Sunday, February 2, 2014

Why Is DSA Trying to Destroy Network Marketing Through Denial? (Redemption is still possible!)

Previously, MLM Skeptic has asked a hypothetical question: why does DSA ignore the threat of 'product-based pyramid scheme' to network marketing?   By pushing 3 myths that are not reality, DSA has basically denied there is a problem with network marketing.

While browsing through some documents related to Omnitrition case and self-consumption (aka internal consumption) I found a document that proved DSA's denial is much deeper, and that may lead to total destruction of network marketing as we know it. It's quite alarming... but if they persist in this denial, it is quite possible.

The denial is the threat of Omnitrition case to the current state of network marketing, which is nothing like the way network marketing was back in 1979, when Amway settled with FTC and created the "network marketing industry".

Seal of the United States Court of Appeals for...
Seal of the United States Court of Appeals for the Ninth Circuit. (Photo credit: Wikipedia)
DSA's official position is that everybody should just FORGET that Omnitrition lost the case in the Court of Appeals, Ninth Circuit. It doesn't mean anything, they said.
Omnitrition case was not a final adjudication of the case but instead remanded the case to the trial court for final resolution. The decision was interlocutory in nature, and its dictum cannot be cited as law or even as a statement of generally accepted
opinion.
and self-consumption is perfectly legal.
...compensation received by salespeople for products they themselves buy and use, and those bought and used by other salespeople within their organization, is a legitimate, legal and ethical practice and not evidence of illegal pyramid activity. 
Both interpretations are problematic at best, totally illogical at worst. Let's see why.



Dicta Decisions *are* Important!


DSA claims Omnitrition decision can be ignored because it is dicta, which is not a formal decision, but more of an "incidental" remark. This is a completely erroneous interpretation of the significance of dicta. But first, let us explain what really is dicta.
Obiter dictum (more usually used in the plural, obiter dicta), is Latin for “other things that are said”, that is, a statement in a judgment that is "said in passing". -- wikipedia
For example, when a court rules that it lacks jurisdiction to hear a case or dismisses the case on a technicality, but also offers opinions on the merits of the case, such opinions may constitute obiter dicta. Another way for obiter dicta is when a judge makes a side comment in an opinion to provide context for other parts of the opinion, or makes a thorough exploration of a relevant area of law.

The case about Omnitrition is explained in a separate blog post and will not be repeated. However, the case goes like this, in a very very short summary

  • 1992 Webster, et al, sued Omnitrition in District court. Omnitrition asked for summary judgement
  • 1994 Omnitrition won summary judgement in District court, Webster appealed
  • 1996 Ninth Circuit Court of Appeals hear the appeal about summary judgement, found there are problems with summary judgement, remanded the case back to district court after vacating most of the prior decision

Please note Ninth Circuit Court of Appeals did NOT rule whether Omnitrition was a pyramid scheme or not. Instead, it had analyzed the decision process district court used to grant Omnitrition a summary judgement (i.e. "not guilty of whatever Webster said"), found that the district court did not analyze a lot of things it should have (went over each item in detail and why ignoring them was a bad idea) and remanded it back to district court.

So while DSA is technically correct in that the Ninth Circuit did NOT adjudicate the case, the case was settled before district court could have ruled on the case as Ninth Circuit instructed. Based on the behavior of Omnitrition, it apparently assumed that it would have likely lost the case had the case gone to trial, thus settling the case out of court in its best interest.

Furthermore, DSA is wrong in claiming that dicta decisions are of no legal consequence. Dictum / dicta was OFTEN cited as legal standards, despite what DSA claimed. Here are a couple examples:
  • "ANY children born in the US, even if their parents had entered or stayed in the US illegally, are US citizens"  is a dicta from the case INS vs. Rios-Pineda
  • "Juristic person can also be protected by Fourteenth Amendment" is a dicta dating back to 1886 in Santa Clara County vs. Southern Pacific Railroad
  • "Due process can be used to strike down laws that violate fundamental rights" is also a dicta, from United States vs. Carolene Products (1936) 
Dicta formed some of most fundamental American legal concepts, so for DSA to ignore dicta given in Omnitrition is a very dangerous interpretation.

