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Monthly Archive for: ‘May, 2013’

No MLM Cowboys Allowed in Montana!

For years Montana has required that multilevel distribution companies (MLMs) submit an annual filing with the Securities Division of the Montana State Auditor’s office. The filing was a “notice” filing that provided Montana with the information it felt it needed to identify persons and entities operating MLM businesses in Montana, and further gave the state the tools it believed necessary to investigate MLMs that it believed were problematic.

This May Montana revised its filing statute.  It is no longer just a “notice” filing. Rather, Montana law now provides that it is “unlawful” to conduct an MLM business in Montana unless the business files an annual registration. However, there is one very notable exception to the new law; businesses that are members of the Direct Selling Association (DSA) are exempt from registering.

The new statute provides that the Securities Department will provide a form that shall be used for filing. I spoke with Lynn Egan, Montana’s Deputy Commissioner of Securities, and she indicated that they were working on a form that should be available in approximately the middle of June. Once it is available, the state will provide it to those companies that have filed their annual notices. In the meantime, Ms. Egan said MLM companies should continue to use the existing form (Form MLD-1).

All direct selling companies should take this registration requirement to heart. In the past Montana has been serious about its notice filing obligations. The new law has more teeth, so all direct sellers that utilize a multilevel compensation plan should ensure to submit their annual registration to Montana.

Fortune HiTech is Successful in Changing Venue – so What’s the Big Deal?

Various bloggers and analysts were abuzz last week reporting that Fortune HiTech Marketing (“FHTM”), which is being sued as an illegal pyramid scheme by the Federal Trade Commission and the states of North Carolina, Illinois, and Kentucky, was successful in its motion to have the case moved from the U.S. District Court in Illinois to the U.S. District Court in Kentucky.  This may not seem like a big deal. After all, the case was not dismissed; it was just moved from one federal court to another.  But in this situation it is a big deal, and it’s good for FHTM.

Since 1996 the FTC has claimed that MLM compensation must be derived from sales to retail customers rather than sales to the company’s own distributors. That position stems from a case decided by the Ninth Circuit Court of Appeals called Webster vs. Omnitrition. (Note that the FTC argues this position before the courts, but when talking to industry stake-holders, it does not assert such a firm position).  In response to the Omnitrition decision, some states have enacted MLM laws that make it clear that an MLM company’s sales to its own distributors, and the payment of commissions on those sales, can indeed be legitimate sales to end-users.

Illinois is not one of the states that specifically identifies sales to an MLM company’s sales force as a proper basis for paying compensation.  However, Kentucky law does specifically recognize that sales to a company’s distributors can be a proper source for paying compensation, and is contrary to the FTC’s interpretation of the Omnitrition case. This contrast in state law makes Kentucky a much more favorable forum for FHTM than Illinois.

The FTC will certainly argue that no state law applies in its case against FHTM.  Rather, it will claim that prior decisions rendered by the Federal courts govern. The Commission must take this position because the foundation of its go-to expert witness’ opinion relies on the position that all sales to a company’s own sales force do not qualify as bona fide product sales to end-users.  But now that the case is in Kentucky, even though it is in a Federal Court rather than a Kentucky State Court, the Court may be more receptive to an argument supported by Kentucky law that the company’s sales to its own sales force can indeed be classified as bona fide end-user sales and not a disguised head-hunting or participation fee.  If the Court does take this approach, either wholly or in part, it will undermine the foundation of the FTC’s expert witness’ analysis and make it more difficult for the FTC to prove its case.

Consequently, the order granting FHTM’s change of venue request may have an impact that is far more significant than simply shuffling the case from one federal court to another. An interesting point is that neither the briefs filed by the FTC nor by FHTM point out the impact of Kentucky law.  They fail to do so because whether one state’s law is better than another for a party is not a proper consideration in a motion to change venue, so the court would not have considered it had the issue been raised.  But rest assured – both sides recognized the significance of moving the case to Kentucky.