Rebuttal to TOD Emerald and Attorney Matt Abraham

[What is TOD?]

A site visitor sent me an article by Team of Destiny^{1 ®} IBO and attorney Matt Abraham. I speculate that his article is meant to rebuttal and discuss the criticism of the Team of Destiny's ^® legality on my other web pages. It is surprising to me that a "professional" attorney would ignore the abundance of case law and the most recent rulings on the topics of pyramids and chain marketing schemes.

All lies and jest
Still a man hears what he wants to hear
and disregards the rest.
"The Boxer", Paul Simon

The case precedents used in this rebuttal were collected from www.ftc.gov, and www.mlmlaw.com.

[Omintrition] [Equinox Complaint, Court Order] [Trek Alliance Complaint, Court Order]
[Membership Marketing] [Unimax and The Dynasty Systems Corporation] [Koscot]

The total time expended to download about 18 cases, throw out the ones not applying to chain marketing, and recording the important court decisions was about four hours, and I am just an "amateur expert" as Mr. Abraham writes in his article. Given that he is a professional, he could have performed the research even more quickly. The results of this little project show that even some "professionals" skimp on their research and might not dig deep enough to get the whole picture. It has also been my experience with attorneys that they will "blow both ways", as long as somebody is paying them. Being an Emerald, I'm sure since Mr. Abraham is on the receiving end of the TOD BSMs payments so he just chooses to overlook the easy to find case and precedent history on the topic. Anyway, below are the results of my research. It does not take an attorney to do this, only are person with a little curiosity and the ability to read. I hope it helps the readers to understand better the legalities of pyramid and chain marketing schemes.

Mr. Abraham notes that his article concerns only the Team of Destiny ^® compensation plan, and not the Quixtar plan. He explains the background and reasoning behind legislation regulating MLM with a statements similar to:

Mr. Abraham addresses the issue of the compensation plan structure with a statement similar to:

Mr. Abraham then goes on to detail the nature of a legal compensation plan with a statement similar to:

At this point, Mr. Abraham does his readers a great disservice by failing to define and give the latest definition of an illegal marketing scheme and what constitutes sales, or more to the point, "sales to the ultimate consumer", or "retail sales". The current controversy and the most recent precedent setting cases in the MLM industry now revolve around this point. Here is the latest FTC definition:

"Pyramid" Definition from FTC vs. Equinox April 2000, is the same as FTC vs. Trek Alliance June, 2003

When a plan has the majority of the sales to the participants them selves, courts and the FTC have ruled that compensation for recruitment is made via commissions for the sales of those goods. Mr. Abraham tends to focus on the "headhunting fee" issue, which typically represents up front cash payments to join a scheme. This is a secondary consideration as most of the recent legal cases focus on the "retail sales" issues whereby the headhunting fees are disguised as the sales commissions. See my page "the illegality of buyers club schemes" reviewing various court and FTC actions.

The following graphic attempts to classify the various characteristics of pyramid and marketing schemes, which show up in the legal case precedents. The important characteristics to be considered are up-front payments, headhunting fees, level of retail sales, and finally a 90% buy back policy to prevent inventory loading. You can see the trend that in the absence of headhunting fees, mandatory purchases, and up front purchases that the focal point becomes the level of retail sales to plan non-participants.

TOD² Background
The Team of Destiny â makes and sells support products and sponsors motivational and introductory seminars that may be purchased by Team of Destiny â affiliated independent business owners ("IBO"). TOD IBOs can also participate in the TOD compensation plan due to purchase of BSMs and seminars.

The use of these BSMs is always optional. BSMs are covered by the BSMAA refund policy ^Note.

"Just wanted to let you know, I gave my upline two letters (one to Nick and the other to the person's name that appears on my receipts Mike Barrett) requesting my intent to leave TOD and requesting a full refund. He responded by telling me that I could not get a refund on tools as it is specified in the TOD contract. I responded that according to #8 that tapes, books, opens and seminars are refundable. I'm currently awaiting a response."

