Multi-level Marketing Litigation

MLM lawyers at McCormick and Boyd Law Firm wants to work with you to build a quality consumer products and services marketing company that distributes through a vast network of salespeople, salespeople who not only sell the product but who recruit and develop an even larger network of salespersons and for which effort payment is given based on the volume of sales of those in down line recruited networks.

Up Next For ZeekRewards Ponzi Scheme Victims...Clawbacks?
Jordan Maglich, Contributor | Forbes
August 27, 2012

When the Securities and Exchange Commission (“SEC”) accused ZeekRewards (“Zeek”) and its founder, Paul Burks, of perpetrating a massive $600 million Ponzi scheme, hundreds of thousands of victims were shocked to learn that the healthy returns they had been receiving were the result of a massive fraud.

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Feds Halt Alleged $600 Million ZeekRewards Ponzi Scheme: How It Happened And What's Next
Jordan Maglich, Contributor | Forbes
August 18, 2012

On Friday, August 17, 2012, the Securities and Exchange Commission (“SEC”) filed an emergency action in a North Carolina federal court, alleging that ZeekRewards and its founder, Paul R. Burks, were involved in one of the largest Ponzi schemes in history.

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ZeekRewards, Post Mortem

A month ago I wrote an article on this page about the Zeek Rewards entitled, Legitimate Opportunity or Ponzi Scheme. Unfortunately, my conclusion that Zeek was likely a Ponzi scheme was accurate as the SEC last week closed Zeek's doors and appointed a receiver as owner Paul Burks agreed to settle and submit Zeek to governmental control. Many people, including several friends of mine, were hurt by what they didn't appreciate as an illegal enterprise. I have received several inquiries about what will happen next for them. Unfortunately, the news is not particularly good.

First, it is highly unlikely that Zeek will reopen after making changes to its model. Paul Burks, its owner agreed to a court appointed receiver (without admitting wrongdoing) and United States District Judge Graham Mullen has appointed Kenneth Bell as the temporary receiver and empowered him to seize Zeek's assets and investigate, a process which will not likely be completed for several months, if not longer. Those who have not received their bid purchases will be seen as victims and those who have made more than their purchases may come under US clawback laws and be asked to surrender funds to the receiver, who then, assuming liquidation, would redirect money to the victims, usually only pennies on the dollar for the victims of what the government will likely conclude was a scam.

If you put money in through a credit card in the last 30 days, your best option will be to go to the card company and file a fraud claim through your card company. If you were an investor for a longer period than that, you will likely be notified of a claims filing procedure to submit a claim through the receiver's office, a process which will have time constraints which you must respect. If you need assistance with that, by all means contact my office through my email. Be sure to identify yourself as a distributor in whatever network marketing company with which you are affiliated. Or you may call my cell at (713) 254-0099.

Because only $225 million is available for refunds domestically and abroad, not counting administrative expenses, there will most certainly be a shortfall. Act quickly and stay abreast of developments through the SEC website. For other questions and answers, go to ZeekRewards Closed – Questions and Answers. Ted Nuyten offers a very understandable summary through commonly asked questions and answers. Also, check in here, Community Commerce and You for periodic updates.

We sincerely hope that all those injured in this debacle are compensated and those who harmed folks are brought to justice. Just a reminder that if it sounds too good to be true, it often is. Legitimate network marketing companies are different than Ponzi Schemes and pyramid because they actually have legitimate products to sell and pay real commissions based on the flow of product sales rather than tying the payouts to recruitment of new members. The principles which govern network marketing are in many ways far superior to traditional businesses, but like all business pursuits, the model must be ethical and legal to be legitimate.

