Talk Fusion, a member of the DSA and a purported legitimate multilevel marketing company, was recently named in a class action lawsuit. The lawsuit can be found here and in its entirety below. The lawsuit was filed by Spreter Law Firm, based out of San Diego, California.
It’s a meaty lawsuit, clocking in at 110 pages (plus an additional 200+ pages for exhibits). The attorney that filed the lawsuit, Geoff Spreter, did a fair amount of homework.
Bob Reina, owner and founder of Talk Fusion, was also named as a defendant in the lawsuit.
The gist of the lawsuit: Plaintiff is alleging that Talk Fusion and the other defendants conspired together to perpetuate a pyramid scheme. The conspiracy between the defendants is the basis for a RICO claim. RICO (Racketeer Influenced and Corrupt Organizations) fraud exists when multiple parties conspire together to engage in fraudulent conduct. The damages associated with RICO fraud can be quite large. Amway faced a similar allegation in a class action filed back in 2006. They ended up settling the case for $60+ million.
The case is in its early stages. There are a number of battles that will need to occur before the pyramid issues are addressed. Mainly, the arbitration provision. Talk Fusion has an arbitration clause. They will undoubtedly move the court to dismiss the case and send the dispute to arbitration.
Regarding the pyramid allegations, the complaint lays out some strong arguments (and provides a lot of exhibits to support those arguments). As a refresher, pyramid schemes exist when there are rewards unrelated to product sales. The mere act of selling a token “product” does not eliminate the risk of pyramiding. If an MLM sold $1,000 pencils, it would clearly be a pyramid scheme because the pencils would lack legitimate market value. In addition to looking at product value, courts and regulators look at the “operational realities” of the program. Regardless of what’s on paper, if behaviors in the field are crazy (heavy emphasis on recruitment), it can be indicative of a problem.
Regarding products, there needs to be legitimate value. Value is demonstrated through several factors: retail sales, emphasis of the culture (product focus vs. recruitment focus), consumer safeguards, compliance measures, incentives in the pay plan, requirements to buy product to enhance earning potential, etc. Plaintiff is alleging that Talk Fusion is selling an over-priced token product. The pricing structure for Talk Fusion is below (available on their website here). The service consists of video email and video conferencing capabilities. The larger packages allow more attendees on the video calls (up to 500) and allow for more storage.
Plaintiffs allege that there are free / cheaper alternatives readily available on the internet i.e. Skype, Google Hangout, Adobe, Webex, GoToMeeting, etc.
In Talk Fusion, participants are paid by way of a binary compensation plan. The structure of the plan is not really the issue, it’s mainly the incentives that allegedly lead participants to focus almost exclusively on recruiting. The lawsuit provides some exhibits that show Talk Fusion associates aggressively pushing products, heavily emphasizing the financial gains associated with the business model (implying that product value is secondary to the benefits of the compensation plan).
There are two sides to every dispute. Talk Fusion will get its chance to respond. If the case progresses to the point where the Court acknowledges the possibility that a pyramid scheme exists, Talk Fusion is going to have to provide answers to some very simple questions:
How much revenue is attributable to customers (as defined as people outside the distributor network)? With a technology product, the data should be clean. With inventory based MLMs (companies that sell physical products), the retail sales can be harder to track because the inventory sometimes moves through distributors (they buy and re-sell). With technology MLMs, the data is clearer.
What are the purchase patterns between customers and associates? If associates spend an average of $3,000+ per year and the average customer spends dramatically less, it’ll be an issue.
What sort of compliance measures were implemented to stop aggressive income claims?
When associates quit Talk Fusion, what percentage continue to pay for the product?
Do associates actually use the Talk Fusion software? With technology MLMs, usage is always a factor.
What is the average number of attendees per video conference? If the number is small when the majority of people choose to purchase a pack (the “pro pack,” retailing for $1500) that allows for 500 attendees, it could be a problem.
How many associates actually use the software each month? How many times each month?
Did associates teach other associates to upgrade simply to qualify for additional compensation? If that’s proven to be pervasive throughout the culture, it could be a problem.
If the case proceeds beyond the arbitration issue, these are just a few of the questions that will be heavily litigated.
It’s going to be a street fight. I know Geoff Spreter from another action several years ago. I also know Talk Fusion’s lawyer, Lawrence Steinberg. Steinberg is on the other side in our lawsuit against Jeunesse. He was also BurnLounge’s attorney. It’s a good matchup. They’re both good lawyers. In the spirit of full disclosure, there’s a chance I get involved on the Plaintiff’s side as the lawsuit develops.
If you’re reading this via email, click here to view the complaint.