Binary Compensation Plans

Double Trouble!!


Spencer M. Reese1


Introduction
What is a Binary Compensation Plan?
The Legal Framework Governing Binary Compensation Plans
The Bottom Line
Endnotes

Binary compensation plans have become the darling of startup multilevel marketing
companies. From the distributors’ standpoint, binaries have a lot of sizzle. They are
relatively simple to understand and offer fast-paced growth opportunities. Companies find
them attractive for the same reasons. In addition, several companies utilizing binary plans
have recently entered the market and generated eye-popping sales and profits. This, of
course, has led to an influx of programs modeled after the highly successful plans.

Unfortunately, not all that glitters is gold. In the last 24 months, the multilevel
marketing industry has seen a dramatic increase in regulatory actions. These actions
have come in the form of joint efforts between the states and the Federal Trade
Commission (notably Project TeleSweep in 1995 and Project Missed Fortune in 1996), as
well as numerous individual and joint state actions. Companies utilizing binary
compensation plans have been hit particularly hard in these actions. As a result, those
companies that have been hit have had stringent limitations placed on their programs.
These limitations oftentimes strike at the heart of their method of doing business and
require significant changes to their marketing approach.(2)

So what is the problem with binary plans? Why have states attacked them with so
much more vigor than companies utilizing other compensation plans? I have many people
ask me if binaries are “legal.” The short answer is the proverbial and oh-so-lawyerly “Yes –
but” response. Yes, they can be designed to operate legally, but in addition to proper
design, companies must properly implement their programs so that they accurately follow
the design. Several relatively new MLMs that entered the industry using binary plans
simply failed to adhere to the legal principals governing the MLM industry in implementing
their plans. Unfortunately, these companies were quite visible, and consequently there
have been highly publicized actions brought against them. Naturally flowing from these
actions is a great deal of bad press that has tarnished the image of binary plans, including
those that are operating legitimately.

Fortunately, solutions are available, but they require companies to carefully analyze
their programs and make some painstaking changes. This article will discuss several key
areas of law applicable to the multilevel marketing industry and apply these legal principles
to the operation of binary compensation plans. In conducting the analysis, it will focus on
a common binary format utilized by companies selling prepaid long distance telephone
cards. Although not all binary plans follow this format, it is a blueprint that has been
frequently copied by new companies entering the marketplace. Moreover, since
companies selling prepaid telephone cards utilizing this format have been among the
hardest hit by regulatory agencies, these plans provide an ideal case study for legal
analysis. Bear in mind however, that the principles apply to all binary programs regardless
of the product or service that is being offered. The plans used by the prepaid telephone
card companies are simply an illustration of problems that can arise in any program.

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What is a Binary Compensation Plan?

A binary plan is a multilevel marketing compensation plan which allows distributors
to have only two front-line distributors. If a distributor sponsors more than two distributors,
the excess are placed at levels below the sponsoring distributor’s front-line. This
“spillover” is one of the most attractive features to new distributors since they need only
sponsor two distributors to participate in the compensation plan. The primary limitation is
that distributors must “balance” their two downline legs to receive commissions. Balancing
legs typically requires that the number of sales from one downline leg constitute no more
than a specified percentage of the distributor’s total sales.

1. Multiple Business Centers

A unique attribute of binary plans is that distributors are allowed to operate multiple
positions, or “business centers,” under the umbrella of a single distributorship. A business
center is simply a position within one’s own marketing organization. When a distributor
enrolls, he is automatically assigned his first business center. The distributor may then
purchase additional business centers and place the centers at strategic locations within
his downline organization. The typical cost for each business center is $100.00, which
gets the distributor the position and an inventory of phone cards to service the center.
Each business center must independently meet their two person enrollment requirements.
Historically, Distributors have been allowed to purchase up to seven business centers, but
the current trend is to allow only three centers.

2. The Three Phase Program

A common component to binary plans is a three phase sales and compensation
cycle. In the first phase, a distributor joins by paying $100.00 for an initial inventory of
phone cards and a business center. Because the distributor receives an initial inventory
of phone cards for this payment, it constitutes a “sale” which is commissionable to his
upline. The distributor then enrolls two new business centers for $100.00 each. One
business center is placed on his right downline leg and the other on the left leg. After 12
business centers have been enrolled (i.e., 12 “sales”), the distributor is entitled to a
$100.00 commission (assuming the proper balance is achieved between legs). After a
total of 50 sales, the distributor is entitled to a $500.00 commission. Fifty sales completes
the first phase of the compensation plan.