Mike McCormick

800 Town & Country Boulevard • Suite 500
Houston TX 77024  

Located in CityCentre 

1 (713) 254-0099

Raiding and Solicitation in Network Marketing

Network Marketing

One does not have to be involved in this industry long before he or she witnesses one team of distributors leaving for another new and allegedly better opportunity. It has happened for decades and will happen for decades into the future. As an attorney whose focus over the last 25 years has been litigation, the enforcement of non-competition clauses and non-solicitation agreements is nothing new. In traditional business, it is the source of suits for injunctive relief and temporary if not permanent restraining orders--all part of being in the shooting gallery. In the highly emotion-driven context of network marketing, litigation surrounding the enforcement of non-competition clauses or non-solicitation agreements is more than just an ordinary event in the day to day war of competitive businesses. In network marketing it can be devastating.

This discussion of non-competition clauses and non-solicitation requirements is separate and distinct from the discussion of "crosslining" which will be the topic of next week's article. "Crosslining" is a concept that is more ethical than legal. It involves taking or attempting to get distributors within your existing company to leave their upline in favor of another line of sponsorship. It is destructive and disruptive and rarely effective in converting an underperforming distributor into a performing distributor. But this article is about raiding and non-solicitation, not "crosslining."

So how do you stay out of the crosshairs when a distributor from another company leaves and seeks to join your business or when someone leaves your organization for allegedly greener pastures? Let's be honest--every week we hear about a distributor who is defecting and leaving one company to go to another (typically to one person's delight and another's horror). To be completely honest, though most of us fear the raider and tell others how bad it is, we would be the first to jump for joy if that leader brought his existing downline to our organization.  But if the fish is of any size ( a "keeper" in angler terms), there will be a cost to be reckoned with at some point and one will have to balance the risks of disruption and litigation with the benefit of the move. Movement outside or on the fringes of the contractual obligations spelled out in the Policies and Procedures is often a gun that kicks as hard as it shoots and may not be worth the trouble. As we say in criminal law circles, "You can avoid the time, but you can't avoid the ride" (the process of the ensuing litigation or repairing damaged relationships).

First, as a distributor, you should understand where such agreements are typically found and why they are valuable, not just to the corporation but to the distributor base generally. The Policies and Procedures of most network marketing companies typically feature two provisions that are central to this discussion. The first type is a non-competition clause that will often require a person to not engage in another network marketing venture for a period of time that typically ranges from 6 months to 2 (and sometimes as long as 5) years. Often, the prohibition is limited to competitive products but sometimes is broad enough to consume any and all network marketing opportunities. The broader the provision, the less likely it is to be enforced in court. The second type of provision typically precludes the individual leaving one company from talking to others in the downline for a period of time. This is known as a non-solicitation clause. Some non-solicitation provisions prohibit communication with the entire downline while some permit discussion only with those distributors which the departing distributor personally sponsored.

Both the non-competition provisions and the non-solicitation clauses operate in "restraint of trade" and are therefore viewed skeptically by the courts generally. However, if reasonable in duration (length of time of the restriction), geographic scope(does the provision restrict markets to which the distributor's previous business did not extend) , and marketplace scope(does the provision extend beyond the reasonable marketplace scope to which the distributor previously engaged--nutritional or skin care products versus a completely different industry like prepaid legal services or travel services), courts of most states will enforce the provisions. Either way, as stated above, the cost of the fight will likely serve as a natural deterrent from engaging in such a battle.

The raiders are here.

Why are these provisions worthy of enforcement? Why not just let people come and go as they please and under the guise of free speech and free trade and capitalism and allow people to speak to anyone and everyone about their new gig? Whether you are the "raider" (the beneficiary of the movement of one group of distributors to your downline) or the "raidee" (the one who lost a large group of distributors to another company), the disruption resulting from the movement of large numbers of distributors harms the marketplace, often irreparably. In one particular case I handled, over a nine year period of litigation, we were by all measures successful. We won a several million dollar judgment (which we never collected in any meaningful way) and bankrupted most of our opponents. The marketplace never recovered and I am confident that both sides would agree that a better solution would have been to solve the problem rather than fight.  What we "won" in the courtroom was lost by my clients tenfold in the marketplace. In a separate case, we achieved a seven figure result but over seven years of litigation, I am certain both sides would reflect and conclude they would rather have the residual income from those downlines than be victorious in the courtroom.

