Melaleuca, Inc. v. Organo Gold Int’l (D. Idaho – Aug. 9, 2011)

The defendants are accused of raiding a competitor’s downline. The fight is over whether Idaho is an appropriate venue. The defendant loses its motion to dismiss for lack of personal jurisdiction in Idaho.

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Posted in Jurisdiction

70 Percent Rule

Common sense is not all that common. – Anonymous

When putting together a good set of policies and procedures for an MLM startup, common sense requires that companies adhere to something called “the 70 percent rule.” At its core, the 70 percent rule exists as a way to make sure that network marketing companies do not lose sight of why they exist.

The network marketing industry exists as a way to get products to market efficiently and without the need for a multi-billion dollar advertising budget. In other words, it is a great way for small entrepreneurs to compete with large corporate conglomerates.

In 1979, the Federal Trade Commission (“FTC”) legitimized the network marketing industry by concluding that “[t]he Amway Sales and Marketing Plan is not a pyramid plan.” In the Matter of Amway Corp., Inc., et al., 93 FTC 618 (1979). It reached this conclusion for a number of reasons, one of which was that Amway adhered to a “70 percent rule” which was set forth in its policies and procedures.

According to the FTC:

The ’70 percent rule’ provides that ‘[every] distributor must sell at wholesale and/or retail at least 70% of the total amount of products he bought during a given month in order to receive the Performance Bonus due on all products bought . . ..’ This rule prevents the accumulation of inventory at any level.

[T]he buy-back rule, the 70 percent rule, and the ten customer rule are enforced, and … they serve to prevent inventory loading and encourage retailing.

Ibid.

A very important part of this FTC order, a part that is too-often ignored by MLM companies, is the part about how Amway actually enforced its 70 percent rule “to prevent inventory loading and encourage retailing.” The whole purpose for why the network marketing industry exists is to get products to retail customers. If distributors are inventory loading then this purpose is clearly not being served.

The problem with inventory loading, from a business perspective, is that it demoralizes distributors to have a garage full of unsold products. An MLM company with demoralized distributors will not stay in business for very long.

From a legal perspective, the problem with inventory loading is that if distributors continue to buy product that they are not selling then that is a good indication that the product is not truly what the distributors are buying. There is a good chance that what they are truly buying is an opportunity to be involved in an illegal pyramid scheme.

In sum, the 70 percent rule arose in 1979 from the landmark Amway order as one guideline for keeping an MLM busines legitimate in the eyes of the FTC. More fundamentally, however, it is just common sense to require distributors to actually distribute products. Click here to see some of the cases which have applied the 70 percent rule.

Posted in 70 Percent Rule

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

Bunchan v. USA (D. Mass – July 25, 2011)

“He who is his own lawyer has a fool for a client.” – Proverb

This was a last ditch effort by James Bunchan to overturn a conviction and unsuccessful appeal. This time, he represented himself.

James Bunchan operated two multi-level marketing companies that were deemed to be Ponzi schemes. He was convicted of money laundering and fraud and sentenced to 35 years in prison. His companies generated at least $26 million over the course of five years. Although approximately $12 million of that total was paid out to investors on a monthly basis, the remaining $14 million was left to Bunchan and others to spend at their whim.

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Posted in Ponzi Scheme

Melaileuca, Inc. v. Hansen (D. Idaho – April 15, 2011)

A multi-level marketing company sends mass e-mails advertising its services, including to executives at a competing company. The competing company files suit alleging that this is unlawful spam under the CAN-SPAM Act. The plaintiff loses because it was not the one to whom the spam was sent. It then refiles lawsuit. It loses again, for basically the same reason plus the fact that it is improper to refile a lawsuit after you lose.

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Posted in CAN-SPAM
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