MLM Cross-Recruiting: The nuts and bolts of cross-recruiting claims by network marketing companies

Caution: This is a very general explanation of cross-recruiting and should not be used for anything other than general information. This is not legal advice. Retain an attorney if you want legal advice. Every case is different, especially in the context of cross-recruiting.

One way that distributors get into legal trouble in the MLM industry is by engaging in a practice that is called “cross-recruiting.” Often, cross-recruiting lawsuits occur when a key distributor moves from one company to another taking a large organization with him or her. Check out the results from some recent cross-recruiting lawsuits here.

Cross-recruiting occurs when a distributor uses contacts that he or she develops while working at one MLM company to solicit distributors to join a competing company.

Generally, the policies and procedures of a company will prohibit the practice of cross-recruiting. The Uniform Trade Secrets Act also prohibits this practice, as do common law prohibitions against the misappropriation of trade secrets.

One argument that often gets unsuccessfully raised in this type of case is that prohibitions against cross-recruiting are an unlawful restraint on trade. States such as California have strong public policy which favors free competition and therefore California law limits the extent to which businesses can prohibit their employees from engaging in lawful competition.

MLM companies are able to get around such laws, and enforce prohibitions against cross-recruiting, by proving that their lists of distributors (sometimes called a “genealogy” or “downline”) are a protected trade secret. A “genealogy” or “downline” is analogous to a customer list and customer lists are a protectable trade secret.

Therefore, prohibitions on cross-recruiting are generally enforceable under trade secret law to the extent that a genealogy or downline is wrongfully disclosed to and/or used by an MLM company’s competitor.

Solicitation of Personal Recruits

Distributors may usually solicit personal recruits.

This is because a personal recruit’s identity is not a trade secret belonging to the MLM company.

For example, if Amy is a distributor of XYZ Company, and she knows Betty from her church group, and she recruits Betty to join XYZ Company as a distributor, then Betty is a personal recruit.

If Amy leaves XYZ Company and becomes a distributor for Acme Company then she can solicit Betty to join this new opportunity with her.

However, if Betty recruits her cousin Charlie to join XYZ Company, and Betty introduces Charlie to Amy in connection with XYZ Company, then Amy cannot recruit Charlie to join Acme Company because Charlie is not a personal recruit of Amy’s.

That said, if Amy recruits Betty to join Acme Company then Betty can solicit Charlie to also join this new opportunity because Charlie is a personal recruit of Betty’s.

Solicitation of Non-Personal Recruits

Distributors may not solicit non-personal recruits.

If a distributor changes companies and a former member of that distributor’s downline enrolls in the new company, this does not necessarily violate any law because distributors are free to change companies. However, the upline distributor must not solicit the downline distributor to change companies (or vice versa).

This is a very fine line that often gets litigated because there is no clear distinction between whether somebody was solicited or whether that person merely changed companies without any solicitation.

Using our earlier example, suppose that Amy leaves XYZ Company to join Acme Company. If Charlie sees that Amy is gone from XYZ Company, and therefore searches for and finds Amy, then Charlie can join Acme Company as long as Amy does nothing to solicit Charlie to change companies.

Posted in Cross-recruiting
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