"My ex-upline and I agreed to a 50% refund for the TOD tapes for personal use but unfortunately the BSMAA agreement rules out any money given back for tools I bought to give out to people." - TOD site visitors

Orrin Woodward points out that qualification to participate in the Team of Destiny ^® BSM compensation plan occurs at attainment of the Quixtar Platinum level. The amount of compensation is then based totally upon the sales volume of the BSM's moved into the various downline legs. Mr. Abraham states There is one price for BSMs. There are no "price breaks" based upon their Quixtar pin level, as in other Quixtar groups. If you are a prospect for Team of Destiny â, ask them to show you the contract or plan for participating in the BSM profits, before spending a lot of time and effort working to get to Platinum. . Having a contract is important so that your income is not arbitrarily cut off if you fall out of favor with those making the payments. I doubt they will give you the details.  

Mr. Abraham makes the assertion that the Team of Destiny ^® BSM's business is not a multi-level marketing opportunity and thus not subject to any MLM legislation, since there is no "multi-level" pricing structure. He points out the definition of a Multi-level-distribution company from the Maryland³ Code.

In this subtitle, "multilevel distribution company" means a person who, for
consideration, distributes goods or services through independent agents,
contractors, or distributors at different levels of distribution with rates of
pricing or discounting that differ from 1 level to another. Maryland³ Code

Mr. Abraham then goes on to make the outlandish statement that the Team of Destiny ^® scheme is not subject to Federal regulation since it is not a "multilevel" plan.

I'm not sure what the relevance is of the Maryland definition in the whole scheme of things. When Quixtar operates under the "Direct Fulfillment" program, Quixtar would also no longer be defined as a Multi-level-marketing program according to the Maryland definition. However that does not mean the FTC still doesn't have authority to regulate them.

Legality of the Team of Destiny BSM Program
Mr. Abraham makes the following assertions as to why the Team of Destiny ^® BSMs program is completely legal.

1. It is not a "multi-level" opportunity. It cannot be a pyramid and would not be regulated under any laws.
2. The purchase of BSMs is completely optional. No purchases are required as consideration to participate in the plan.
3. Members, who are not compensated, are then by default "retail customers" of the scheme.
4. There are no "headhunting" fees paid for recruiting people into the scheme.
5. BSM's are completely refundable.

1. Chain Marketing Scheme
Let's look at the Team of Destiny ^® business structure.

IBOs recruited into Team of Destiny ^® are granted the right to recruit other IBOs. Team of Destiny â IBOs are also granted the right to be compensated for sales of BSMs to their downline IBOs, once they meet certain requirements. Further more, those IBOs they recruit can too benefit from selling BSMs to their respective recruited downlines. This type of business is globally defined as a chain marketing scheme. The FTC certainly has the authority to regulate schemes like these.

Team of Destiny ^® IBOs are made aware of the opportunity to earn money from the "B" type business (BSMs) from web site articles such as "How the Money Works" and from Team of Destiny ^® weekly meetings.

Mr. Abraham confirms the chain marketing aspect of the plan when he notes that that compensation in the Team of Destiny ^® plan is also made upon the sales of goods and services to other participants who may be compensated in the Team of Destiny ^® plan. Most states have chain-marketing laws and deceptive trade practices acts. To say then that Team of Destiny ^® falls under no regulation or regulatory agency because it is not a "MLM" is totally absurd. Besides the FTC definition of an illegal marketing scheme, there are also many state laws concerning chain marketing, or endless chains.

Here is a random example from California, Penal Code Sec. 327 for chain marketing schemes. It reads as Follows:

Mr. Abraham even goes on to note the Michigan statute:

1. a plan or scheme or device,
2. by which
1. a participant gives valuable consideration for the opportunity to receive compensation for inducing other persons to become participants in the program, or
2. a participant is to receive compensation when the person introduced by the participant introduces one or more additional persons into participation into the plan.
1. each of whom receives the same or similar right, privilege, license, chance or opportunity.