Upon completing the first phase, a distributor can re-enter phase one by paying
another $100.00 and receiving additional inventory. This re-entry again qualifies as a
commissionable sale to the distributor’s upline. Rather than stay in phase one, the
distributor may elect to enter phase two by paying $300.00, which may be automatically
deducted from the distributor’s phase one $500.00 commission. This $300.00 sale gets
the distributor additional inventory and promotes him to phase two. Under phase two, the
distributor receives a $500.00 commission after 12 sales, and a $2,000.00 commission
after 50 sales. This completes phase two.

Phase three requires the distributor to pay $1,000.00 for additional inventory. This
is again deducted from his $2,000.00 phase two commission. In phase three, the
distributor receives a $2,000.00 commission after 12 sales and a $7,000.00 commission
after 50 sales. After completing phase three, the distributor again re-enters phase three,
with the required $1,000.00 inventory purchase being deducted from his previous
commission. In addition to phase three income, the programs usually allow distributors to
participate in phases one and two concurrently with phase three.

3. The Products

Multilevel pre-paid telephone card companies have adopted the binary plan as the
program of choice. Until recently, most programs were strikingly similar to one another,
right down to the prices charged for the products. Upon each entry into phase one of a
program, distributors received an inventory of phone cards with a total of 60 minutes of
long distance time for their initial $100.00 payment. Upon cycling into phase two,
companies charged $300.00 for phone cards totaling 300 minutes of time. The $1,000.00
charge as a distributor entered phase three netted 960 minutes of phone card time.
Recently, companies have begun lowering their prices as they have recognized the
necessity of becoming more price competitive.

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The Legal Framework Governing Binary Compensation Plans

Amid the confusion and concern over the legality of binary plans, many people have
lost sight of the fact that binary plans operate under the same laws that govern other
multilevel compensation plans. There is no law stating that operation of a binary
compensation plan constitutes a consumer fraud, or a company using a binary plan is a
pyramid. Thus, so long as the implementation of a binary plan complies with the laws
governing the operation of multilevel business, it will be legal. However, because of their
structure, binary plans have unique challenges to implementing their programs within that
legal framework.

Four principal areas of law governing the multilevel marketing industry are: 1) anti-pyramid laws; 2) business opportunity laws; 3) securities laws; and 4) lottery laws. A
comprehensive discussion of each of these areas of law is properly the subject matter of
its own article. However, a brief overview will assist us in examining which aspects of a
binary plan present the greatest risk of running into legal problems.

1. Anti-Pyramid Laws

Pyramids are illegal in every state as well as under federal law. It would be
convenient if these laws were uniform and cohesive; unfortunately, the industry is not so
lucky. The application and enforcement of the laws varies from state to state, so the best
we can do in the limited space of this article is generalize about what actions will cause
a company to violate pyramid laws.

The fundamental question that must be asked in every pyramid analysis is “What
must a distributor do to earn a commission?” If a company pays its distributors based on
the recruitment of other distributors (headhunting) rather than for legitimate sales to end
consumers, it is a pyramid. This rule appears straightforward, but its application can be
difficult because most pyramid operators are not so foolish as to blatantly pay a
commission based on recruitment of other participants. Rather, they typically disguise the
program as a legitimate multilevel marketing business by offering a product or service that
the distributors can sell.

The question then becomes, “How do you determine if a company is simply offering
a product or service that is merely a facade for a pyramid?” In a nutshell, a legitimate
program will incorporate and enforce policies which effectively deter and prevent inventory
loading. But on this point, industry and law enforcement officials diverge on what
constitutes “inventory loading,” and what measures are appropriate to deter it. Ever since
the Federal Trade Commission’s decision in The Matter of Amway Corporation, Inc.,(3)
industry has taken the position that so long as a company is willing to repurchase
unwanted inventory at a rate of at least 90% of the net cost to the distributor for those
individuals who elect to cancel their participation in a program, the company is not
engaged in inventory loading. Law enforcement officials have, however, seized upon
dicta(4) contained in the recent Ninth Circuit Court of Appeals decision in Webster v.
Omnitrition International, Inc.(5) which states that “Inventory loading” occurs when
distributors make the minimum required purchases to receive recruitment-based bonuses
without reselling the products to consumers.(6)

