A Conversation with Jeff Babener Video Series: Some companies face issue of manipulation by distributors, with distributors signing up their spouses, children, even pets. This is not so much a legal issue but a standard in best practices for network marketing companies.

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To learn more about the direct selling industry, visit MLMLegal.com!

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Most companies will allow consultants to join downlines with multiple companies so long as they don’t raid the sales organization.

Some companies state that you can’t recruit people that you didn’t personally sponsor. If you personally sponsor a friend or family member then why can’t you recruit them to join you at your new company?

The short answer is that company policies have evolved over the years, resulting firstly from a combination of increased raiding by distributors who switch companies. And secondly, direct selling companies have become more rigid in trying to retain their sales force, sometimes with good reason, although they sometimes appearing to be “overreaching.”

For instance, around 20 years ago, leading direct selling companies maintained a policy that required consultants to only offer the opportunity to people who they personally sponsored. Twenty years ago, this was a common policy.

Over time that policy changed. With the increased ease of communication due to technology, many companies asked that consultants not participate in raiding anyone in their organization while they were active with a company. The policy later morphed again to require consultants not to sponsor anyone in a new opportunity except for those that they personally sponsored upon leaving for a new company. Then the policy changed once again to where companies required that consultants who left a company not sponsor anyone into the new company.

In a few instances, some companies have provided non-compete agreements, which aren’t considered fair and are not even enforceable as a matter of policy in the state of California. Some companies have gone so far as to tell their distributors that they cannot participate in any direct selling activity for a certain period of time after leaving the company. Almost all states frown on non-compete agreements because they inhibit people from conducting their livelihood. Compared with the policies of twenty years ago, the extremities in policy have morphed extensively in terms of restrictions.

Today, the most common clauses seen are ones in which companies have moved from the concept of “don’t recruit anyone unless you’ve personally sponsored them” to “during your time with our company, we ask that you not raid anyone in your sales organization, whether you’ve personally sponsored them or not.” Most companies today will also ask that former consultants not raid people in their organization and recruit them to another for a period of six months to one year.

Most companies will allow consultants to join downlines with multiple companies so long as they don’t raid the sales organization. In the party plan arena, companies will often implement restrictions based on product. If you are selling jewelry, for instance, then the company will ask that you not join another company which is selling jewelry.

What happens if consultants raid anyway?

As a practical matter, not a legal matter, if a distributor is affecting the entire franchise of the company – having a major impact – a company will not hesitate to file suit and to seek an injunction against the distributor. It is very rare to see a company pursue a consultant who is very low on the sales genealogy or who has a very limited sales organization. Legal action is usually reserved for consultants whose major raiding activities would take a good portion of the business away from the company. Often in situations, such as these, there has been a bad-faith decision by the distributor themselves, which isn’t fair to the company.

Is there a right or wrong? Probably not. However, it is important to the future of direct selling that companies and distributors reach some common ground on acceptable practices by distributors who leave companies and recruit their former colleagues to new companies versus reasonable expectations of companies in restricting distributor movement in a way that is not overreaching in the marketplace.

For more information on the network marketing industry visit www.mlmlegal.com and www.mlmattorney.com.

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That was the last the industry heard from the FTC, for the most part, other than various product-related issues. That is, until the mid-1990s when the FTC started to revisit the question of personal use by distributors. Some of the consent decrees with companies that were really egregious violators, were not in adjudicated rulings, but consent decrees, the FTC’s position was that at least 50 percent of product needs to be sold outside of the distributor network for a company to be legitimate. This put a lot of tension on a lot of companies, particularly health products companies that have a lot of personal use. There has been a lot of debate back-and-forth and a number of states, at the request of the industry, have changed their pyramid statutes to recognize personal use as a legitimate end-destination and an ongoing dialogue still occurs with the FTC.  In fact, in a 2004 FTC Staff Advisory Opinion, the FTC actually recognized the validity of personal use by distributors so long as the purchases of product are founded on the actual desire for the product as opposed to pyramid schemes in which distributor purchases are often primarily to merely qualify in the business opportunity.  Said the FTC, “..the purchase of goods and services is not merely incidental to the right to participate in a money-making venture, but rather the very reason participants join the program.”

Today, at industry conferences, the FTC is a participant and it always tends to assure the industry it recognizes its industry. As a matter of fact, just a couple of years ago, the FTC sought to modify its Business Opportunity Rule and considered some options that would have made it much more restrictive for MLM companies to recruit. After an onslaught of letters and comments to the FTC, the FTC modified its position on the Business Opportunity Rule and came into agreement for the most part with the industry on how things should go.

There will always be tension between the FTC and the industry on the issue of personal use, and overall, there seems to be a consensus. It is the observation in the industry that the FTC chases after egregious companies and does not chase after what we would normally consider legitimate companies.

For more information about network marketing and the FTC, watch the companion video to this blog post: What is the Relationship between MLM and the FTC?

Or, read one of our many articles on the Federal Trade Commission:

FTC Guidelines on Endorsements and Testimonials
FTC Guidelines Resource Center
FTC Guidelines Endorsements and Testimonials: Detailed Analysis
FTC News Release on Endorsements and Testimonials
FTC Complete Guidelines Release
FTC Short Version Guidelines Release
FTC Examples of Material Connection
FTC Regulation of Advertising

FTC Proposed Business Opportunity Rule: Analysis and Updates:
New! The FTC Final Business Opportunity Rule: Still Work to Do
FTC Exemption Draft Falls Short … MLMLegal.com and DSA Suggest Revisions
FTC Exempts MLM from Proposed Business Opportunity Rule
DSA Position on FTC MLM Exemption Proposed Business Opportunity Rule
Analysis and Industry Response
Actual Text of Proposed Rule
FTC Speaks Out
DSA Speaks Out
DSWA Speaks Out
MLMIA Speaks Out
DRA Speaks Out
MLMLegal.Com Speaks Out

FTC v. BurnLounge: Lessons Learned for MLM/Direct Selling

For more information on the direct selling industry, visit www.mlmlegal.com or www.mlmattorney.com.

Visit us at www.mlmlegal.com to learn more.