My track record is good. I usually win. But if the result is nothing more than a contribution to my kids' college fund, is the problem one that would have better been solved than litigated? Not so in traditional business but definitely so in the context of network marketing. That is why the lawyers in my firm, particularly in the context of network marketing, fashion ourselves as problem solvers.  Once in the courtroom, we will certainly show our teeth (I have been accused of being willing to "spike my own mother as I slide into second base"), but in the context of network marketing, coming up with creative solutions is far better than another notch on the belt in terms of "victories" in court.

So how do you stay out of the crosshairs? First, as a distributor, be proactive! The only way you will have success in keeping your downline from being raided is to have consistent pro-active communication with your group. This process has to be a two way street and you should always seek to add value to the people with whom you are communicating. Two way communication is essential. In both of the litigated situations described above, communication by the ultimate leader was completely lacking, the ultimate leader relying on downline chain of command to keep the fires of the distributor base stoked. YOU MUST HAVE A POSITIVE RELATIONSHIP WITH THE TEAM MEMBERS WHO ARE THE LIFEBLOOD OF YOUR BUSINESS! Be careful that you give particular attention to those who are different than you. You may not enjoy their company as much, but they are just as important to you as the guys you enjoy golfing with and spending time with on vacations. But when the folks who aren't like you leave, they will take half your business and spread rumors and innuendo about your character as a leader. If you serve someone a great steak he will tell two others about it.  You serve someone a crummy steak and he'll tell 15. As my brother, a retired colonel in the military has said, "It only takes one 'Oh Shi*" to screw up 100 at-a-boys!" Be cognizant of the folks who you don't naturally relate to and give them the attention they deserve.

Network Marketing

Secondly, you MUST always take the high road publicly. Our's is an Internet world. "What happens in Vegas stays ... on Facebook, Twitter, My Space, Linked in..." Wish the departed well and privately re-engage those with whom you have a connection. Handle your conflicts privately, but sternly. Do not crater. The agreements you seek to enforce are valid and enforceable and for the good of the industry generally and all of the distributors specifically. But trashing people on the internet, though therapeutic, is typically self-destructive  Even blogging anonymously is a poor solution to addressing your adversary. As an attorney who litigated the anonymity of bloggers in a series of federal and state court cases from Nevada to Georgia to California to Michigan to Texas, I can attest that everyone knows where the blogs came from and, like parents talking ugly about one another in a divorce, no one wins.

If you believe a change of companies is best for you, go for it. But respect the non competition and non-solicitation agreements in your contracts. If you are a downline and see your fearless leader go somewhere else, it is appropriate to inquire whether he or she, because of their rank or pin level, got a special deal with the new company that no one else can achieve. Corporations are often culprits in raiding and will pay big leaders based on their anticipated production large sums of money and even give special deals outside the provisions of the comp plan. The downline will not likely see the benefits of that. So when your leader talks of the next greatest thing, ask pointedly whether he or she is getting a special deal not available to you or your downline. If he is, at best his credibility is questionable and at worst, he is in line for a long litigious battle that will not serve you or your downline well.

Finally, remember this: If your distributor base is not producing at the level of your expectations or theirs, the chance that a change of scenery will fix things is highly unlikely. If the pay plan is predominantly the same as it was when the decision was made to join the existing gig and the product line is the same or better, changing scenery is not likely the answer.

Be sure to consult legal counsel in the event you are faced with one or more of these issues. This was just a brief and general discussion of the nuances of non-competition and non solicitation agreements and not intended to be a memoranda of legal authority on the subject as every case is distinct.

Mike McCormick

800 Town & Country Boulevard • Suite 500
Houston TX 77024  

Located in CityCentre 

1 (713) 254-0099

Is This Another One Of Them Pyramid Schemes?