The focus of regulators is therefore on retail sales of product. If the products or
services are being purchased and used primarily by individuals who are participating in
the compensation plan, or who are purchasing in order to qualify for compensation, they
contend that the sale is not a true retail sale. Following this line of reasoning, they have
attacked programs (not just binary plans) as pyramids. If, on the other hand, distributors
are retailing the goods or services to persons who are not involved in, or trying to become
involved in, the compensation plan, regulators consider a legitimate retail sale exists.
Industry takes strong exception to this approach because it dramatically restricts
companies’ ability to pay commissions on products and services that are consumed by its
distributors. Although this debate between industry and law enforcement is not settled, we
are clearly seeing a trend in states with aggressive attorney generals directed at ensuring
companies require their distributors to incorporate retail sales quotas in their programs.(7)

The degree to which true retail sales are occurring within a company’s program is
difficult to monitor. Since actual distributor surveys presenting data on retail sales levels
are generally not available at the investigatory stage, there are several factors which
regulatory officials consider evidence that a program is not offering a true retail sales
opportunity. Principal among these are: 1) excessive inventory requirements; 2)
overpriced products; 3) a primary emphasis on recruiting rather than product sales.

a) Excessive Inventory Requirements

A court or regulatory body will look skeptically on programs that generate sales
through excessive inventory requirements. These purchases, whether a front-end load or
a monthly maintenance requirement, will be viewed simply as a participation fee from
which commissions are paid. Of course, it is common for multilevel companies to require
monthly production quotas of their sales force, so the mere fact that a maintenance
requirement exists does not prove that no true retail opportunity exists. The amount
distributors must spend must also be taken into consideration. Programs with high
mandatory purchase requirements will be scrutinized much more closely than programs
with modest requirements. Although there is no magic number as to what constitutes a
monthly maintenance quota that is too high, a strong dose of common sense is in order.
Clearly, the danger of inventory loading is dramatically decreased if production quotas are
$75.00 per month rather than $1,000.00 per month.

Binary plans are closely watched by law enforcement officials because they require
significant investment in inventory as distributors progress through the phases of the
program. For example, if a distributor is participating concurrently in phases I, II, and III
of a program, the cost of his inventory may easily be $1,400.00 each time he cycles
through the three phases. It is unlikely that a distributor will be able to use or resell
$1,400.00 worth of product before repeating each cycle and is again forced to purchase
yet another $1,400.00 in merchandise. This danger is magnified even further if the
distributor operates multiple business centers. If a person has seven business centers in
phase three of a cycle, he will have $7,000.00 worth of inventory for that phase alone (if
he has cycled through and re-entered phases one and two, he will have more inventory
than that). Clearly, the danger that a distributor will be loaded with unsaleable
merchandise is significant under this scenario.

b) Uncompetitively Priced Products

Because retail sales are so important in the eyes of regulators, multilevel
companies must ensure their products are priced competitively. Distributors simply will not
be able to retail goods and services that are too expensive. Regulators recognize this,
and therefore those programs whose products and services are excessively priced will be
subject to greater regulatory scrutiny. Indeed, if a product is priced so high that no
reasonable person would purchase it, it is evident that the only reason distributors are
buying the product is to participate in the company’s compensation plan. In this case,
regulators and courts will consider the product simply a disguised recruiting fee.

Many companies operating binary plans have found themselves under the
regulatory microscope partially as a result of excessively priced products. In the pre-paid
phone card example, the price per minute for phone time runs from 96 per minute to
$1.60 per minute. This is dramatically higher than the price of phone cards offered
through retail channels, which typically range from 20 to 50 per minute. Based on the
difference in price between the retail cards and those offered through binary plans, there
is no reason for a consumer to purchase a phone card through a binary plan other than
to participate in the compensation plan. Thus, the likelihood of these goods being retailed
by distributors is slim to none.

Because excessive prices precluded any meaningful retail sales opportunities,
distributors often simply gave away excess cards as a means of garnering the interest of
prospects. Whether or not this was done at the urging of company officials will be
disputed. Regardless of the source, however, the practice cast a negative shadow on
those programs that engaged in it. Regulators take the view that if a product must be
given away, it has little or no legitimate economic value. Absent any inherent economic
value attached to the product, the price paid by distributors is simply a masked head-hunting fee, and the program will collapse without a constant supply of new recruits.

c) Primary Emphasis on Recruiting Rather than Product Sales

If a program primarily focuses on recruiting new distributors rather than sales of
products or services, law enforcement officials will attack it as a head-hunting operation.
Legitimate programs are driven by the sales of products and services, not by recruitment
of new people. This is not to say that companies should not train distributors in
recruitment techniques, for clearly, recruitment is an essential component to building a
multilevel business. However, companies must strike a balance between emphasizing
recruitment and product sales. On this point, there is no magic formula to determine
whether excessive emphasis is placed on recruitment, as this is a very subjective
determination. Companies should be advised, however, that attorney generals will attend
their meetings incognito, and will literally put a stopwatch to the duration of the product
discussion and the compensation plan discussion. This is oftentimes an unfair practice,
as a compensation plan may be much more difficult to explain than is a product or service,
but it is nonetheless a common practice.

