Fishy MLM Contract Provisions To Watch For – Corporate/Commercial Law

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Fishy MLM Contract Provisions To Watch For


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When it comes to network marketing companies, commonly referred
to as multi-level marketing (MLM) companies, the network of
relationships that MLMs develop are a common cause of litigation
and arbitration. Litigation is always expensive and the outcomes
uncertain so avoiding it is a best practice.

Network marketing is legal when executed properly and aligned to
regulations. MLMs typically start out small – selling to family and
friends – and when successful, grow quickly, often without time to
update their policies to match their vast national or international
network of salespeople. The sales network may be selling a product
off-label or with unlawful promises as they work to not only sell
but recruit an even larger network of salespeople. The unwitting
distributor could be violating company policies or the law and then
face far reaching retribution, including withholding of payments
earned or the termination of the business altogether.

When MLM companies fail to deal conscionably with the large
array of legal issues and personalities as they grow, especially
when its distributors circle the globe, the ramifications are
commonly heaped onto the shoulders of the distributors. MLMs try to
modify their contracts to point the finger at the distributors and
away from themselves to avoid legal penalties or loss of
shareholders. Unwary distributors caught in the crosshairs need to
appreciate they are often at odds with the goals of the MLM
company.

Position of Power

When they initially sign on work with an MLM, distributors may
not recognize the full extent of the terms that the MLM will
attempt to hold them to. While a potential distributor might be
presented with a brief, one page document to sign, those short
forms often cross-reference and purport to integrate huge, outside
documents outlining terms that heavily favor the MLM.

These additional documents could include disciplinary procedures
allowing the MLM to terminate a distributor with little or no due
process or compensation. They can also include terms that are so
vague that they leave the MLM near-absolute discretion to interpret
its side of the deal as it sees fit.

Another MLM tactic is to issue rapid fire policy changes in
contracts with distributors that can leave distributors unsure of
what rules or expectations they will be held to. As an MLM
increasingly drafts policy that favors the company, distributors
are squeezed into unfavorable positions that can lead to
litigation.

Lopsided Contracts

In theory, many distributors are independent business owners who
are free to walk away from the MLM at any point if the MLM’s
terms become too onerous or if a distributor is treated unfairly.
In practice, however, successful distributors have often invested
such significant time, money, and effort in building those
businesses that they consider it untenable to walk away from that
business. It is the distributor’s relationships that enabled
the MLM to generate its substantial wealth and those relationships
are often locked away from a distributor who leaves the MLM for a
different venture.

Ultimately, a distributor may find himself at the mercy of an
MLM that claims the power to either impose onerous, unworkable
conditions or terminate the distributor’s business. A
distributor in those situations may have little choice but to
either give in and walk away or hire experienced legal counsel to
fight for his rights.

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Legal Recourse

Where does this leave distributors following their American
dream, small-time entrepreneurs as well as larger-scale success
stories? Distributors are building a business, putting their heart
and soul into creating that business.

The initial policies a distributor signed decades ago may be
unrecognizable from the MLM policies a distributor currently
operates under. Distributors need to know what they originally
signed and whether they were forced to adopt the changes that led
to the current iteration.

Those who are uncertain about the language and terms should work
with a qualified attorney to make sure key provisions in their
contract are fair and conscionable. “Unconscionable”
policies and provisions can be legal and enforceable under specific
circumstances or illegal and unenforceable under others. Where the
line is drawn is the foundation work for a qualified attorney to
ensure a distributor is being treated fairly.

There are some key modifications to watch out for in MLM
policies, including:

  • Contracts that lock in a high damage limitation and specify
    that a distributor cannot get future income from the MLM

  • Mandatory arbitration clauses that favor the MLM to the
    disadvantage of the distributor

  • Clauses giving an MLM the discretion to terminate a
    distributor’s account for no reason or in its sole
    discretion

  • Unfair compensation changes or structures that leave a working
    distributor without the benefit of the bargain he or she signed up
    for initially

  • Over ambitious non-compete provisions preventing the
    distributor from leaving the MLM for a better opportunity

Unconscionable provisions may be thrown out in court (i.e.,
dismissing the MLM policy in favor of distributors’ rights to
basic fairness) but a distributor might need to be prepared for a
protracted fight against the well-funded MLM’s pocket. Merely
hiring a lawyer or sending a demand letter is unlikely meet a
distributor’s needs or force the MLM to the table.

Many MLMs have their own attorneys standing ready to call a
distributor’s bluff, push a dispute into arbitration, and fight
a case up to trial. Ultimately, defending a distributor’s
rights requires litigators who know the MLM landscape and have the
willingness and ability to take a case all the way.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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