MLM GOING INTERNATIONAL

BY JEFFREY A. BABENER
DECEMBER, 1996

Business is booming internationally for MLM and network marketing companies. On a global basis the industry does better than $70 billion a year with 20 million independent distributors. The Direct Selling Association reports that every week 150,000 distributors sign on to a direct selling opportunity somewhere in the world. Some of the largest internationally known companies do the majority of their business outside of the United States.

Network marketing companies are anxious to take advantage of the international boom. They enter foreign markets through a variety of methods, including:

  • international licensing and exclusive supply arrangements - akin to franchise arrangements;
  • joint ventures with local partners; and
  • preferably, if they can afford it, from both a time and money standpoint, establishing their own presence in foreign countries.

Understanding business and legal issues is paramount for international expansion. A legal treatise could be written for every country. For starters, however, here is a brief discussion checklist of legal considerations to start the ball rolling as companies look at a new foreign market:

  1. Corporate and Foreign Lawyers.
  2. Locate counsel in the foreign country that has expertise in direct selling. You may need to locate several different lawyers with expertise in direct sales, including food and drug, taxes, corporate structure, etc. Include your usual corporate counsel in the loop as you move into foreign countries to create some continuity throughout the world system.
  3. Trademarks.
  4. Look into registration of your company trademark and product and service trademarks as early as possible, and preferably even before entry to the country. Companies are always surprised to find themselves being held hostage to well-meaning distributors or greedy pirates who have already registered important company trademarks.
  5. Consumer Legislation.
  6. Every country has variations on deceptive trade practices, laws, consumer laws and anti-pyramiding statutes. These vary around the world and you should check out the local pyramid scheme acts to make sure that your compensation plan and method of marketing are in tune. In fact, in many countries you may be able to receive opinion letters, advisory opinions or approvals by government agencies as to the marketing program before entry.
  7. Earnings Claims.
  8. Check out the sort of restrictions that you and your distributors may make with respect the business opportunity you are offering and how it may be presented.
  9. FDA Issues.
  10. Food, drug and cosmetic laws vary widely from country to country. You may need to reformulate your product's ingredients. You may find yourself forced to manufacture within the country. Get an early start on labeling as this may slow you down considerably. Get yourself to a lawyer knowledgeable in FDA-type law.
  11. Product Compliance.
  12. Check out the government standards for manufacturing with respect to your product. Your product may need to be manufactured within the country. Specific type products may have their own regulations within the country. You will need to check out your entire product line on this point.
  13. Intellectual Property.
  14. In addition to trademarks you may need to register patents for your products in the country. You may need to check out restrictions regarding transfer of intellectual property such as software licenses, etc.
  15. Immigration.
  16. You will be sending key employees from company headquarters to work for indefinite periods within the country. You need to check out short and long term business visas or other necessary documentation for ongoing residency and local employment.
  17. Language.
  18. Verify language restrictions for labeling and literature. In some countries you may be required to have dual language labeling.
  19.   Banking.
  20. There will be large scale movement of monies in and out of countries. You need to verify restrictions on currency movement across borders and whether profits can be repatriated to the home country or must be reinvested in the foreign country.
  21.   International Sponsoring.
  22. Every company has its own unique method for international sponsoring. Make sure that the new market is receptive to your method of international sponsoring. Determine the relationship of sponsoring distributors in both the home country and foreign country. Will distributors need to sign up in country by country or is the company considering a seamless international sponsoring system with inter-company accounting for commission payments?
  23.   Customs and Tariffs.
  24. Although more free trade is coming about in the world, you need to explore in detail customs and tariff issues with respect to your product into the foreign country. In particular, taxing authorities of foreign countries will pay attention to transfer pricing with respect to both customs issues and tax issues.
  25.   Taxes.
  26. You need a good overview of national, provincial, sales, value added and other taxes. Your corporate counsel, tax accountants and foreign counsel need to advise you on the most tax advantaged method of operating whether it be as a subsidiary, an affiliate, a branch office, etc.
  27.   Corporate Form.
  28. Must you have local ownership? Must you have local residence of shareholders and members of your board of directors? Will your distributors be considered employees? You need to fully understand what your presence will mean in the foreign country.
  29.   Manufacturing and Supply Agreements.
  30. Must your manufacturing be local? If you are having local manufacturing, make sure that you have adequately secured under foreign law, your rights and responsibilities with respect to local vendors and suppliers. This may include both production as well as protection of your trade secret formulas of confidential information.
  31.   Marketing Literature.
  32. Everything that is passed out to the consuming public or your distributors must be brought up to speed, including distributor agreements, policies and procedures, compliance with door to door sales rules, distributor cancellation rules, buy-back policies, termination notices, etc.
  33.   Advertising.
  34. Before you bring your products into the country are they required to undergo testing to verify claims that you may make about the product or other product specific advertising rules that require compliance?
  35.   Antitrust and Trade Regulations.
  36. You need to check out restrictions on pricing, relationships with suppliers and vendors, relationships with your distributors, relationships with the other competitors, etc., all to verify that you are not in violation of local antitrust and trade regulation rules. For instance, may you ask your distributors to adhere to suggested prices or trade practices imposed by the company?

The above are good starting points for discussion and exploration of the new foreign market. Critical to your entry into those markets will be the assistance of specialized legal and tax counsel.

Bon Voyage.

Jeffrey A. Babener
Babener & Associates
121 SW Morrison, Suite 1020
Portland, OR 97204
Jeffrey A. Babener, the principal attorney in the Portland, Oregon law firm of Babener & Associates, represents many of the leading direct selling companies in the United States and abroad.

www.mlmlegal.com

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