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November 1999

 

Legal

Regulatory Commissions 202 Part Two - Spencer Reese

Part One introduced the Federal Trade Commission (FTC) v. Equinox case (currently playing out in the US District Court of Nevada) as an example of government procedures against a Network Marketing company. The FTC claims that the defendants are operating an illegal pyramid scheme and filed a Temporary Restraining Order which we discussed last month.

Equinox is putting up a fight in the courts of law and public opinion. Their Internet press release from September 3 stated:

"FTC efforts to shut down Equinox without a trial have failed. After a hearing in US District Court, Equinox has been allowed to continue business operations, and the Judge has agreed to give Equinox a full trial to present their case. Equinox unequivocally denies the FTC's allegations and expects nothing less than a complete victory."

A search for further information introduced us to Tracy Brierly, Deputy Attorney General, Nevada Bureau of Consumer Protection, who provided a copy of the judge's order.

Upon review of the case, Spencer Reese had the following comments:

"It has become a standard FTC tactic to attack MLM programs by obtaining temporary restraining orders without the company's prior knowledge. The Equinox case is no different-- the company was attacked in a manner that offends fundamental notions of due process. Nevertheless, we in the Networking industry must learn from the clear warnings telegraphed by the court's factual findings and rulings.

"The most important thing to understand is that the court did not limit its review to the Equinox compensation plan as written in company literature. Rather, the court paid particular attention to the evidence presented by the FTC regarding the manner in which Equinox and its distributors implemented the program. The point is that unless you actually implement a program to comply with the law, even the most legally bulletproof plan on paper will offer no protection.

"A second lesson is that high pressure sales tactics combined with high purchase requirements will cause trouble. If you allow distributors to buy their way to a higher position in a compensation plan (which is never a good idea), be ready to present compelling evidence that they are reselling the goods to end consumers and that you have a strong inventory repurchase policy.

"Where does the case go now? Quite frankly, the court found some very damning facts against Equinox, but this is not the end of the story. The court has scheduled a one-month trial for April 2, at which time Equinox will have an opportunity to fully present its case (Equinox was greatly hampered in its case preparation during the preliminary injunction phase because it did not have sufficient time to take depositions and written discovery). If the damaging facts found by the court are true (which is ultimately up to a jury to decide), a settlement would be best for Equinox and other Network Marketing companies, because bad facts lead to bad law. The Ninth Circuit's decision in Webster v. Omnitrition is a perfect example. It has haunted MLMs since the day it was issued-- we don't need any more rulings like that one!

"Although Equinox is still operating, one can imagine it is doing so under extremely difficult circumstances. The company's financial resources may limit its ability to fight (litigation is outrageously expensive and Equinox's assets are largely in the control of the Temporary Receiver). This is exactly the scenario we witnessed in the recent SEC action against International Heritage, Inc. While the company fought a good fight, its business suffered too much and the company had to close the doors. It remains to be seen whether Equinox can weather the damage to its business long enough to have its day in court."

-- TH

Spencer Reese is a partner in the law firm of Grimes & Reese. He is a graduate of the Washington University School of Law and is a member of the Idaho, Missouri and Colorado bars. Grimes & Reese is a supplier-member to the Direct Selling Association and the Professional Association of Network Marketers. Mr. Reese can be contacted at (208) 524-0699, or via e-mail at sreese@nicoh.com. For detailed information, you can review the firm's website: www.mlmlaw.com

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Reprinted with permission from Upline, Title - November 1999, 888-UPLINE-1, http://www.upline.com

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