The design of binary plans arguably focus on enrollments rather than sales in two
key ways. The first is classifying the enrollment of a business center as a “sale.” Calling
an enrollment a “sale” is asking for trouble because there is a direct one-to-one correlation
between enrollments and distributors’ commissions. This problem is easily resolved by
requiring distributors to balance the sales volume in each of their legs rather than to
balance the number of enrollments in each leg. If for example a program required
distributors to have at least one-third of their total sales volume in each leg to qualify for
commissions, the direct relationship between enrollments and commissions is diluted.

The second design aspect of binary plans which results in an emphasis on
recruiting over sales arises from the practice of selling multiple business centers. This
format lends itself to the argument that the companies are more interested in head-hunting,
or “selling positions” rather than moving products to end consumers. For example, if a
company allows each distributor to enroll seven business centers, the value to the
company of each distributor who takes the seven center plunge is $700.00 rather than
$100.00. It is true that there is never a “requirement” that a distributor operate more than
one business center. However, if in actual practice distributors are “strongly urged” to
open multiple business centers, law enforcement will consider the emphasis to be on
acquiring bodies for the program rather than product sales to end consumers. Moreover,
the $700.00 initial fee, although “optional” will be attacked as a front-end load or initiation
fee.

2) Business Opportunity Laws

The Federal Trade Commission and many of the states regulate the offering of
business opportunities. Although the F.T.C. and state definitions of a business opportunity
differ, they share a common goal of ensuring that persons who invest significant sums of
money in a business opportunity have the benefit of full disclosure of information
surrounding the opportunity so the investor can evaluate potential risks. Therefore, if
classified as a business opportunity, the promoter must make detailed disclosures about
the program, its finances, the history of the business, the personal history of the
promoters, the identities of other distributors, and other detailed information. In some
states this information must simply be filed with the state, whereas other states require the
promoter to provide each prospective distributor with a copy of the disclosure statement
ten days before the distributor can be enrolled in the program. In addition, some states
require the promoter to secure a surety bond before doing business in the state. These
onerous requirements will suffocate any multilevel marketing opportunity.

The drafters of business opportunity statutes recognize that not every investment
of money constitutes a significant sum which requires regulatory intervention. The
business opportunity laws therefore exempt programs which require an “initial investment”
below a specified dollar figure from the definition of a business opportunity. These
thresholds limits differ between states, and range from $200.00 to $500.00. The “initial
investment” is most often defined as all payments that are required within the first six
months of entering a program, or the total of all payments that are required pursuant to the
terms of a contract. Required payments for sales aids and training materials are usually
not applied to the initial investment if they are sold to distributors at the company’s cost.

Prudent multilevel companies seek to avoid being classified as business
opportunities by keeping required purchases below the initial investment threshold limits.
Close analysis of many MLM programs reveals that although distributors must meet
monthly quotas, these quotas can usually be satisfied by purchases made by their direct
retail customers. In this way, companies can claim that these purchases are optional, and
therefore are not properly allocated to the initial investment column because the purchases
are not “required.”

This position, while within the letter of the law, will not necessarily stop an attorney
general from attacking a plan. They will take the position that although technically
“optional,” in reality the program works because the overwhelming majority of distributors
personally purchase their own monthly quotas rather than meet them through the
purchases of their personal direct customers. They will then tally distributors’ monthly
purchases to determine if the applicable initial investment threshold has been satisfied.
Under this approach, a modest monthly quota can result in the institution of an
investigation or enforcement action. While this position does not follow the letter of the
law, it is nevertheless largely within the regulators’ prerogative to institute an investigation
or action. To date, states have had success in negotiating settlements based on this
argument. Unfortunately, very few companies have been inclined to go so far as to allow
a court to decide whether the attorney generals’ position is proper.(8)

Programs that encourage distributors to purchase multiple business centers are
always suspect as business opportunities in the eyes of regulators. If the emphasis is on
purchasing seven centers at $100.00 each, the initial investment will be $700.00, which
is over the $500.00 F.T.C. threshold as well as that found in most states. Even if a
company only allows three business centers, a $300.00 investment will surpass the
threshold in several states. Regardless that these purchases are optional, if the company
or its field force place an emphasis on the purchase of multiple centers, regulators will
argue that these purchases are in reality required initial investments. Moreover,
mandatory inventory purchases will also be added to the total. Thus, as a distributor
cycles into subsequent phases of a plan and is automatically charged for inventory, it is
impossible to stay below the $500.00 threshold under the attorney generals’ interpretation.

