or customer-driven MLM model

Full transcript

Nancy Tobler: Welcome to MLM.com Podcast. This is Nancy Tobler. I’m guest hosting for Kenny Rawlins.

Today we have Spencer Reese, who is a lawyer with the law firm of Reese, Poyfair, and Richards. He has been in the direct selling space, multi-level marketing space, since 1986. He’s been a regular participant on MLM.com as well as on our podcast and we’re very grateful to have him here with us today.

What’s the MLM legal climate like today?

Nancy Tobler: Spencer, you always get a great response. It’s been a year, I think, since we talked to you last—so, thought we should check in and see what the legal climate is like. Now, tell us what you know.

Spencer Reese: Sure. Well, I certainly will. And, Nancy, thanks as always for having me on the podcast here. It’s always truly my pleasure.

We’ve been seeing actually a lot going on in the civil arena with the class actions in the last year or so. Certainly, the civil actions have been more active than the regulatory climate. We have seen some state actions, but at the federal level we aren’t seeing a lot in the pyramid claims.

What we are seeing is that the FTC has shifted their focus. I think I spoke about this last time. The FTC has shifted their focus somewhat from pursuing pyramid claims against network marketing businesses to pursuing claims just based on deceptive income representations. The FTC has figured out that that’s much lower hanging fruit and those cases are much easier to bring—far, far, less complicated than pyramid actions.

Pyramids the standard of proof—since the Burn Lounge case was decided by the 9th Circuit Court of Appeals—the standard of proof that the FTC has to meet is considerably higher than it used to be. And consequently, the FTC has figured out that, “You know what, we can get the relief we’re after simply by being in a deceptive income claim case and that’s much easier to prove.” So that’s the avenue that they’ve been pursuing.

But on the civil side, in the class actions, we’re still seeing the pyramid cases where pyramid claims are being alleged. And more traditional pyramid and RICO claims those are still certainly front and center. Now what’s driving that is the plaintiff’s bar.

Why are class action pyramid cases on the rise?

Spencer Reese: There’s just one or two law firms that are primarily responsible for filing a number of class action cases. I wish I knew how they were financing them. Class actions are not easy. They’re not cheap.

You know, what a plaintiff’s lawyer hopes for is to get a quick settlement so they can move on to the next.

Now, I don’t know how they’re financing these cases. It’s smaller firms that have been bringing them. So, they’re not well bankrolled. I know that. But I know they’ve settled one or two and maybe they’re using those funds to bankroll the other cases that they’ve brought.

Nancy Tobler: So, in a civil case they allege they’re a pyramid.

Spencer Reese: Correct.

Nancy Tobler: And they just try to get a lot of plaintiffs on one case. Isn’t that how that works?

Spencer Reese: Yeah. What happens in a class action case is that you have to have a large number of people that are purportedly similarly situated. And then you file your claim and say, “Hey, these people are similarly situated. They’ve all been damaged, relatively the same. And by the same conduct.” One plaintiff, one individual or a small group of individuals will be the designated plaintiffs on behalf of an entire class.

Spencer Reese: Now, the way that they work in and the leverage that they have is that they make these allegations of a pyramid scheme which is obviously highly illegal.

They make these allegations but then because it’s a class they’ll try to get the class certified. That is if the court says, “Yes, this is a class of individuals that are similarly situated.” And then you have to send notice out to the entire class.

So, for example, they say a class consists of “all individuals who recruited and became a distributor for Company X during the year 2015 through 2019.” That could be a lot of people.

Nancy Tobler: Right.

Spencer Reese: Just depends on how much the company has grown. And chances are it’s going to be a company that’s been a fast grower because a small company, is not a viable target for a class action.

Nancy Tobler: Right.

Spencer Reese: They just don’t have the resources.

Why is the pressure to settle so powerful?

Spencer Reese: But that’s what we see, they bring these class cases and notice goes out to the class. That is, they have to be issued notice of this allegation that there is a claim against the company that it’s a pyramid scheme. And, of course, once the notice goes out to the class with a claim like that, it really damages the company’s reputation.

