http://www.MLM-DRA.org
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MLM Distributor
Rights:
From The DRA Book For Distributors and MLM Companies
The DRA Owes A Debt of Gratitude To
Counselor Babner ( A Top Gun MLM Specialist Attorney) For This
Contribution! It Changed The Course of The DRA To Push For Mediation First In
Our Charter!
DIALOGUE AS AN AGENT OF CHANGE
By Jeffrey A. Babener
© 2004
You Had Me At Hello
Contrary to popular myth, the interests of network marketing companies and
their family of distributors are one and the same. Without the one, the other
could not exist. One cannot be a winner if both are not winners. Distributors
are the backbone of all direct selling organizations. Although it has become
trite, the film character Jerry McGuire had it right when he said, "You
complete me."
Decisions of a direct sales company are accepted if they are grounded in
defense of supporting the livelihood of thousands of distributors rather than
the bottom line of a corporation. A "we" environment is much more
conducive to success than a "we-they" adversary relationship. The
success of Mary Kay is attributable to the philosophy of its founder, Mary Kay
Ash. Respected by those inside and outside of the direct selling industry, and
having risen herself from distributor ranks, she intuitively "got
it." In her book On People Management, she noted "Good people are a
company’s most important asset. People are more important than the plan … we
want our message to be 'We’re a people company.'"
Open Eyes, Open Ears, Open Minds
An open forum of ideas is the best place to start. Progress is not made by
the faint of heart or those with closed minds and petty grievances. There is
room in the "big tent" for all ideas. Those that prefer polarization
to dialogue are doomed to live with their head in the sand. Censoring or
stifling criticism of companies or practices is a sure way to lose credibility
among your peers. As Indira Gandhi said, "you cannot shake hands with a
clenched fist."
Mischaracterizing sincere or truthful criticism of abusive companies or
abusive practices as anti-MLM/network marketing or anti-direct selling/direct
sales ignores the fact that such companies or practices poison the pool of
potential recruits for those millions of distributors who are thwarted in
building their businesses. No service is provided by the person who puts his
hands over his neighbor’s ears and eyes.
In her insightful work on relationships, Mary Kay Ash went on to comment on
the art of listening, "Good Managers are good listeners. God gave us two
ears and only one mouth, so we should listen twice as much as we speak. When
you listen, the benefit is twofold: You receive necessary information, and you
make the other person feel important … people can be distracted by their own
petty prejudices … Listening is an art. And the first tenet of the skill is
that undivided attention to the other party."
Listen to Your Ultimate Market—The Consuming Public
And finally, it is not only important to listen to each other. It is
important for all parties in the industry to listen to their ultimate audience,
the consuming public to whom is offered both products and a business
opportunity. A fair-minded guiding principle in this dialogue is "Be
positive, be realistic … pro-MLM, anti-scam." In the preface to the book
for distributors, Network Marketing: What You Should Know (Jeffrey A. Babener,
2003), the theme is always one of fair-minded balance of interests:
"Network Marketing – Love it or hate it, this book is for you. For all
its supporters and detractors, it must be agreed that this channel of marketing
touches many lives. Although an ultra niche industry with less than one percent
of retail market share, its hallmark is that it is interactive, blurring the
line between seller and consumer - in the U.S. alone capturing involvement by
individuals in one out of every ten households, 10 million strong with sales
approaching $30 billion.
"This industry has had its image challenges, some earned and some
misdirected. It’s a business that costs 'next to nothing' to join, and, as
such, it brings out the best and worst in many. When done right, however, and
understood primarily for what it is, part-time auxiliary income, this business
can meaningfully enhance individual lives with income, recognition, team spirit,
and earned self-respect. To those, this book is intended to provide a
realistic, yet positive look at the business and practical self-help to be
successful as a network marketer."
The Future is Longer than the Present Milton Friedman, Nobel Award Economist
As economists are prone to analyze, there is a short run and there is a long
run. In the short run, confrontation and polarization can be a way of life,
albeit a very poor one. In the long run, any society can only thrive through
dialogue and reconciliation. The MLM industry is a microcosm of the larger
society. The better road is to capture the opportunity of cooperation and give
and take. Close your eyes? Well, as poetically noted by the musical group Kansas, "I close my
eyes, only for a moment, and the moment’s gone."
