Direct Sales and MLM

$50 million is burning a hole in a company's pocket...

By
Kevin Thompson

< src="https://dev-thompson-burton-wpms.pantheonsite.io/wpmlm/wp-content/uploads/2011/01/art_of_the_deal-300x241.jpg" alt="" width="300" height="241" class="alignleft size-medium wp-image-149" />...and if you have a large network, those dollars might trickle your way. I received information from a credible source that one of the larger companies in the MLM space is looking to go back on offense and spend $50 million this year to help recruit top distributors. Given this company's losses in 2010, they're looking to go big in 2011 and buy some talent as they've done in the past. When recruiting top distributors, it gets tricky. First, as I've written in the past about master distributors, it's perfectly fine to negotiate deals with top-talent. However, there's usually a few land mines that need to be considered before a company writes checks.First, top distributors are usually saddled with either non-compete or non-solicitation provisions from their prior companies. The non-solicitation clauses typically restrain distributors from contacting non-personals in their downline for a period of two years following their resignation or termination from the business. If a distributor is being recruited because of their large network, it's very likely that their current company has them committed to a non-solicitation clause. If this is the case, the recruiting company can be accused of "tortiously interfering" with the contractual relationships between the company and it's distributors by encouraging the distributors to break the contract and solicit. We saw this kind of lawsuit between Amway and MonaVie, which has recently been settled and MonaVie and XOWii (click the link to review lawsuit, start on page 9). When a company decides to get aggressive and cut some deals, it boils down to a simple truth: it's a matter of calculated risk. If they poach an organization, earn over $10 million from the downline and pay only $5 million in litigation fees, they win. If the numbers are opposite, they lose. As the saying goes, "Nothing ventured, nothing gained."There's another issue that needs attention from companies looking to cut some deals. The FTC recently published it's revised marketing and testimonial guidelines. In a section titled "Disclosure of Material Connections," it states:"When there exists a connection between the endorser and the seller of the advertised product that might materially affect the weight or credibility of the endorsement (i.e., the connection is not reasonably expected by the audience), such connection must be fully disclosed. . . ."With that particular provision in mind, companies seeking to negotiate confidential deals should at least consider disclosing these deals to the public lest they find themselves on the wrong side of a lawsuit by either a class of distributors or the Federal Trade Commission. It has yet to happen; however, the revised FTC guidelines are only two years old.What do you think? Does the benefit of recruiting large organizations outweigh the costs of litigation and potential FTC investigations?

More Insight

February 26, 2024
By
Clay Brewer
Thoughts A Brewin' Newsletter 7: The California Risk
Learn more
Learn more
February 8, 2024
By
Clay Brewer
Thoughts A Brewin' Newsletter 6: Culture is Dead
Learn more
Learn more
January 29, 2024
By
Brooks Brasfield
Breaking Bad? Navigating the Corporate Transparency Act for Small Business Owners and Commercial Real Estate Investors
Learn more
Learn more