Nancy Tobler: Absolutely.

Spencer Reese: And so, the companies don’t want that notice to go out. So, what happens is that gives the plaintiffs’ attorneys considerable leverage to settle the case and get their money and move on.

Nancy Tobler: Right.

Spencer Reese: That’s the lay of the land. Nobody ever wants to litigate—actually take one of these things to trial. I mean, they’re extremely expensive, very cumbersome and the negative publicity and the damage to the business that can occur from notice going out to the class is huge. So, there’s a lot of pressure to settle. And that’s what happens.

Nancy Tobler: Yeah. Whether there’s anything legitimate in the claim or not. Right?

Spencer Reese: Exactly.

Nancy Tobler: You’re gonna settle. You just want to keep your name out of paper.

Spencer Reese: Exactly.

Nancy Tobler: Well and keep your name from being sent to every distributor that you may be a pyramid. That was a problem.

Spencer Reese: That’s exactly right. I mean, the stakes are so incredibly high that the pressure to settle is enormous on companies. And that’s what the plaintiffs’ lawyers are banking on.

Spencer Reese: So, they just want to get a quick settlement and then move on.

Warning: are you putting lipstick on a pig?

Nancy Tobler: Yeah. That’s interesting. I had noticed in the last couple of years we’ve had more class action. I hadn’t thought of that as a way to shut down a company, but I think it certainly has a way to damage a company’s reputation. Maybe not shut it down like the FTC can, but certainly a serious problem, public relations problem.

Spencer Reese: Absolutely. Absolutely. And anymore… I mean it’s we certainly have legal battles but anymore the real battle is in the court of public opinion.

Nancy Tobler: Right.

Spencer Reese: And that’s where if a company’s reputation is damaged in that regard then it’s over for them.

Nancy Tobler: Yeah, I think that’s interesting. I think it’s interesting that companies, since the Herbalife case, really should be moving towards more customers and more documentation of training. Have you seen that sort of shift since the Herbalife case?

Spencer Reese: You know, it’s interesting that you asked that. I have not seen a greater emphasis on that from a legal/regulatory perspective but that was a very very strong pull prior to Herbalife. That’s been the attitude of the FTC since 2004. They issued their advisory opinion and it was highly, highly, focused on driving customers. In fact, that actually came out in the Omnitrition case back in 1996.

And so, we’ve had that heavy focus on being customer-oriented and customer-driven. Essentially that dates back to 1996 rather than just Herbalife. But it certainly became a focus of the Herbalife case.

Nancy Tobler: Have you seen companies move more in that direction or it’s not something really that you end up dealing with?

Spencer Reese: You know what’s interesting? Everybody is trying to figure out how to crack that. I have seen several that have taken really true material measures to drive their customer sales.

Most of what I have seen, however, is companies simply trying to repackage what they’re already doing. They really don’t want to change much, just change their nomenclature, but do business the same way. Which, you know, in my opinion, that’s just putting lipstick on a pig.

Nancy Tobler: Yeah. [laughter]

Spencer Reese: You’re not gonna change the fundamental nature of it. But there have been several sizable companies that I’ve seen make material changes trying to become more customer-oriented. I always tell clients, “Look, you can do it voluntarily or you can have it shoved down your throat like Vemma and Herbalife did.”

Nancy Tobler: Right. Well, you and Kenny talked a little bit about this last time, so we don’t have to go into too much depth, but I think it just makes so much sense to have people sign up as customers if they’re not sure that they want to do the business opportunity. Later on, then transfer them to be a distributor if they find themselves recruiting people because they’re so passionate about the product. Then, yeah, become a distributor, do it. But if you’re not sure, don’t do it.

Why not give customers the best price?

Spencer Reese: Absolutely, I agree with that. The challenge we have comes in in pricing strategies.

Nancy Tobler: Right.