If you are considering or ever have considered direct sales as a viable alternative to whatever you are currently doing, it would be a good idea to wrap your head around what is and is not a pyramid scheme. Four years ago, I was asked to consider a network marketing opportunity. This was not the first time I had been asked whether I was open to such a venture and in each prior instance I said no--I actually said NO! Come to think of it, I may have said, HELL NO! But that was long before I had, as part of my law practice, litigated whether or not a particular opportunity was a pyramid scheme. Having acquainted myself with the law and even argued both sides of the issue on more than a couple of occasions, I was now, for the first time, open to the concept of network marketing. Are you? Be aware that one of the first questions you'll get is, Is this another one of them pyramid schemes? For pure levity, give a look at a great animated video by Pat Petrini:

It's four and a half minutes of satire about the myths of network marketing. Enjoy...and when you're finished consider some of the legal concepts that determine what is and is not a pyramid scheme and put your prospective opportunity to the same test I have put mine through. I am a practicing attorney and a distributor for Mona Vie. Mona Vie had to pass the legal test four years ago, and at the end of this article, we'll see how it fairs today.

So what exactly is a pyramid scheme and how is it distinguished from a legitimate business opportunity? Great question, right. Particularly when you consider some of the facts about the network marketing industry generally. Did you know, for example, that 85% of women making over $100,000 per year do it in the network marketing industry? And did you also know that the U.S. direct selling market grew faster than the overall U.S. economy; smaller direct selling companies (those with annual retail sales under $3 million) fared best with 66.7 percent showing growth, and an average retail sales increase of about 30 percent while overall nearly half of U.S. direct selling companies experienced sales growth and another 14 percent remained flat while the rest of the economy was suffering through these recessionary times.

The Direct Selling Association (DSA) today released the results of its Annual Growth Outlook Survey, which shows U.S. direct sales totaled $29.87 billion in 2011, a 4.6 percent year-over-year increase from $28.56 billion in 2010. The U.S. was ranked as the top direct selling market in the world with 20 percent of worldwide sales in 2011. Japan came in second with $23.9 billion (16 percent) followed by China with $16.3 billion (11 percent), South Korea at $12.8 billion (eight percent) and Brazil at $12 billion (eight percent). Global direct sales increased 10 percent from $139.7 billion in 2010 to $153.7 billion in 2011. This is the continuation of a trend. According a June Wall Street Journal article, between 2009 and 2011, the stock value of publicly traded network marketing companies increased a whopping 268%. How did your 401k fare in the same time frame?

Pretty attractive industry and an industry everyone should consider, but how do you tell if the company you are considering is legitimate and not . . . another one of them pyramid schemes . . . ?

Pyramid Scheme defined: The US Federal Trade Commission considers a pyramid scheme to bean illegal business structure in which recruitment of new members into the pyramid scheme is the main avenue for compensation for participants. In a pyramid scheme, people recruit others to join an organization or business opportunity for an initial fee. They are then compensated--either solely or substantially--with a portion of these recruitment fees and the future earnings of their recruits.

In re Amway Corp is the landmark decision from the 1970's, where the FTC distinguished an illegal pyramid from a legitimate multilevel marketing program. From that case and its progeny we can glean the following relevant characteristics of a legitimate business. First, the legitimate business will compensate distributors based on the flow of products, as opposed to merely marketing an opportunity. If a company is paying its distributors or consultants based on the number of recruits without regard to product flow, that is likely a huge problem. Secondly, if the company relies on significant up-front costs for their kits that feature little or no actual product and then compensates its distributors or consultants based on the disbursement of revenues from such recruitment fees, there is likely a huge problem with the company. If you are being asked to buy large quantities of nonreturnable inventory (front loading) there could be a big problem. If the products you are asked to market are sold at an exorbitant price that the market place could never bear, absent the alleged opportunity, there could be a real problem with the company you are considering.

Other factors from a survey of the cases suggest that a legitimate business will have a buy back policy that allows the unhappy distributor to sell back his/her unused marketable (unexpired) inventory for at least 90% of its cost and the compensation plan will feature a program designed to permit the distributor to be financially rewarded for retail sales.

