THE TAX PEOPLE- KANSAS WINDBLOWN
Blink of an Eye
Hopes, dreams and potential distributors were at risk to be scattered to the winds for a Kansas-based multilevel marketing company, Renaissance, The Tax People, in a matter of days in October, 2000. Renaissance, TTP markets tax products and services.
On October 11, 2000, pursuant to federal criminal search warrants, agents of the Kansas Attorney General's Consumer Protection and Antitrust Division, assisted federal agents from the Internal Revenue Service Criminal Investigative Division and the United States Postal Inspection Service, Search and Seizure Operations at four of the Renaissance, TTP business locations in Topeka, Kansas. On October 19, 2000, the Kansas Attorney General filed suit claiming that Renaissance, TTP is a pyramid referral sales scheme and requested a temporary restraining order during the pendency of the case. The company, obviously, disagrees with the State's position.
By October 25, the company had consented to a temporary restraining order which froze its bank accounts, prohibited new advertising and promotion of its tax relief system, required discontinuance of its internet web site, prohibited enrolling new members and prohibited payment of commissions and bonuses to distributors. A further court hearing was set almost two months later, for December 11, 2000, a virtual lifetime for an MLM company under fire.
Under ordinary circumstances, such a combination of punches is lethal to an MLM company. Leading industry expert Michael Sheffield, of Tempe-based Sheffield Resource Network, is often quoted as saying: "If you lose momentum, you lose." Effectively shutting down for a month and a half without further hearing can be devastating to most MLM companies, sending many distributors in search of other opportunities.
Odd Aspects of the Renaissance Case
There are certain odd elements of the Renaissance case that industry expects will be discussing for some time to come.
Kansas sales referral statutes.
No Contest was a Surprise
An MLM company that finds itself under siege by way of request for a restraining order may need to gear up for a miniature trial in a matter of days if it is to preserve its business. Although a hearing was set several days later, after the Kansas Attorney General's complaint was filed, it was a surprise to see the company waive a full scale hearing and instead enter into a temporary restraining order, which effectively put it out of the MLM business for a very significant period of time. Although the company may have wished to save its best arguments in preparation for another day, it is very difficult to recapture momentum after a company has been shut down for a lengthy period of time. If the company is successful in defending its position at a later date, and repositioning itself in the industry, perhaps the strategy of taking time to prepare may prove wise. From a business standpoint, however, it is a risky move for an MLM company.
The Kansas A.G. Position - No Threat to MLM Industry
Many industry observers have asked whether the action of the Kansas A.G. should be viewed as a threat to the MLM industry in general. At times in recent years, the industry has been rightfully concerned that federal or state agencies have taken direct aim at the legality of the MLM concept itself. This would not appear to be the case in the Kansas A.G.'s pursuit of The Tax People.
The criticisms of The Tax People by the Kansas A.G. are not criticisms of the direct selling industry, but are specific allegations of consumer deceptive behavior by The Tax People. Of course, The Tax People will have its day in court to defend its position, but many of the allegations by the Kansas A.G. in this case are classic deceptive or pyramid practices. Among the allegations of the Kansas A.G. are as follows:
Lessons to be Learned
Can the industry learn lessons from The Tax People case? - Yes.
For a long time before the filing of the lawsuit, the company should have known that the Kansas Attorney General had significant concern about whether or not The Tax People was a "pyramid." At an earlier point in time, the company should have relocated its business to another state. It should have seen that it was headed for trouble in the State of Kansas. By headquartering in the State of Kansas, it could be assured that, if the State of Kansas took action against the company, it would impair or shut down its entire U.S. national operations.
The company risked legal attack by selling high ticket items in multi-packs and paying commissions before demonstrated use by retail customers. The presence or absence of nonparticipant retail customer requirements is critical with this type of product.
Individuals appear to be approached in their capacity as consumers rather than distributors. There may have been a failure on the part of the company to distinguish the identity of consumer versus distributor.
The allowance of multiple positions in a pay plan creates a gamelike element that makes any company a target for regulatory agencies. Such plans were first promulgated in the Gold Unlimited-type schemes, followed by the over-priced prepaid telephone card-type programs. Such programs were often described as "binaries" or "trinaries." A binary compensation plan is not, in itself, illegal, but the effectuation of such programs with founder's packs, turbo packs, multiple pay positions, etc. has promoted their disrepute among regulatory agencies.
A company which adopts a highly restrictive refund policy or a refund program which is frustrating to participants is surely one which will create scrutiny by regulatory agencies.
If ultimately in the legal the process The Tax People is able to demonstrate a high ratio of nonparticipant retail customers to its participant base, it will survive legal scrutiny. (As to nonparticipant customer to participant ratios, four to one would be great. One to one would be very troubling. One to four, arising for founder's packs, would be devastating.) If in fact the real money to be made in The Tax People program was in the sale of tax packages to participants, and if in fact there was very little "retailing" to nonparticipants, and if in fact most of the money was to be made by causing other participants to buy multiple packs of uninitiated tax systems, the defense would be very difficult.
Why are they buying multiples of a $300 box of materials? Why are there multiple pay positions? In addition, must distributors pay $100 per month to keep active each pay position if they have not signed on an actual "retail customer" who is using the service? The bottom line in analyzing The Tax People program is the question: Why are people buying tax systems? If participants and customers are buying them because the products and services stand on their own, and they want and use them, the company has a good defense. If, on the other hand, the primary reason that participants were purchasing tax systems was to "buy into the deal," neither The Tax People nor companies organized like this can sustain regulatory attack.
An Uncertain Future
The door is not closed for The Tax People. It will have its day in court. From a business standpoint, once momentum is lost, it is very difficult, if not impossible, to overcome. A big question mark for distributors must be created by the involvement of the criminal investigative division of a federal agency, which place any business under a "cloud." If the allegations of deceptive consumer practices by the Kansas Attorney General's office are sustained, such a business would have a very bleak future. The company obviously takes a contrary position to the Kansas Attorney General. Only time will demonstrate the answers to the hard questions involved.
|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.
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