Spencer Reese: And so many companies want to price their products on a tiered structure so that distributors get the lowest price and then distributors, if they’re on autoship get the next lowest price. But, so everybody, you know, they they say that, “Well, these people are distributors. They signed up to get the lowest price.” But if they have to convert them to customers, well then they have to raise the price. And, of course, you know, people know that the real price is the lowest price, that’s the distributor price.

Nancy Tobler: Right.

Spencer Reese: They have to fight that fight.

I mean, honestly, I think that that the best strategy is to have your preferred customer price being the lowest price.

Nancy Tobler: Yeah.

Spencer Reese: And that way, if somebody wants to be a preferred customer, great, they get the best price. If they want to be a distributor, they, you know, they still would have to be a preferred customer to get the lowest price. But then they would also have to pay some other additional fees such as your replicated website, back office, and technology fee or something like that. A starter kit…

Nancy Tobler: Yeah, that makes sense to me. I think I’ve only heard of one company that actually does that that I know of. But it makes sense to me. I think it really helps solve sort of the income claims problem that we talked about earlier. Right? That you have a clear distinction between what’s a customer and what’s a distributor, so the income can be an average of people who actually run the business, not people who are customers.

Are they joining because of pricing or income claims?

Spencer Reese: You know in my opinion, it all comes back to income claims again.

Why is everybody enrolling as a distributor in the first place? Is it really to get the lowest price or is it because they were enticed to join by virtue of income claims?

I have an opinion on that and my opinion is that most people join because they’re induced to do so based on the income claims. If that were not the case, then it would be a lot easier to have your lowest price be the preferred customer price and more people would be motivated to buy the products based on the lowest price.

Nancy Tobler: Yeah.

Spencer Reese: We just don’t see that.

Nancy Tobler: Yeah, I think you’re right. Back to where we started on this call, the FTC is going after income claims. Do you think part of the reason for that shift is because it makes it so easy to catch them because of technology? They’re on social media, and their they have their blogs and they’re making these claims out in the open, or where it’s recorded? Is that why the FTC is going after income claims?

Spencer Reese: Well, I think there’s a variety of reasons.

One, they’ve been going after income claims forever. Any time you have a pyramid claim there’s also been a fraudulent income claim allegation in the complaint as well.

But in addition to that, yes, they’re very easy to find. They’re extremely easy to find. They just log into some distributor’s social media page. And there are the income claims right there. They print the page off, they got the evidence they need.

Do you have an accurate picture of the field?

Nancy Tobler: Yeah, yeah. Do you think companies—you talked about this last time—do you think companies are doing a better job at training, or it’s still an issue?

Spencer Reese: Oh, I think they’re overall doing a relatively poor job of training. You know, I think that there’s the desire to do so. But the unfortunate reality, from what I’ve seen, is that too many executives sit in their offices and dictate what they think should be policy. But they don’t get out in the field and see actually how the business is done. They’re removed from reality or have become removed from reality in that regard. They’d like to think that the products are driving the sales but they’re kidding themselves. That’s my opinion!

Nancy Tobler: Yeah.

Spencer Reese: And I said, too, they need to get an accurate picture. They need to get out in the field and then actually attend the distributor meetings and see what’s actually going on.

Nancy Tobler: Yeah. Well, I mean, I think they certainly can do a better job of monitoring what happens on the internet through technology. But I think, like you say, just to get out into the field and find out what happens, I think could be quite eye opening.

I think there are things we can do better as an industry. I think having more customers is… it just makes total sense to me. I must shake my head about that on a regular basis. Why not just make them customers? That’s what they are. Well then you can be more transparent in your reporting and your income claims can be more realistic. But I think we can do a better job of training too. Technology makes training so easy now. And it also makes it easy to keep track of who’s been trained.

Spencer Reese: Yeah, ultimately, I think it goes beyond training. We have to identify, “What do we need to train on?” And that means we have to identify, “What are the fundamental issues that we’re dealing with?” That’s what I think the real issue is.