So how does your company fair when put to the test? I asked these questions of Mona Vie before jumping in as a distributor four years ago and concluded Mona Vie was not only legitimate but a very desirable company with which to be associated. Let's fast forward 4 years and see how it fares.

First, does it rely on the recruitment of people or the sale of products? Though a $39.95 fee is charged for a new distributor, that fee can reasonably be explained as the cost to the company of a new distributor getting started. More importantly, existing distributors are paid nothing for recruiting distributors, absent the flow of product. Therefore, this fundamental characteristic of a pyramid is nowhere to be found in the Mona Vie model.

Secondly, are products being offered that have a reasonable market value? With the myriad of weight management products on the market, that is easily investigated. Based on Fresh Direct, the Bureau of Labor Statistics and Forbes, the following price comparison on the RVL product line satisfies pricing concerns vis a vis the market place:

RVL Premier Weight Solution

Mona Vie's other products include the antioxidant juice blends and Mona Vie energy drinks. In light of the unique ingredients and characteristics of those products, there are simply no comparables on the market with which to compare. For example, the EMV energy drink is sweetened with a product called palatinose--a long chain carbohydrate that metabolizes slowly preventing spikes and crashes associated with several other products on the market. Since Mona Vie has an exclusive on palatinose, and since its exotic fruits are not found in any other product on the market, there can be no comparable. But at just under three dollars a can, and with over 42 million cans sold, no one can realistically dispute that this product is within a reasonable market range. Similarly, the MMun product is fueled by a product known as Wellmune, exclusively provided to Mona Vie from a company called Biothera, thereby preventing a marketplace comparison. And as to all the juice products in Mona Vie's line, Mona Vie has secured patents on its process, ensuring cell penetration and signifying a unique addition to the marketplace which no other product can achieve. Hence, Mona Vie offers products priced appropriately for the marketplace.

Mona Vie has invested and continues to invest millions of dollars in research and science to support its product line and these double blind, placebo controlled studies back up the unique claims Mona Vie can make about its products. Moreover, many if not most of the studies have been presented in peer reviewed scientific journals and the studies have been presented at major science conventions across the country. Mona Vie also has a satisfaction guaranteed policy spelled out in its policies and procedures.

As for return policies, Mona Vie has two such policies, one for existing distributors and another for distributors who are electing to terminate their distributorship. Both can be found in addendum B to the Policies and Procedures and both permit the return of marketable inventory for 90% of its price within a reasonable time frame.

As for retail sales, arguably Mona Vie's most lucrative portion of the pay plan is reserved for retail sales. The program is called the Preferred Customer program and offers distributors an enhanced incentive to sell product to customers at retail.

Is Mona Vie the perfect network marketing company? Certainly not for everyone, but it cannot be reasonably argued that Mona Vie is ...another one of them pyramid schemes.

Mike McCormick

800 Town & Country Boulevard • Suite 500
Houston TX 77024  

Located in CityCentre 

1 (713) 254-0099

Practicing attorney in the field of, among other things, multilevel marketing, and Blue Diamond in the Mona Vie distributor field.

Legitimate Opportunity or Ponzi Scheme?

As opportunities in the business world come our way, it makes sense to evaluate the law and the opportunity against the backdrop of what is and is not a legitimate business opportunity. There is a buzz floating around about a company whose model is at best questionable. If it comes your way, be sure you acquaint yourself with what is and is not a legitimate business opportunity. Please seek your own independent legal advice about this before you jump in.

In the meantime, consider the following:

The Federal Trade Commission (FTC) says that a Ponzi scheme revolves around continuous recruiting where the promoter generally has no product to sell and pays no commissions to investors who recruit new members (differentiated from a Pyramid scheme). The promoter collects payments from a stream of people, promising them all the same high rate of return on a short-term investment. In a typical Ponzi scheme there is no real investment opportunity, and the promoter uses the money from newly recruited members to pay obligations owed to longer-standing members of the program. The theory is that every Ponzi scheme will fail because it cannot expand beyond the earth's population, and when it can no longer recruit new members, most investors find themselves at the bottom and are unable to recoup their losses. The parameter of the earth's population is for illustration purposes only. In reality, a market place parameter based on the size of the up front investment will be reached and at that point the house of cards will most certainly crash. That's why these types of businesses are illegal and if you solicit someone into one, you can be held criminally responsible.

