UPDATE: On February 17, 2010, Medifast Inc. filed suit in US District Court, Southern District of California, alleging defamation, violation of California Corporations Code, and unfair business practices. On March 29, 2011, Judge Janis Sammartino dismissed all of Medifast’s claims against me in her ruling on my anti-SLAPP motion.

A few weeks ago, Medifast Inc. (NYSE:MED) sued Barry Minkow, his Fraud Discovery Institute, me, my corporation, William Lobdell (a journalist working with Barry), Robert FitzPatrick (an expert witness on mutli-level marketing and pyramid schemes), and an anonymous message board poster (good luck with that).

Medifast sued us for daring to say that their Take Shape For Life multi-level marketing division is a typical recruiting scheme and looks like a pyramid scheme. FitzPatrick has done years of research on MLMs, in large part using the numbers publicly released by companies to demonstrate how the vast majority of participants lose money. He wrote two formal reports on Medifast and their numbers – – he basically showed that the company’s financial gains in the last year or two have come almost solely from their multi-level marketing division. (The first report is here, and the second report is here.)

How dare FitzPatrick say such a thing, especially when the numbers demonstrate exactly what he reported!!!

FDI produced several press releases on the findings about Medifast, and I reproduced and quoted some of those releases and reports, as well as wrote my own analysis of the company… questioning whether TSFL could be considered a pyramid scheme.

So Medifast sued us. For what? They claim we defamed the company by writing untrue things about it, yet they have failed to point out any specific inaccuracies in the reports that were produced about Medifast. Instead, all they’ve really done is act insulted for being compared to Bernie Madoff and for being called an endless chain recruitment scheme. (I’ve yet to find a multi-level marketing company that is not an endless chain recruitment scheme, but what do I know?)

As many are already aware, there is a First Amendment right to free speech, and we are allowed to talk about our opinions on things, including Medifast and Take Shape For Life. (Won’t it be fun to have the court consider this issue of free speech?)

So litigation has commenced and none of us defendants seems scared. Pooh. That’s not what Medifast wanted. They wanted us shaking in our boots and vowing to never speak of them again. So much for that. It seems instead that Medifast will now fall victim to the Streisand effect, since all this hubbub just serves to shine a brighter light on their multi-level marketing business.

William Lobdell wrote up a list of ten questions Medifast could answer to end the controversy about its Take Shape For Life business. We say the TSFL business has accelerated because of recruiting. They say it’s not because of recruiting. Here are a few of Lobdell’s ten questions… which surely could put this issue to rest if only Medifast would be willing to pony up the data:

• On its website, Medifast has advertised two income scenarios: one based on the coach selling the meal replacements to clients, the other based on the coach recruiting new coaches. One showed $8,000 a month in income, and the latter, $20,000 a month. What percentage of all coaches who have worked for Medifast over the years have earned either of those illustrated income examples?
• What is the average income of all coaches from product sales to clients, not from bonuses and commissions derived from recruiting other coaches who recruit other coaches who recruit other coaches?
• What is the average monthly income of all coaches who were enrolled during a year, not just the active ones?
• Medifast advertises that financial health is a key element for success in losing weight and offers its “coaching” program as the prime means for achieving financial health. What is the average net profit  to the coaches gained from sales to clients, factoring in all normal business costs (i.e., advertising)?
• What percentage of all coaches earn more per month than the costs of the product and related business expenses?
• The Medifast pay plan rewards coaches to recruit more coaches. The majority of commissions, per sale, are transferred to recruiters in the upper levels, making recruiting more lucrative than retailing.  When are there too many coaches in any given area? Is the sales force expected to grow without limits in all market areas?

Check out ibizreporting.com for the full list of questions posed to Medifast.