Direct Sales and MLM

The Truth Behind Non-Competes and Non-Solicits in Direct Sales

By
Clay Brewer

A few weeks ago, I spoke at the Association of Network Professionals (ANMP) discussing one of the most important, although likely least sexy, topics that currently faces the world of network marketing: Non-Compete and Non-Solicit provisions within company policies and procedures and distributor agreements.

Because I have continued to receive numerous questions and comments on this topic due to recent FTC actions as well as arising from the topic of my discussion at ANMP, I find it prudent to break it down here, simply.

Non-Compete

Unless you’ve been living under a rock, you’ve likely heard of the FTC’s attempt to ban non-compete clauses in a final rule announced earlier this year.

When the FTC first announced the rule, companies and distributors alike were engulfed in confusion. Companies were immediately concerned as to whether or not their non-compete clauses were still valid. Distributors began to take to social media exclaiming #NoHandcuffs and claiming they can and should do whatever they want, whenever they want, companies be damned.

Neither approach is rational, and business owners must seek to be rational. It’s important to remember that companies are not the only business owners in any network marketing-distributor relationship. Distributors are also business owners, so they best begin to act like it and be rational as well. It’s not a free-for-all because you receive a few likes on Twitter or Facebook.

The most important item to understand in the rule is that it ONLY applies to

“a term or condition of employment [including independent contractor relationships] that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from (1) seeking or accepting work in the United States with a different person where such work would begin AFTER the conclusion of the employment that includes the term or condition; or (2) operating a business in the United States AFTER the conclusion of the employment that includes the term or condition.” (emphasis my own).

So what does this mean?

It means that non-compete provisions that apply during the term of the contractual relationship are still valid (subject to state laws and regulations). Under this, companies in the direct selling space are permitted to prevent their distributors from participating in other network marketing ventures and/or from marketing/selling competing products. How strict these provisions should/can be is a topic for a different discussion as it relates to independent contractor versus employment status to which I have spoken broadly on previously.

The FTC published the rule in the Federal Registrer on May 7, 2024. The Rule is set to go into effect, absent court rulings, on September 4, 2024, 120 days after publication.

Non-Solicit

The real meat of any contract in network marketing centers upon non-solicitation as opposed to non-competition. If a distributor wants to embark on a different journey and start from scratch, the more power to them.  The issue is when these distributors leave and seek, directly or indirectly, to poach others to join them.

The outcome of the rule has zero impact on a company’s ability to protect its intellectual property, such as line of sponsorship information, or to prevent distributors from poaching their former downlines, customers, or others within the distributor’s company not within that distributor’s downline.

While it should go without saying that poaching, raiding, or other unethical business practices shouldn’t occur, the sad reality is that it does frequently. This needs to stop for the industry to survive. There’s absolutely zero excuse for it. These actions derive from two core reasons in my opinion: (1) the company has neglected the field so the distributor has decided to leave; (2) the distributor wants to get rich quick and capitalize fast in their new venture.

In short, both of these core reasons derive from a lack of symbiosis between corporate and the field. Solve this and many of the offshoots will be solved as well. Network marketing should focus on coming together and creating a better future in a business model that has demonstrated to be successful.

As I wrote previously, Culture is Dead but there’s room for a Lazarus movement if we want it.

Clay Brewer
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