About the Author of this Esteemed Article:
Jeff Babener has been a leader in the network marketing industry for almost
20 years. His law firm has represented many of the leading companies all over
the world, like Avon, Nikken, NuSkin,
Melaleuca, USANA, AOL Select and Excel. He has lectured on the industry at
major universities, and he has published several books, as well as countless
articles in national business journals. You can read many of those at www.mlmlegal.com,
where he is editor-in-chief
THE FOLLOWING IS ALSO A GREAT SET OF Q&A’s
BY COUNSELOR BABNER FOR UNDERSTANDING
THE MLM INDUSTRY
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Thought You'd Never Ask – MLM IS
PERFECTLY LEGAL
Here are answers to some of
the most frequently asked questions about the network marketing industry.
Q: Can I
belong to more than one company?
A: Most network marketing
companies will allow you to belong to more than one company. However, most
companies do restrict their distributors' activities in promoting other
companies' opportunities and products. The most common policy allows distributors
to introduce other opportunities only to individuals that they have already
personally sponsored. In addition, most companies won't let their distributors
promote other opportunities or products at any company-sponsored events or
activities.
Q: Can my
husband and I have two distributorships?
A: Actually this is not a
legal issue. This is a policy adopted by companies who are concerned that
distributors will "stack" and manipulate to achieve better payout in
the compensation plan. Although many companies permit more than one
distributorship in a household, the majority do not.
Q: Can I
sponsor in foreign countries?
A: Some companies permit
this; some don't. Be sure to talk to your company about this before you devote
any time or money to overseas recruitment. The pace of sponsoring in foreign
countries is often faster than a company's ability to lay the proper ground
work for such expansion. Each country has its own rules regarding network
marketing, door-to-door sales, products of claims, etc. Chances are, your
company will ask you not to sponsor distributors in a foreign country until it
has laid the proper legal groundwork in that country.
Q: Do attorneys
general approve marketing programs?
A: Although government
agencies in some foreign countries may issue advisory opinions, no attorney
general office in the United
States gives its stamp of approval to an MLM
program. Inquirers are always told to review the appropriate laws. In fact,
nothing will bring the wrath of an attorney general's office more than a claim
by a distributor or a company that the program has been approved by the
attorney general.
Q: Can I sign
up by fax?
A: Some companies do allow
distributors to sign up by fax. In an electronic age, more and more courts are
recognizing that we must honor the way the commercial world actually works.
Facsimile signatures are legal. However, the best approach is to have an
original, signed distributor agreement on file at the home office.
Q: Who is
the true sponsor the first contact, or the name on the distributor application?
A: Some distributors think
that the first contact who introduced them to the company should be the true
sponsor. However, this creates problems for a company, because it is often
difficult, if not impossible, to determine who the first contact really was.
Therefore, most companies tell distributors that the sponsor listed on the
distributor application will be deemed the true sponsor.
Q: Why do
I have to pay sales tax?
A: This is a long
complicated story and not without ongoing legal dispute. Unlike mail order
firms which are immune from sales and use tax, direct selling companies are
viewed by state officials as having "nexus" (sufficient contacts in a
state for sales tax purposes). Their reasoning is based on the fact that distributors
of direct selling companies actually promote the product and opportunity, and
conduct opportunity meetings and training meetings in the states in which they
live. Consequently, their sales are not considered to be in the same category
as mail order sales. Distributors must either obtain resale tax licenses and
take care of the taxes themselves, or the company will collect and remit sales
and use tax.
Q: If I'm an
independent contractor, why are there rules regarding my conduct?
A: From a legal standpoint,
you are an independent contractor because the company does not tell you when,
where, and how to perform your tasks. If it did, you would be an employee.
Adopting guidelines on ethical issues, consumer legal safeguards, and general
rules for fair competition among distributors does not negate independent
contractor status. Independent contractor status generally means that
individuals are liable for their own income taxes, unemployment insurance,
worker's compensation, etc. In 1982, the federal government specially
recognized independent contractor status of direct sellers, and many states
have followed suit with specific legislation.
Q: What
can I do on the Internet with my network marketing business?
