Going Postal

By Jeffrey A. Babener
February 1997

Enter the Postal Service.

"Going postal" is not just a line from the movie Clueless. Is your program a matrix plan 3 x 9?, a seven level unilevel or stairstep breakaway?, a binary with infinite levels? Are mail recruitment campaigns to mail lists a frequent occurrence in your program? Is earnings hype under control? -- Enter the U.S. Postal Service.

For many network marketing distributors and their companies, a once in a lifetime opportunity may be shattered by a simple letter from the U.S. Postal Service notifying them that their MLM program violates U.S. mail fraud or lottery statutes. Without an adequate understanding of U.S. Postal laws and procedure, nor competent backup from legal counsel familiar with this field, the ultimate tragic result all too often is mail cut off of those all important distributor applications, product orders, leads, commission checks, etc. What should you know when you hear from the U.S. Postal Service?

In recent years, mail-driven campaigns have been an excellent source of recruitment and sales for both MLM distributors and companies. Traditionally, the U.S. Postal Service has remained aloof from MLM marketing as most recruitment and sales have been through one-on-one personal contacts. It was inevitable, however, that such mail-driven campaigns would produce monitoring by local postal inspectors or investigations triggered by inquiries to local postal offices.

"...a once in a lifetime opportunity may be shattered by a simple letter from the U.S. Postal Service notifying them that their MLM program violates U.S. mail fraud or lottery statutes."

For years, postal inspectors have chased illegal lottery schemes, chain letter schemes, blatant boiler room fraud operations and other scams. In recent years, many mail-driven scams have posed as legitimate multilevel marketing companies. As might be expected, the line has become blurred for many local postal inspectors, as well as the general counsel's office of the U.S. Postal Service in Washington, D.C., between legitimate multilevel marketing opportunities and illegal schemes. In the last few years, unfortunately, enforcement activity has become blurred, as well as administrative decisions in this area.

Two Types of Postal Statutes.

The U.S. Postal Service enforces two types of postal statutes. First, mail fraud statutes prohibit soliciting and receiving of monies through the mail under false pretenses. Naturally any multilevel program in which fraudulent earnings representations or product representations are made will trigger enforcement action. Common sense, together with competent legal counsel, should dictate to MLM companies and MLM distributors guidelines for avoiding enforcement under mail fraud statutes. Our experience indicates that nine times out of ten the culprit in this category is a representation, such as: "Earn $10,000 a month after your first week with minimal effort." As is the case with most attorneys general, the U.S. Postal Service expects some attempt at substantiation of earnings claims. U.S. Postal lottery statutes are a much more difficult animal. The statutes are quite ambiguous and, if improperly enforced, may attempt to ensnare even the best of MLM programs. Postal lottery laws provide that it is illegal to charge a consideration for the "chance" to win a prize using the U.S. Mail. Applied to MLM companies, this approach usually focuses on the question of whether or not the receipt of override commissions from a downline sales organization is based on chance or whether a sponsoring distributor exerts meaningful control and management over his sponsored sales organization.

Ironically the U.S. Postal lottery statute was truly intended to stamp out real gambling lotteries as opposed to business organizations whose activity may involve some elements of chance. The original U.S. lottery statute was enacted after the state of Louisiana, in the early 1800's, adopted a state lottery which offended the morals, as well as depleted the funds of residents of many of the other states. Congress passed the original lottery statute to combat the "evils" of this first state lottery. It is ironic, in the last few years, with the depletion of state revenues, that Congress has amended its U.S. lottery statute to specifically permit state run lotteries, but all other lotteries are illegal and sometimes legitimate multilevel marketing companies are the targets of the broad lottery statute.

Taking on the Government.

At this point in time, legal issues have only been litigated at the administrative judge level of the U.S. Postal Service and have not yet really been truly tested in U.S. District Court. Keep in mind that it is not the position of the U.S. Postal Service that all multilevel programs constitute a lottery. Appropriate advice to companies and distributors is that a program in which sponsoring distributors must play an active management supervisory function and be in regular contact and communication with their downline organization is the most likely insurance against attack. Beware of sleazy MLM programs that attempt to avoid the "consideration" element of the lottery statute by making all sales kit materials optional and then turning around and running an inventory loading program with bogus and inflated prices. Those programs do a disservice to the entire industry.

Unless you believe that your program does in fact violate postal statutes and / or you in fact intend to stop pursuing immediately the MLM program, never sign a voluntary agreement to cease and desist.  If you do and you continue the program, the US Postal Service is authorized to cut your mail off without a hearing.