Furthermore, FTC has already referenced Omnitrition case in its case against Burnlounge (read summary by Kevin "The MLM Attorney" Thompson), and should have also done so in its shutdown of Fortune High Tech Marketing (FHTM) in January 2013.

Thus, it is quite "unreasonable" for DSA to ignore Omnitrition and deny its role in laws governing the network marketing industry. 

Indeed, even MLM lawyers have noted that FTC based its cases on the Omnitrition decision. Here's "Grimes and Reese" LLC have to say about this on their blog:
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). 
Which leads us to the second "unreasonable" position that DSA has on "internal consumption" (i.e. sales to company's own distributors).

Too Much Internal Consumption = Pyramid Scheme!

Note that Grimes and Reese (that's two famous MLM attorneys) wrote that FTC takes the Omnitrition decision very seriously, and FTC does NOT like to see compensation based on sales to company's own distributors.

Remember the Koscot test says that the commission a distributor earns must be based on SALES, not on recruiting other people (who also buy into the scheme).

Yet that's what DSA was doing: claiming that selling products to its own distributors, i.e. "internal consumption", and calling it "retail sales" and thus not pyramid scheme, when the distributors basically "paid into the scheme" via those qualifying purchases (to themselves), and is compensated by recruiting other people who did the same.

If you don't quite see this, let's try this theoretical scenario:

I have a "business" here. To join, you give me $2000, and I give you this X amount of Item Y.

How do you make money? Find more people to do the same thing you did... Pay $2000 for X amount of item Y.  For every Z people you find, you're rewarded with $W dollars.

Does this sound like a pyramid scheme to you? Or is that a legal MLM? FTC would say this is a pyramid scheme, because no item Y actually reached ultimate consumer.

DSA, however, claim that distributors, i.e. "you", who handed over $2000, and all you recruited (who also paid $2000) are the ultimate consumers because you count as "sales" even though you haven't sold anything.  Apparently you can consume all X amount of Item Y, or give them away, or auction them off on eBay, or dump them in the trash... The company doesn't care. Neither does DSA. DSA claims this is NOT a pyramid scheme, because internal consumption (of any amount) is legal. That makes absolutely no sense.


Solution to DSA's Denial 

DSA's denial of Omnitrition is both ominous and idiotic. By adopting denial, it will doom the network marketing industry by refusing to see the danger and believe in its own interpretation of events. This is called self-delusion.

DSA needs to make all of its members emphasize retailing the products, instead of trying to push the 'self-consumption' concept. Once the self-consumers are "fixed", the rest of the problems should fix themselves.

There are two solutions to the self-consumer problem.

a) limit the amount that can be counted as "self-consumption" to only "reasonable" amount of the products. As most items have recommended daily dose (2 tablets?), simply multiply that by re-order period (30 days?), and divided by package size (60 tablets per bottle?)

Reason: DSA's position that ANY amount of self-consumption is okay is... well, nonsense! If the distributor's buying for him or herself, then s/he needs only one "portion". AND s/he still needs to sell to 9 other customers to fulfill the ten customer rule as per Amway Safeguard rules.

FTC's objection to self-consumption stems from the Omnitrition case where Webster testified that one can self-consume enough to fulfill the 70% reorder rule (i.e. no retail at all). By fighting the limit on self-consumption, DSA has basically negated its own namesake: direct selling. Selling to oneself is not direct selling.

b) make any self-consumption non-commissionable (i.e. they cannot be counted for personal volume for commission calculations).

Making self-consumption non-commisionable will fundamentally change the dynamic of network marketing... but only the BAD KIND. It will only hurt companies that sells the products to distributors but not for retail, as the distributor only bought the stuff so his PV is enough to qualify for commission. This would also force the distributors to "prove" they are indeed retailing the products as required by Amway Safeguard rules (as the default would be it's consumed by the distributor... unless otherwise proven).

This would require random audits and such, but with computer technology this should be easily achievable by verifiable credit cards and shipping addresses and such and smartphone apps to register customers, and so on. Most can be automated.


Conclusion

DSA's denial about the problem is faces is self-delusional and alarming, even for the MLM skeptic, since the future of MLM is on the line.

Yet the solution is so simple... And so within the law, the only real reason to go against is "we haven't done it that way".

Things change, people. It's called PROGRESS.

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