A: Here again, you will
have to talk to the company. Keep in mind that companies closely guard their
trademark names and have a right to regulate their usage in all media, whether
it is print or on the Internet. The Internet offers tremendous possibilities
for both companies and distributors, and this opportunity is one with which
many companies are wrestling. Some companies will provide space at their home
page for distributors. Some companies will provide a linking mechanism from
distributors' home pages to the company's home page. Many companies will not
allow a distributor to promote the company's product or opportunity on the
Internet. The main reason for this restriction is two fold. First, if the
company's name appears on distributor home pages, individuals who use search
engines would likely to be unable to find the company's home page because a
search would produce thousands of "hits" on the company name. The
company's home page would be lost amid the huge number of hits. The other
reason for restrictions by the company is the concern about earnings claims and
unauthorized product claims that have been made by distributors in the past and
have threatened the business opportunities of both the company and its
distributors. Many government agencies hold the company responsible for the
statements of its distributors, and at the very least expect the company to
regulate such advertising.
Q: What
can I say about a company's nutritional and dietary supplements?
A: Generally, companies
will be very clear about what can be said and what cannot be said, as demonstrated
in their official literature. Unauthorized claims can lead to problems not only
with state officials, but with the FDA and FTC as well. The Dietary Supplement
Act of 1994 dramatically increased the ability of companies and distributors to
comment on the benefits of dietary supplements. Under the Act, third- party
literature or scientific studies which are generic in nature may be passed out
to the public. In addition, companies that have specific backup data may make
claims about ingredients in their products when the claims relate specifically
to their impact on the structure and function of the human body, as opposed to
medical therapeutic claims. For example, under the Act, a company may comment
that vitamin C is beneficial to connective tissue. Keep in mind, this is not
the same thing as saying that a particular nutrient will treat or cure a
connective tissue disease.
Q: Is it
appropriate to pay commissions on sales aids?
A: No. Commissions should
only be paid on products or services that are available to be sold or used by
consumers. Sales aids do not fall in that category because they are merely
tools for distributors. Payment of commissions on sales aids would be
criticized as a payment of "head hunting fees" for the mere act of
finding other distributors, as opposed to sales to users of the company's
products or services.
Q: Are there
any trade organizations for the industry?
A: There are two major
trade organizations this industry. The Direct Selling Association in Washington, D.C.
represents a broad spectrum of direct selling companies. Some are strictly
direct sale, some are party plan, but almost all the growth in membership in
recent years comes from multilevel companies. The Multi-Level Marketing
International Association (MLMIA), in Newport
Beach, California
opens its membership to multilevel companies, multilevel distributors, and
professionals and suppliers involved in the multilevel marketing industry. Both
associations have the same goal, which is to promote the industry, and to assure
consumer safeguards for network marketing distributors and consumers.
Q: Is the
type of compensation plan the key to a company's success?
A: Historically this has
not been proven to be true. "Sexy" compensation plans have come and
gone, but long-term success has always been a function of product, management,
company vision or mission, a quality training program, and the bonding of
distributors and consumers with the goals and products of the company.
Q: Which
is more important: sponsoring or selling?
A: They are both important.
An army of distributors that sells nothing will produce no commissions. On the
other hand, recruitment is very important in a business where 90 percent of the
distributors are part-time and productivity per distributor is relatively low.
A balance is the key.
Q: Must
companies be registered in every state?
A: Actually, a number of
states have multilevel distribution statutes that require registration. In
addition, most companies will be registered to pay sales taxes throughout the
country. However, most network marketing companies will only register to do
business as a foreign corporation doing business in those states in which they
have a physical presence such as manufacturing facilities, warehouses, offices,
or employees. The corporate laws of most states provide that a company is not
"doing business in the state" merely because it sells through
independent distributors in that state.
Q: Who is
Glenn Turner?
A: In the 1970s, Glenn
Turner was the man behind a company called Dare to Be Great and Koscot
International. Dare to Be Great sold motivational programs and Koscot sold
cosmetics. Many people in the industry who knew Turner have remarked that he
was one of the most charismatic individuals and motivating leaders ever to come
along in the industry. Many company executives of subsequent network marketing
companies came from the Turner programs. Regulatory agencies and courts held
that Dare to Be Great and the Koscot programs promoted the opportunity rather
than the product. As a result of extensive litigation, those companies were
forced out of business in many jurisdictions. In the aftermath of those cases,
almost every state adopted pyramid statutes. Later in the 1980s, Turner
resurfaced again in association with Challenge to America, another motivational type
program. That program also faced difficulties and even a criminal conviction in
Arizona.
Q: What is the
Amway FTC decision?