Who are you really competing with?

Spencer Reese: And so, what am I talking about? I’m talking about, well, let’s define ourselves and figure out who our competitors are.

Nancy Tobler: Right.

Spencer Reese: So, what are we going to train on? I mean, if we need to train people on getting more customers, well, who are we competing against? Well, in my opinion, from a customer perspective, if you’re product-oriented, your biggest competitor is Amazon.

Nancy Tobler: Yeah.

Spencer Reese: Let’s face it. Amazon, you can get anything you want. You can get next-day shipping, if you’re a Prime member. You can get the best price. I mean, they’ve got stainless steel precision when it comes to operations.

Nancy Tobler: Yeah.

Spencer Reese: So, you’re competing against Amazon!

If your program is primarily opportunity-driven, your main competitors are the gig economy. You know, your Ubers, the Lyfts, the Airbnbs, I mean, they will generate immediate cash. You won’t necessarily be profitable. I question the profitability of those business models. But you can certainly get some cash flow going and get it going quickly.

Nancy Tobler: Right. I think it’s interesting, Uber drivers, 50 percent of them drive one to five hours a week and on average they make about twenty-five dollars an hour. And you think about—well, at least what Mark Rawlins has always said—people want to make $200 to $500 a month. Well, that gig economy model is proving that. Right? “How do you get distributors to $200 to $500 dollars a month?” is, I think, a big question that companies should be asking themselves.

Spencer Reese: Yeah. Yeah. But, you know, the reality of the gig economy is, okay, you made 500 bucks a month, you have cash flow, but, you know, by the time you depreciate your car, holy smokes, you’re in the hole.

Nancy Tobler: Yeah.

Spencer Reese: Anyway, that’s that’s a whole different story.

Nancy Tobler: Yeah. That is. It is an interesting topic too.

How can you defend against class action suits?

Nancy Tobler: Well, thank you, Spencer. I appreciate you taking time out of your busy day. I know you’re busy and we always appreciate your expertise. And I think the class action information, I’m gonna go and do a little reading on it, in fact, based on your insight here today. I think that is an issue. And I don’t know what companies can do for that. Do you? Maybe our final thought could be what can companies do to sort of protect themselves against class action.

Spencer Reese: Well, there’s there are actually things you can do. The best protection is also completely unpalatable and that is not to be financially successful. Don’t make yourself a target.

Nancy Tobler: [laughter].

Spencer Reese: That doesn’t work. What plaintiff’s lawyer is going to file a class action case against a company that can’t afford to pay anything anyway?

Nancy Tobler: Right.

Spencer Reese: That would be stupid.

Nancy Tobler: Yeah.

Spencer Reese: But you can have an effective class action waiver in your contract. You gotta do it right. It’s not easy. But you can do it and the courts have upheld them. So that would be, I think, your first line of defense. Have a class action waiver—whether you have an arbitration provision (which I encourage), or you allow people to file a mitigation in court. Either way, you can put an effective class action waiver in the agreement. And that would be your first line of defense.

Nancy Tobler: Yeah. You see it everywhere. Right? When you go into your doctor’s office you sign a waiver. You say you’ll first do arbitration. So, there are not very many places where we don’t sign something upfront that says we won’t we won’t go to court. So. Okay!

Closing

Spencer Reese: All right, Nancy, well, you have a wonderful day.

Nancy Tobler: You too!

This has been the MLM.com Podcast. I’m Nancy Tobler, your guest host. We are very grateful to Spencer Reese for spending some time with us today. He’s enlightened us on the use of class action suits as a way to get at companies and ruin reputations. Essentially that’s the way a class action lawsuit works. And his information is very useful as to how you might avoid or at least minimize the potential of class action. And we appreciate you also as listeners. And we’d love to hear from you. Make a comment. Tell us what you want to hear more about. Like us, share us. We appreciate you as listeners. Thank you.

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