3) Securities Laws

Multilevel marketing programs are often attacked as offering a type of security
known as an “investment contract.” These securities are subject to the registration and
disclosure requirements of the Securities Act of 1933 and the Securities and Exchange Act
of 1934, as well as a number of similar state securities laws. Selling an unregistered
investment contract security is a serious issue for multilevel companies, for there are
significant criminal and civil penalties that can be imposed.

Neither the Securities Act of 1933 nor the Securities and Exchange Act of 1934
define an investment contract. Rather, the definition has been supplied by a series of
United States Supreme Court and Circuit Court of Appeals decisions. These decisions
have established a three part test to determine if an investment contract exists. These
elements include: 1) an investment of money; 2) in a common enterprise; and 3) the
investor is lead to anticipate profits primarily from the efforts of the promoter or some third
party. Of these three elements, courts and regulators focus most keenly on the third
element. While this is not a technically correct application of the law, you are probably
getting the idea by now that in the real world, the law is not always applied in a technically
correct fashion, particularly at the administrative investigation stage.

While all multilevel companies must be careful to avoid promoting their programs
as securities, binary plans must be especially cautious due to the inherently rapid spillover
rate which results from each distributor having only two front-line positions. Unfortunately,
since the spillover is one of the most attractive features to binary plans from a marketing
standpoint, companies have been anything but bashful about trumpeting the downline
building power of the system. A very common field pitch is “All you have to do is get your
two and you’re done!”

This is precisely the pitch which courts and securities regulators have a problem
with. The message is that all a distributor need do is enroll two people. The rest is done
by the system, either through the efforts of the distributor’s upline or the two whom the
distributor enrolls. In any event, the managerial efforts which a distributor must put forth
to be successful are minimal, and therefore the income stream is largely a passive
investment because it is generated primarily from the efforts of others.

To avoid this pitfall, distributors must engage in true managerial activities to build
their businesses and promote sales. Most companies have a policy that requires
distributors to continue to train, supervise, and motivate their downline, as well as ongoing
sales requirements. These policies should be taken seriously as they impose ongoing
managerial requirements on distributors so that their income is not primarily dependent on
the efforts of others. Under no circumstances, however, should a program be promoted
as “get your two and your done.”

The next obvious question is “how much downline management is required to
satisfy the law?” Unfortunately, there is no bright-line test to determine how much is
enough. However, we do know that promoting a program through reliance on spillover,
without personal involvement by upline distributors, will dramatically increase a company’s
securities exposure. Ultimately, the question of “how much is enough?” will be answered
on a case-by-case basis as companies negotiate with law enforcement officials following
the institution of regulatory action.

4) Lottery Laws

Lottery issues always follow on the heels of securities issues. A lottery exists when:
1) an individual pays consideration (i.e., money); 2) to receive a prize; and 3) the prize is
awarded based on the element of chance rather than on the skill or effort of the participant.
In a multilevel marketing analysis, regulators will argue an enrollment fee or mandatory
product purchase satisfies the first element of the test, and that the “prize” is the
commissions from downline purchases. They will further argue the element of chance
(luck) exists if a distributor’s downline can be built with little or no effort on her part.

Because binary plans place a heavy emphasis on the spillover effect of their
programs, and because they have been promoted by companies and distributors as
“simply get your two and you’re done,” the element of chance can play a significant role
in the success of distributors. If a distributor need only get two enrollees, law enforcement
officials will argue they must be relying heavily on luck that a productive downline will be
developed below them because the distributors are putting forth only minimal effort to
personally contribute to its success.

Companies must remove the element of chance from their programs to avoid falling
prey to lottery laws. As with the securities analysis, this is done by requiring participants
to engage in bona fide management responsibilities and ongoing sales and marketing
efforts. Again, how much is enough will be determined on a case-by-case basis as
individual programs are analyzed.