Clearly since Team of Destiny ^® IBOs can recruit other IBOs and eventually earn commissions from their volume, the business has the basis of a chain marketing scheme. Chain marketing schemes are regulated by numerous laws, including the FTC.

2. Up-Front Payments
As Mr. Abraham correctly points out that TOD does not require any up-front payments to participate in Team of Destiny ^® , and there is also no requirement to purchase any minimum amount of BSMs.

This issue was brought up in the Membership Marketing Incorporated (MMI) case, also know as "Five Star Auto".

The Missouri Court of Appeals, Western District court in Five-Star Auto ruled:

This was due to the fact that consideration was granted by the member when agreeing to abide by MMI marketing policies for the concurrent benefit of commissions to be earned. In this case no money was exchanged for the purpose of having consideration

Being a specialist in business and contract law, Mr. Abraham must know that the term "consideration" applies to more than just making a cash payment. It generally means the surrender of any valuable right. As Mr. Abraham highlights, Team of Destiny ^® IBOs participate in BSM profits based on reaching a certain pin level and by having certain levels of BSM sales to their groups. The consideration is the work/purchase/recruiting necessary to obtain the level in order to share in the BSM profits. Although there is no written contract, there is a "contract." There is a promise that if a particular IBO reaches a certain pin level with Team of Destiny ^® , they will obtain a share of the BSM profits for those they have recruited. A contract is an offer and an acceptance supported by consideration. The offer is the "diamond lifestyle" pitch, which includes at least implicitly the right to profit from BSMs. The acceptance is the Team of Destiny ^® IBO following the upline's instructions to recruit enough downline to reach the pin level necessary to share in the BSM income. Legally, this is known as "acceptance by performance."

Mr. Abraham specifically notes there is not "pay to play" issue in so many words.

This argument was rejected in two cases. The first case was in The Dynasty Systems Corporation case:

The argument was also considered and rejected by the North Carolina Court of Appeals in State ex rel. Edmisten v. Challenge, Inc. (1981), 54 N.C.App. 513, 284 S.E.2d 333.

The North Carolina statute defined a pyramid distribution plan as " 'any program utilizing a pyramid or chain process by which a participant gives a valuable consideration for the opportunity to receive compensation or things of value in return for inducing other persons to become participants in the program.' " (54 N.C.App. 513, 516-17, 284 S.E.2d 333, 336.) The defendants argued that their activities did not constitute an unlawful plan because an "Independent Sales Agent" need not purchase any products or services in order to earn commissions from the recruitment of new sales agents. In rejecting the defendants' argument, the court held that the statute is violated if an individual pays consideration, whether or not he is required to pay it.
TDSC referenced in Unimax vs. People of the State of Illinois

Certainly if one isn't required to pay, the TOD training materials none the less gives the impression of the need to "pay to be successful". The purchase of these materials are of course completely optional, but those "wanting to succeed" should purchase them. Listen to the following teachings from their tapes.

I attended a Team of Destiny ^® open meeting. Afterwards I spoke to the guest speaker about the BSMs and the profit potential from the "B" type business outlined on Orrin Woodward's web page "how the money works". I asked him if I had to buy the tools to be able to participate in the tool profits. He told me that if I was not using the tools, that I would probably not be able to attain the level required to participate in those profits. The speaker would not confirm that the tools are "required" for success but did state that using them would "ensure your success" in the business.

3. Retail Sales to non-Particpants in the Plan
I suggest that all Team of Destiny ^® IBOs building their businesses, hoping to have a big "B" type business, who are not yet participating in the compensation plan, are never the less participants in the scheme. They are not retail customers, but rather still-yet uncompensated participants.

In the MMI (5-Star Auto) case, commissions only became payable after participants reached level 4. Never the less they were all considered participants by the court. They were not retail customers, just uncompensated participants.

The fact that only a small amount of TOD'ers participate in the BSM compensation becomes irrelevant based upon the 5-Star case. The Team of Destiny ^® situation only amounts to more highly leveraged pyramid with an absolutely huge front end investment (in time and money) before you get to participate in the profit from your downline recruits' BSM purchases. Just because the payback is delayed or conditioned on the amount of recruiting an IBO does, doesn't mean he isn't a participant.