A: This is the landmark
decision for the network marketing industry. In 1975 the Federal Trade Commission
charged Amway with violating FTC rules. After four years of litigation, Amway
prevailed when an FTC administrative law judge ruled that Amway was a
legitimate direct selling company and not an illegal pyramid scheme. The basis
of the decision is recognition of Amway's (1) ten retail customer rule, (2) 70
percent rule, and (3) buy-back policy. The industry owes Amway a debt of
gratitude. The industry would not likely exist if Amway had not prevailed.
Q: Who
owns the downline?
A: Actually no one owns the
downline. Distributors enter into an individual contract with the company.
Inherent in the contract is the company's agreement to pay overrides on the
downline sales organization of the distributor. However, downlines are people
and no one owns people. On the other hand, companies provide distributors with
computer printouts and genealogical reports, which the companies view as
proprietary and confidential. Companies do expect that distributors will not
use printouts to solicit for other opportunities, or to conduct mass mailings
or in any other way utilize computer printouts to compete.
Q: Is
multilevel marketing taught in leading business schools?
A: This is one of the
popular myths in the marketing industry. Though case studies have been done on
some leading direct selling companies such as Mary Kay, multilevel marketing
itself has not historically been a course topic in business schools. This may
be changing, however. In the mid-1990s, the University
of Illinois in Chicago first offered studies on network
marketing, and other universities have followed.
Q: How many
people are engaged in network marketing in the
United States?
A: Over 10 million people
are working either part-time or full-time in network marketing in the United States,
and upwards of 20 million worldwide.
Q: Are
noncompete agreements enforceable?
A: This is a tricky area of
law. For example, the State of California
specifically holds noncompete agreements to be unenforceable. Other states
uphold noncompete agreements if their terms are reasonable. Most courts frown
on noncompete agreements, and look for ways to not uphold them on the basis
that they interfere with an individual's ability to earn a livelihood. Network
marketing companies do have the right if they so choose (although few do) to
ask their distributors to have an exclusive relationship with them when they
are under contract with the company. However, after termination, the power of
companies to is very limited unless distributors are using confidential or
proprietary information. On the other hand, courts have upheld clauses which
prohibit distributors from returning to their old companies to interfere with
contractual relationships, or solicit or raid distributors from those
companies.
Q: What
about companies with offshore banking?
A: From a regulatory
standpoint, companies that transfer funds to offshore banks or tax haven
countries immediately go on the radar scope. The suspicion is that money is
being hidden for tax purposes or to avoid potential creditors. Networkers should
take a clue from this and avoid such regulatory suspicion.
Q: What is
an umbrella organization?
A: Through the years, a
number of organizations have invited distributors to join multiple network
marketing companies under the auspices of one organized effort. For whatever
reason, these types of organizations generally do not last very long because
peoples' interests and efforts are pulled in different directions. Most
industry experts agree that a distributor's best return on his or her efforts
is to work hard at one company at a time.
Q: Are
there conferences on multilevel marketing?
A: Quality conferences are
being held on the subject of network marketing with increasing frequency. The
DSA and MLMIA sponsor conferences. For more than a decade, Legaline Publications
and the law firm of Babener & Associates (Portland, Oregon)
have sponsored the MLM Entrepreneur Series twice a year. This conference, which
addresses trends in the industry, is co-hosted by the publication, Money
Maker's Monthly. In addition, Legaline Publications and Babener &
Associates are also the hosts of an annual national symposium on network
marketing, a serious look at the network marketing industry for company
management. For information on upcoming conferences, call Legaline Publications
at 1-800-231-2162.
Q: Will
MLM account for 90 percent of the sales of products in the 1990s?
A: This is another one
those myths about multilevel marketing. While it may help recruiting, its not
true. The types of products sold by network marketing companies cut across the
entire spectrum of consumer goods and services. Although it is a significant
industry, it should be kept in mind that is a $20 billion industry in a $5
trillion economy.
Q: Did
most of
America's millionaires make their money in MLM?
A: Again, this is a myth.
There is good money to be made in multilevel marketing, and quite a few people
have become millionaires in this industry. Though you will find Rich DeVos and
Jay VanAndel of Amway among the Forbes 400 America's richest individuals, the
vast majority of others do not come from the network marketing industry.
Q: What is
an "at cost" sales kit?
A: Almost all states
pyramid statutes prohibit the payment of an investment for the right to be
involved in a multilevel type business. Many of the states specifically hold
that the purchase of an "at cost" sales kit from a company is not
considered to be an investment. Sales kits typically cost between $15 and $75.