The Securities and Exchange Commission (SEC) describes a Ponzi scheme as an investment fraud that involves the payment of purported returns to existing investors from funds contributed by new investors. In a Ponzi scheme, the promoters solicit new investors by promising to invest funds to opportunities claimed to generate high returns with little or no risk. The promoter usually focuses on attracting new money to make promised payments to earlier-stage investors and to use for personal expenses instead of engaging in legitimate investment activity. The SEC provides the following as attributes of a Ponzi scheme:

  • Typical Hook—Earn high investment returns with little or no risk by simply handing over your money (the investment typically does not exist)
  • Payments/Profits—No recruiting necessary to receive payments (the alleged investment opportunity does not require YOU to recruit anyone to receive payments)
  • Interaction with Original Promoter—Promoter generally acts directly with all participants
  • Source of Payment—comes from money paid by new participants/investors (this is never disclosed to the members)
  • Collapse—May be relatively slow if existing participants reinvest money

Legitimate MLMs are different from Ponzi and Pyramid schemes because they have a real product to sell, and more importantly, MLMs actually sell their product to the general public (as opposed to its own members) without requiring the general public customers to pay anything extra or join the MLM system. MLMs also pay commissions for real retail sales as opposed to recruiting new members (it can actually continue to exist if new members do not join).

Zeekler—How it works (from ZeekRewards'website)

Rather than retyping the information, here is the link to the How it Works page on ZeekRewards' website:

In short, here is ZeekRewards'business model in its own words: Each day Zeek affiliates (members) purchase VIP Bids and give them away or sell them to customers, which earns the member points. Then all the member has to do is log into the back office and place a free ad for (the penny auction site). At the end of each day, Zeek tallies the net profits and determines the profit share award, which it posts in the retail profit pool account, which gives the members a monetary reward.

Ponzi Scheme?

Both myself and the lawyers in my office have concluded that this is likely a Ponzi scheme, though, as is always the case, some courts might take a more generous view.

Comparing Zeek's business model to the FTC and SEC definitions of a Ponzi scheme, it appears that there is no real investment opportunity because the money paid out to members is taken from money put in by new members. When Zeek initiated its business, it guaranteed a 125% return on investment on all money invested into the company, and all a member had to do was submit a daily classified ad (which was pre-determined by Zeek).

Since hiring its legal team due to Ponzi scheme scrutiny, Zeek has tried to alter their business model to say that the commissions paid are actually derived from profits earned on the penny auction site. However, in Zeek's leadership call on June 25, 2012, Zeek's COO, Dawn Wright-Olivares, made several comments that if no new money is put in by Zeek affiliates, then no commissions will be paid out (to existing affiliates). This admission lends credence to the fact that Zeek is a Ponzi scheme because no one will receive a return on their investment if new affiliates do not sign up with Zeek.

I listened to an interview with Dawn Wright-Olivares on an MLM blog in which she made this admission along with several other statements trying to explain the business model of Zeek. The blog, analyzed the interview and came to the conclusion that Zeek is likely a Ponzi Scheme.

Has Zeek made changes to its model sufficient to overcome Ponzi Scheme scrutiny? This is a fluid process and changes are made regularly. Zeek has now hired experienced MLM attorneys to navigate these issues and hopefully they will overcome these challenges. In the meantime, before jumping into Zeek or any other penny auction business, seek competent legal advice on such matters and plow ahead with caution. Thousands of men and women have fought and died for our freedom to engage in legitimate capitalism. It's difficult to be an entrepreneur from behind bars!

I hope this helps each of you if approached by others seeking to recruit you to the next great thing.

Mike McCormick

800 Town & Country Boulevard • Suite 500
Houston TX 77024  

Located in CityCentre 

1 (713) 254-0099