From The Dynasty Systems Corporation case referenced in Unimax vs. People of the State of Illinois:

I would speculate, as a practical matter, that there are no Team of Destiny ^® Platinums participating in the BSM compensation scheme who themselves did not participate in it coming up through the ranks. Maybe Mr. Abraham can elaborate in his next letter what would happen in the hypothetical example where a Team of Destiny ^® Platinum stopped purchasing and promoting the system who was receiving compensation from it, yet still had sufficient volume to qualify for a pay-out. There are other lines of sponsorship in Quixtar where Platinums stop getting BSM compensation if they themselves stop subscribing to the system.

I suggest that majority of sales are therefore being made to the participants of the scheme themselves. According to the FTC definition, this would be illegal.

4. Headhunting Fees
Compensation in these cases can not be only from headhunters fees but can also come from commissions the downline organization generate. Previous court cases show that commissions from sales to downline can also be considered compensation for purposes of applying the law. Many precedent cases did not have head-hunting fees but were still prosecuted as illegal marketing schemes. The headhunting fees were implied to be contained in the commissions of those they recruited, when the purchases were mainly for the participants own consumption.

'The presence of this second element, recruitment with rewards unrelated to product sales*, is nothing more than an elaborate chain letter device in which individuals who pay a valuable consideration with the expectation of recouping it to some degree via recruitment are bound
to be disappointed.'" Omnitrition, 79 F.3d at 781 (quoting Koscot).
*(product sales to non participants)

Mr. Abraham stated in so many words:

This is kind of a chicken and the egg argument. Since the TOD products have little or no use outside of the Team of Destiny ^® organization, the only way to increase sales volume is to sell more to existing IBOs or recruit more IBOs who will purchase them. He could easily have written "Eligibility is based exclusively upon sales volume, which can only be achieved by recruiting more people who buy our BSMs". It would still say the same thing since they probably sell the majority of BSMs to those working to one day participate in their scheme. Practically speaking, BSM sales volume can only be increased by recruiting new IBOs who will buy them.

From The Dynasty Systems Corporation case referenced in Unimax vs. People of the State of Illinois:

The marketer acquires "the opportunity to receive a benefit or thing of value" by way of commissions,
which are themselves "primarily based on the inducement of additional persons" to buy into
the Unimax system. Marketers' commissions, therefore, are "not primarily contingent on the
volume of goods, services or other property sold or distributed * * * to persons for purposes
of resale to consumers," but are entirely unrelated to the sale of goods or services available
through the Buyers' Service and are obtained only by recruiting more persons into Unimax.
See Ill.Rev.Stat.1985, ch. 121 1/2 , par. 261(g).

5. Buy Back Rules
Mr. Abraham mentions the TOD BSMs refund policy in so many words:

Quixtar has an excellent 100% money back guarantee. I've heard that Quixtar will also pay the shipping costs. If Team of Destiny has such a policy, I have never seen it written down. Maybe they would care to send me a copy of it? The Team of Destiny ^® refund policy via the BSMAA contract is not as generous as Mr. Abraham leads his readers to believe. Interesting to note is that the TOD Business Support Materials Arbitration agreement specifically excludes tools that were purchase for inventory (non-personal use).

Unlike the Quixtar refund policy, the Team of Destiny ^® BSMAA specifically states many conditions and specifically excludes BSMs purchased for non-personal use. It appears that the TOD BSM scheme also has no effective buy-back policy to prevent inventory loading. Chain-marketing schemes with no buy back rule to prevent inventory loading can also be ruled illegal.

No doubt that is the reason Mr. Abraham wishes to write about this issue another time.

Conclusion
Due to the above precedent cases and the latest FTC definitions, I take exception with Mr. Abraham's ultimate conclusion, that the TOD plan is completely legal. Be reminded that no court or judge has ruled on the specific issue of Team of Destiny ^® . You will have to ultimately form your own opinion and do what your conscience tells you.