Direct Sales and MLM

Distributor Agreements: The fine print

By
Kevin Thompson

< src="https://dev-thompson-burton-wpms.pantheonsite.io/mlmattorney/files/2010/11/Mining-Contracts.jpg" alt="" width="510" height="339" class="aligncenter size-full wp-image-135" />The Distributor Agreement is the equivalent of a Constitution that outlines the relationship between the company and distributors. The company agrees to ship product and pay on time while the new person agrees to countless terms spelling out the do's and don'ts of marketing the products. When there's litigation in the industry, it almost always involves one of the bottom provisions, which are all very common.Non-compete The non-competes usually restrict the distributor from promoting a competing product for a period of six months following resignation or termination.Rationale On the surface, this provision seems harsh. But from the company's perspective, they're investing resources for branding and marketing that the distributors leverage to build their downline / businesses. The non-compete ensures that distributors don't cash-in (at least not immediately) on the investments made by the companies for personal gain. Check out this hospital example: a hospital invests $10 million in marketing to attract new patients. The doctors benefit from the investment via the increase in patients walking through the door. The doctors would not have had exposure to the new patients but for the hospital's investment. In this case, a short non-compete would prevent the doctors from unfairly benefiting from the ad campaign...at least for a brief period of time. Plus, the noncompetes are negotiated. The doctors can agree to it or work somewhere else. It's a hot button issue in the direct sales space. If the noncompete is short i.e. six months, it's generally enforceable unless it's too broad.If you're a distributor thinking about leaving your company and joining a company that sells a similar product, there's really no way around the non-compete. It's always best to wait it out unless the non-compete is overly restrictive i.e. duration is too long, the scope is too broad (preventing someone from selling candles when they were selling juice in their prior business), etc.Non-solicitation The non-solicitation provision is controversial. It typically prevents distributors from contacting people they did not personally enroll in the business. However, it happens a lot in the industry when leaders develop relationships with members in their downline. Technically, since they did not personally enroll those people, they are contractually precluded from contacting them for another business opportunity.Rationale The relationship between the distributors and the company is a partnership. In this partnership, the company agrees to provide marketing tools, IT infrastructure, customer service, cutting edge products and a fair compensation plan. The field has obligations as well such as their responsibility to market the business in an ethical manner. And since the company usually invests considerable resources in support of the distributors, and the distributors benefit by those dollars via increased sponsorship rates, the company has an interest in protecting its network. From the company's perspective, the distributors never would have had a relationship with their non-personals in the downline but for the MLM opportunity. This is why distributors are allowed to solicit their personals (people they knew) and not allowed to solicit their non-personals (people they arguably did not know). Companies will say something like: "If it were not for our product, pay plan and goodwill in the community, you never would have known those people in your downline. Try building a MLM that sells $1,000 lemonade....you won't sponsor anyone...we built that downline together."Distributors will argue against this provision by stating something like: "Although I did not personally enroll those people, I was instrumental in getting them involved...I showed them the plan, I worked with them and helped them build their businesses, I knew them before they enrolled....." In court, this issue has gone both ways. It's a tough one. The cases on point with this issue usually involves brokerage firms where a broker leaves a firm (a company like Morgan Stanley) and solicits the customers. Morgan Stanley has argued (and won), "Hey, we helped you develop that list."Dispute Resolution The dispute resolution provision is where the companies really stack the deck in their favor. This provision almost always requires that all disputes be litigated in confidential arbitration.RationaleUnder normal circumstances, disputes are litigated in civil court. One party files a publicly available lawsuit and the information that results from the lawsuit (exhibits, deposition transcripts, court testimony, etc) is usually available for public scrutiny. Proponents of arbitration clauses (companies) say that arbitrations are faster, fairer and less costly. On the other side of the argument, people argue the opposite: arbitrations are grossly unfair, stacked in favor of big businesses and they're more expensive. Judges in civil courts, after all, are free. Arbitrators are paid by the hour (and they're paid A LOT!).In a confidential arbitration, the distributor is missing one of his or her most valuable bullets: their ability to generate public support. In David versus Goliath battles where the lone distributor is fighting a larger opponent, their only weapon, in addition to having good facts, is their influence with the public. However, in a confidential arbitration proceeding, they have ZERO leverage as they're forced to litigate the contract (drafted by the company) in a predetermined forum (chosen by the company) without the ability to generate public support. It's a tall order for distributors and the issue is controversial across the board.One point in favor of arbitrations: they protect the company from malicious smear campaigns calculated to do harm by distributors looking to skirt around their obligations. Over the past 12 months, I've represented four companies dealing with threats from distributors to "go public!" and it was junk each time. An amped-up distributor can do a lot of harm in a short amount of time. Understand, there's a difference between negative lies (smear campaign) and negative truths. The negative truths hurt more.One point against arbitrations: distributors are not able to publicly discuss the case, which harms their ability to build support and build their case against a company.ConclusionSince the cost of entry is so low and the risk of loss is minimal with most companies, most people never take the time to review these agreements and negotiate accordingly. FULL DISCLOSURE: As an attorney, I have an obligation to draft the contracts in the best interest of my clients (companies), which means I load their gun with all of the available bullets mentioned above. But if distributors actually got together and said, "we're not cool with arbitration provisions," companies might be forced to reconsider. What do you think?I'm currently on the Advisory Board for the Direct Selling Reps' Association. We're considering a certification process where companies would be required to have (and not have) certain elements in their contracts to pass the certification process. Think it's a good idea?

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