In addition, the mandatory purchase of product to activate a business center and
to re-enter a phase provides ample support for the position that the consideration element
of the lottery test is satisfied. By removing all mandatory purchase requirements from a
program, companies will be able to argue that the consideration element is not satisfied.

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The Bottom Line

Binary plans definitely have their place among multilevel compensation plans. If
operated properly, they are a classic example of a “people helping people” multilevel
program. There is no question that they can be designed and operated legally. However,
companies using the plans have had more than their fair share of law enforcement actions
brought against them. But the battles that have been fought are teaching the industry a
lesson, and industry is listening. We are seeing companies that have been attacked by
regulators changing their plans to diminish the potential for inventory loading and to
increase the ability of distributors to engage in bona fide retail sales of merchandise.
Similarly, new companies that adopt binary plans are not all following the standard format
of the prepaid phone card companies that have run into so much resistance from
regulators. The current trend is to allow only three business centers rather than seven,
to balance legs based on sales volume rather than enrollments of new business centers,
and to require distributors to engage in retail sales activities before allowing them to collect
commissions or cycle into subsequent commission phases.

Is it too little too late? Certainly binary plans have been tainted in the eyes of many
regulators, and they are now viewed skeptically. While regulators’ skepticism does not
make a plan illegal, it does raise the probability that companies using binary plans will be
investigated. The negative press that follows a regulatory investigation is sufficient to
cause serious problems for a company. To address this problem, it is up to the companies
using binary plans to teach regulators how they differ from plans that have been attacked
in the past. Those companies that cling to the old ways of the binary plan may prosper in
the short term. However, given the recent barrage of regulatory action we have seen
against companies using this format, it is a safe bet that those who do not voluntarily
change will have changes forced upon them through regulatory action.

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Endnotes

1. Spencer Reese is a partner in the law firm of Reese, Poyfair, Richards PLLC. He is a graduate of the Washington University School of law and is a member of the Idaho, Missouri and Colorado bars. He was formerly in-house counsel for Melaleuca, Inc., a multilevel marketing company with sales in excess of $260
million. Mr. Reese’s current practice includes representing and advising multilevel marketing
companies on all aspects of their business, including consumer protection issues, advertising law,
litigation, contracts, marketing plan design, regulatory compliance, trademark law, FDA law, policy development and distributor compliance. Visit the firm’s website at
www.mlmlaw.com/dev. Mr. Reese can be contacted at (208) 522-2600.

2. Some well recognized companies appear on the list of those attacked by regulatory agencies. On
February 4, 1997 the Arizona Attorney General entered into a settlement agreement with Tele-Sales, Inc.
wherein the company was required to pay a $25,000 settlement fee. More importantly, however, the
Arizona A.G. also sent letters to the company’s top distributors in the state, accusing them of violating
the state’s pyramid law. The letters demanded that the distributors enter into a settlement agreement
and that each individual distributor pay a $25,000.00 fine, otherwise, the A.G. would sue them
individually. On February 28, 1997, the Alameda County Prosecutor and the California Attorney General
entered the offices of Destiny Telecom and seized business records to be used in actions against the
company. The same day, they filed a $20,000,000.00 civil suit against the company, alleging it was
promoting an illegal pyramid. Two weeks after the suit was filed, Destiny settled the case for $1.6
million. In 1996, Strategic Telecom Systems, Inc. was investigated by the states of Pennsylvania and
Florida, which resulted in fines against the company, and the imposition of sales requirements which
required the company to dramatically change the way it conducted and promoted its business.

3. 93 F.T.C. 618 (1979)

4. “Dicta” is a legal term that refers to the opinion of the judge who authors a judicial decision, but which
does not constitute a statement of law.

5. 79 F.3d 776 (1996)

6. 79 F.3d at 783, note 3.

7. Despite the position of some regulators that commissions are not properly paid based on products
or services consumed by distributors, there is a movement among industry to pass legislation reversing
this position. Texas and Oklahoma have passed such legislation, and Direct Selling Association is
working on introducing similar legislation in other states. 21 Okl.St. 1072; Tex. Bus. & Com. Code
17.461.

8. One company, Travel Max, recently did take this issue to court in Kentucky. The state requested that
the court impose a temporary restraining order on Travel Max operations based on the arguments that
Travel Max was operating a pyramid and an unregistered business opportunity. The judge denied the
state’s motion for a TRO on the business opportunity claim because distributors’ purchases, other than
an initial $25.00 sales kit, were optional.

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