The term "at cost" means that the sale of the mandatory sales kit
does not generate profit for the company. Profits for the company and its
distributors should come from the sale of the company's products and services.
Q: What
geographical areas dominate network marketing?
A: Network marketing is a
people business. Friendly climates make for great network marketing. Although
all companies have their own specific hot spots, many network marketing
companies count on initial success on the West Coast of the United States, the
Sunbelt (California, Arizona, Texas, Florida, and East Coast areas from Florida
up through Georgia and the Carolinas), and the Bible Belt of the Midwest.
Network marketing typically does not do well in major, high-density urban
areas. Rather, it does well in suburban communities and rural and smaller
towns. This is not surprising, because more socializing is likely to occur in
these areas.
Q: What
is a trademark?
A: Historically, in England,
craftsmen put their marks on their products to denote their source or origin.
This was the beginning of what today is referred to as common law trademark
rights. A company or individual that is the first to use a name or logo
associated with a product or service in commerce has common law trademark
rights. Additional rights come to trademark owners who register their
trademarks in the U.S. Patent and Trademark Office.
Q: Can a
company restrict my advertising?
A: The rights of the
distributor and the network marketing company are determined by their contract,
and specific restrictions on advertising are contained in the distributor agreement
and the company's policies and procedures. The rules regarding advertising are
usually very detailed. Companies are zealous about protecting their trademarks.
In addition, they want to avoid inappropriate claims about earnings
opportunities or product properties, such as medical claims.
Q: Is it
okay to pay commissions for recruiting new distributors?
A: Absolutely not! This is
what is referred to as "head hunting" fees and is commonly referenced
as an element of pyramid schemes in court cases. Commissions should be paid
only on the sale of company product or services.
Q: What is a
"heavy hitter"?
A: The term "heavy
hitter" is used in the industry to denote individuals who have had major
success building sales organizations and selling products. Heavy hitters who
have the ability to build quality long-term sales organizations are very much
in demand. On the other hand, heavy hitters who merely recruit "multilevel
junkies" (those who frequently move from one company to another) are of
little use to companies or to their distributors.
Q: Who owns
the distributorship in a divorce?
A: There are no special
network marketing laws for divorces. The same laws that regulate dissolutions
of marriage in each state regulate the fate of a distributorship in a divorce
situation. In court proceedings, valuations are placed on the distributorship
just as other assets are valued. Network marketing companies, however, commonly
ask distributors to inform the company who will be the successor distributor
after a divorce.
Q: Why do
network marketing companies prohibit sales in retail stores?
A: If consumers could buy Avon, Tupperware, and Shaklee products in retail stores,
why would they bother purchasing them from distributors? Network marketing
distributors have made the market for these products. Sales in retail stores
would be viewed by companies as undermining the very foundation of the growth
of these companies. Providing distributors with a proprietary product to bring
to the marketplace, with the assurance that the product will not be sold
through retail channels, is a key ingredient in the success of network
marketing companies.
Q: Are
network marketing companies active in
Japan?
A: You bet. Not only are
they active in Japan,
they are active all over the world. Japan-based direct selling companies such
as Nikken, Noevir, and Pola are among the world's largest, with billions of
dollars in sales. Companies like Amway, Shaklee, and NuSkin have had singular
success in Japan
and in the Asian markets. In fact, the majority of the sales of leading network
marketing companies such as Amway or Herbalife are in their foreign markets.
This doesn't mean that there are not still tremendous opportunities in the United States.
It merely means that they are also great overseas opportunities.
Q: What is
stacking?
A: Stacking is a term used
by network marketing companies to describe a distributor's attempt to
manipulate compensation in the marketing plan by placing members of his or her
household or family in the downline sales structure. It is frowned upon, and
most companies have rules that are intended to discourage the practice of
stacking.
Q: If it
sounds too good to be true, is it?
A: Yes!
About the Author of this Article:
Jeff Babener has been a leader in the network marketing industry for almost
20 years. His law firm has represented many of the leading companies all over
the world, like Avon, Nikken, NuSkin,
Melaleuca, USANA, AOL Select and Excel. He has lectured on the industry at
major universities, and he has published several books, as well as countless
articles in national business journals. You can read many of those at www.mlmlegal.com,
where he is editor-in-chief