Unless extraordinarily abusive, most enforcement activity by the U.S. Postal Service is civil in nature. Typically, the MLM distributor or MLM company will receive a letter from the regional postal inspector indicating that it is believed that the individual or company is participating in a multilevel program which violates fraud statues or lottery statutes. Individuals or companies are either asked to respond with explanatory material or a cease and desist consent decree is enclosed for execution and returned to the postal inspector. How should you respond?

UNLESS YOU BELIEVE THAT YOUR PROGRAM DOES IN FACT VIOLATE POSTAL STATUTES AND/OR YOU IN FACT INTEND TO STOP PURSUING IMMEDIATELY THE MLM PROGRAM, NEVER SIGN A VOLUNTARY AGREEMENT TO CEASE AND DESIST. IF YOU DO AND YOU CONTINUE THE PROGRAM, THE U.S. POSTAL SERVICE IS AUTHORIZED TO CUT YOUR MAIL OFF WITHOUT A HEARING.

If you believe that your program does not violate U.S. Postal laws and you wish to continue your marketing, you should respond with a polite professional letter along the following lines:

"Dear Regional Postal Inspector:

"I have received your recent correspondence concerning the True Blue marketing program. In my opinion, the representations regarding the business opportunity that are made in the program are substantiated and every effort is made to be accurate in the presentation of the business opportunity. Sponsors in the program are required to maintain ongoing management, contact, supervision and control with respect to their downline sales organization and every attempt is made to carry this out through oral contact, newsletters, telephone, personal meeting, training sessions, etc. The intent is to promote a legitimate business opportunity. If you have any further questions, please do not hesitate to contact me.

Very truly yours,"

A distributor who responds in the above fashion, should have a basis for the sort of statements suggested in the letter. If the distributor has cause for concern, he should discuss the matter with the company. The distributor should also pass on postal inquiry and his or her response to the company.

Administrative Proceedings.

If the Postal Service is not satisfied by the response, it may initiate an administrative proceeding to litigate the issues and to cut off mail regarding the program. The U.S. Postal Service is not empowered to cut off the mail of an individual prior to an administrative hearing. Under recent amendments to U.S. Postal laws, the U.S. Postal Service, if it feels the issue is serious enough, may seek an order before a United States district judge for a temporary mail cutoff prior to the administrative hearing.

If an administrative complaint is received by a distributor, immediate contact should be made with the company and legal counsel should be involved without delay. The timing of the administrative hearing or temporary restraint proceedings in the U.S. District Court may be very short and any delay would jeopardize a positive result.

The legal proceedings involved in a U. S. Postal Service enforcement action are deadly serious. Within a short period of time, if inappropriately handled, the opportunity of a lifetime for a distributor may be cut off or the entire national marketing program of an MLM company may be brought to a grinding halt. This area of law is highly focused and is no place for general corporate counsel, in-house counsel, nor even an MLM solo practice attorney. Litigation may move very swiftly at both the administrative level and the U.S. District Court level. The odds are stacked against the unprepared. For instance, the only location in the United States that administrative postal cases are located and available to the public is in Washington, D.C. Unless the law firm involved has had some sufficient experience in this field, it is unlikely to carry a private library of administrative cases in its own office. If U.S. Postal action is commenced, several government attorneys from the general counsel's office of the U.S. Postal Service, Regional Counsel's office, as well as U.S. Attorney's office, may be involved. In response to such explosive and short fuse activity, as many as four or five attorneys in our office may be involved in response working with a private library of administrative cases amassed from prior experience. Perhaps more so than other areas of litigation involving MLM legal matters, disputes with the U.S. Postal Service are resolved, litigated and settled on the Star Wars theory of defense, i.e. being prepared.

Common Sense and Communication.

For better or for worse, the proliferation of MLM mail-driven programs, the hit and run tactics of some pyramid programs posing as legitimate MLM opportunities, the confusion of the U.S. Postal Service in differentiating between the legitimate and illegitimate multilevels and the lack of clear case authority in the lottery area promises a collision course in the future. The best advice for the MLM distributor is to communicate with his or her company and with his or her downline.

Jeffrey A. Babener
Babener & Associates
121 SW Morrison, Suite 1020
Portland, OR 97204
Jeffrey A. Babener, the principal attorney in the Portland, Oregon law firm of Babener & Associates, represents many of the leading direct selling companies in the United States and abroad.

www.mlmlegal.com

Main Library || MLM Legal || Babener & Associates || MLM Articles || Power Index