Alert #227: 6/3/2014

BurnLounge’s Loss is Industry’s Gain

9th Circuit Rethinks Webster v. Omnitrition

Inside Wake Up Now

Objective, Controversial Review Now Posted

9th Circuit Affirms, BurnLounge is a Pyramid Scheme – However… 

… it’s what they defined as not being indicative of a pyramid scheme that is most interesting, and reason for celebration.

Back in 1994 a couple of distributors filed a class action lawsuit against Omnitrition claiming they were an illegal pyramid scheme. Omnitrition won by summary judgement, meaning the court felt there was such little chance the plaintiff’s could prevail there was no need to waste the court’s time. The plaintiff’s appealed to the 9th Circuit Court and won. However, unlike how many MLM critics like to portray this victory, all it did was overturn the lower court’s summary judgement and send it back for trail – it did not find Omnitrition guilty of operating a pyramid scheme, evidenced by the fact that Omnitrition, now 20 years later, is still in business. There was eventually a private settlement, and thus there was never a trial.

But here’s where it got sticky. In the 9th Circuit’s decision they didn’t simply declare the summary judgement overturned, they included what’s called dicta. That is, extra commentary. In this extraneous text it was declared that only those products retailed to non-participants in the income opportunity should be commissioned. That is, reps should not be considered “end user” customers, thus those products personally consumed by reps should not be commissioned. In spite of the fact that dicta is defined as “Opinions of a judge that do not embody the resolution or determination of the specific case before the court. Expressions in a court’s opinion that go beyond the facts before the court and therefore are individual views of the author of the opinion and not binding in subsequent cases as legal precedent”[1], MLM critics, and future plaintiffs in cases against MLM companies, absolutely adored this supposed “legal precedent” that “outlawed” paying commissions on distributor’s personally consumed product.

It appears the 9th Circuit Court has changed their mind.

In their declaration of affirmation[2] that BurnLounge was an illegal pyramid scheme, under the section where they discuss the meaning of “ultimate user” they state: “In Koscot, the FTC found a cosmetics MLM business was a pyramid scheme because it focused on recruiting new participants, rather than encouraging retail sales to consumers, and new participants had to buy large amounts of inventory, ostensibly for resale. When participants in Koscot bought inventory, they could have used some of it personally, arguably making them ‘ultimate users.’ In Amway, though some internal consumption of inventory was common, Amway was not found to be an illegal pyramid scheme.” In other words, not only are they now completely omitting the concept of not counting any personally consumed products from the legality equation, they are basically describing two cases where one company didn’t have enough of it to be legal (Koscot), where as another (Amway) did! Once again, much like the FTC’s guidance letter to the DSA in 2004[3], they are focusing on the motive for buying the products, not who buys it. In fact, they even quoted from this FTC letter where they stated: “Much has been made of the personal, or internal, consumption issue in recent years. In fact, the amount of internal consumption in any multi-level compensation business does not determine whether or not the FTC will consider the plan a pyramid scheme. The critical question for the FTC is whether the revenues that primarily support the commissions paid to all participants are generated from purchases of goods and services that are not simply incidental to the purchase of the right to participate in a money-making venture.”

Perhaps now the infamous language within 9th Circuit Court’s Webster v. Omnitrition decision that forbade commissioning products consumed by distributors can go where it should have gone a long, long time ago. Away.




Wake Up Now Review 

Unlike my previous Empower Network review, which was 51 pages and took almost six months, this one was only 37 pages and took about six weeks. One of the major differences is that Empower Network wouldn’t stop disclosing tons of internal data, and willingly allowed me to grill them for over six hours of interviews. Other than a couple of helpful links about their comp plan sent by their VP of Sales, Wake Up Now (WUN) has refused all requests to participate in my investigation.

The last time this happened was back in 2002 when Prepaid Legal (now LegalShield) refused to assist me in my efforts to get my facts straight. After I published the review I received a letter from their attorney suggesting that I should “get my facts straight”. I asked for a list of specific facts I didn’t get straight, which I would have gladly gotten straight. Not only did I never hear from them again, over the next six months most of the aspects I criticized were corrected or improved.

I said after my Empower Network review that is was the last one I was going to write, for free. EN received literally several thousand dollars worth of compliance consulting as a result of that review, at no charge. Since then I’ve been hired by companies who’ve asked that I turn my magnifying glass on them, but the WUN review was the first where a company, or in this case a group of companies, hired me to do a review of a competitor. I informed them that there was no guarantee the review would be negative, and that I would not deliberately slant it that way. I was instructed to “call it like you see it”. And that’s exactly what I did.

You can read the review here:

Since the review did end up being generally negative I’ve been accused for being a “hired gun”, and manufacturing a negative review just to suit the agenda of my clients. However, no one has yet to offer a rebuttal to any negative point I made in the review. In fact, WUN supporters have tried their best to divert attention away from the facts, opinions and conclusions I presented, and instead have focused on who the companies are that hired me, and how my same criticisms may apply to them. My response is, what if my clients were Fortune HiTech Marketing, BurnLounge, and Zeek Rewards? While that may certainly be ironic, how does it in any way diminish the veracity of my actual review? Either my criticisms of WUN are accurate and well reasoned, or they are not.

If you feel I did get anything wrong, please specify in the comments section below the article.

Perhaps I’m just rationalizing, but I look at it this way: Attorney’s are hired to write negative reports, called Complaints, all the time. And they, in fact, are hired to deliberately make their reports as negative as possible. Or, as positive as possible if they’re hired by the defendant – even if they don’t personally believe what they are writing. And no one cares, no should they. A prosecuting, or plaintiff’s, attorney is legally, ethically and professionally obligated to aggressively present their case against someone in the most negative, damaging way that is appropriate for the circumstances.  That’s their job. I, on the other hand, was hired to make a case for what ever it was that I found, good or bad, nothing more, nothing less. Even if the review was glowingly positive, I still get paid. That’s why, if I were inclined to deliberately fudge the review one way or the other, it was actually to my advantage to make it positive. I still get my fee, and gain tons of credibility.

My fear is that my WUN review made no one happy. Although I did cite some serious financial and legal concerns, it still may not be negative enough to make those who funded the review happy, but was surely negative enough to make WUN unhappy. So I might have just made everyone unhappy.

Oh well. I called it like I saw it.

New Online Radio Show: MLM After Hours

Check out this great new program sponsored by the MLMIA and co-hosted by Peter Mingles and MLMIA founder Doris Wood. On each one hour show a regular panel of industry authorities (including myself) discuss and debate various hot topics related to our industry. The show is live on the first, third, and fifth (if there is one) Monday of each month, and airs at 7:00 pm PST, 10:00 pm EST. The next show will be June 16th.

Last Monday’s show focused on the “independent contractor” issue, and the question of how much control should a company have over an independent distributor’s business?

Listen here:

To hear past shows:

Please check it out, and tell your friends. Thanks.


Len Clements
Founder & CEO
MarketWave Inc.

Podcast #13: Interview with MLM Attorney Kevin Thompson

Discussion of industry legal actions (Amway, Monavie, Herbalife, Burnlounge), personal consumption and pyramid issues, and non-compete clauses.

Guest: MLM Attorney Kevin Thompson

Host: Len Clements, Founder and CEO of MarketWave, Inc.