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

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
  • 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
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

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

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

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

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

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

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

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

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

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

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!


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

Nancy Tobler: You

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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