MLM is a Pseudo Franchise

Multilevel Marketing (MLM) portrays itself as a business that anyone can do, with low barriers to entry and no experience necessary.[1]  However, the contracts that MLM distributors are required to sign paint a different picture.  MLM distributor agreements are similar to franchise agreements; they are lengthy, complex, sophisticated commercial instruments.     Like franchise agreements, MLM distributor agreements are drafted by lawyers who specialize in the field and are intimately familiar with the applicable federal and state statutes, regulations and case law.   In order to understand all of the obligations she is undertaking, the MLM distributor has to navigate an imposing, confusing and non-negotiable collection of densely worded documents, generally without the benefit of counsel.  Moreover, there is an extreme imbalance in sophistication, knowledge and negotiating power between the MLM company and the prospective distributor.

In this paper I analyze three MLM distributor agreements:  Herbalife (circa 2013, prior to the FTC consent order of 2017), Young Living Essential Oils, and International Markets Live (a/k/a IM Mastery Academy). Over the past thirty years I have analyzed scores of MLM distributor agreements and I am confident that the three agreements analyzed here are representative of the entire MLM industry.  Founded in 1980, Herbalife is one of the largest and oldest MLM’s still operating and is a model for many MLM’s.   Herbalife is a member of the Direct Selling Association (DSA) and Herbalife executives have held many leadership positions in the DSA.  Young Living Essential Oils, LC (“YL”) was founded in 1994 and is also a member of the DSA.  International Markets Live (“IM”) was formed in 2013 and is not a member of the DSA.

My analysis demonstrates that MLM companies obtain through their distributor agreements a tremendous amount of power over their distributors.   In recognition of this power it would not be unreasonable to require MLM companies to provide information to prospective distributors covering not only the modest disclosures required by the Business Opportunity Rule (which does not currently apply to most MLM opportunities) but also at least some of the disclosures that franchisors are required to make under the Commission’s Franchise Rule.    These disclosures should include clear explanations of the contractual obligations and liabilities the distributor is being required to undertake, including but not limited to such matters as non-competition, non-solicitation and non-disparagement covenants, mandatory arbitration clauses, forum selection clauses and waivers of jury trials, class actions and certain types of damages.

MLM distributor agreements bear many similarities to franchise agreements.  The International Franchise Association, a trade organization with over 1,400 franchisor members, notes that while there are variations, every franchise agreement should address the following areas:

*  Use of Trademarks

*  Location of the Franchise

*  Term of the Franchise

*  Franchisee’s Fees and Other Payments

*  Obligations and Duties of the Franchisor

*  Restrictions on Goods and Services Offered

*  Renewal, Termination and Transfer of Franchise Agreement[2]

As detailed below, all of these areas are also covered by MLM distributor agreements.   MLM agreements are no less complex and sophisticated than franchise agreements.

         The similarities between MLM agreements and franchise agreements are not coincidental.   Most MLM distributorships meet two of the three-factor definition of a franchise under the Commission’s Franchise Rule.   The MLM distributor agreement creates a “continuing commercial relationship” in which the distributor obtains “the right to operate a business that is identified or associated with the franchisor’s trademark, or to offer, sell, or distribute goods, services, or commodities that are identified or associated with the franchisor’s trademark” and the MLM company “will exert or has authority to exert a significant degree of control over the franchisee’s method of operation, or provide significant assistance in the franchisee’s method of operation.”   See 16 CFR §436.1(h)(1) and (2).  MLM distributorships bear resemblance to both product franchises, in that distributors sell goods and business opportunities that are branded with the MLM company’s trademark, and business format franchises, in that distributors operate businesses that are identified or associated with the MLM company’s trademark.  However, the Franchise Rule effectively exempts MLM companies through the required payment exemption, which exempts relationships in which the required payments within the first six months of operation are below an inflation-adjusted threshold (currently $615).  See 16 CFR §436.8(a)(1).   Critically, “the purchase of reasonable amounts of inventory at bona fide wholesale prices for resale or lease” does not count towards the “required payment.”   See 16 CFR §436.1(s).   Most MLM companies characterize the payments made by distributors as either a nominal entry fee for a “starter kit” (always below the threshold set by the Franchise Rule), or as the purchase of wholesale inventory for resale.[3] Accordingly, MLM companies are able to evade the pre-sale disclosure requirements of the Franchise Rule.

         In the discussion below I identify a dozen features which are characteristic of MLM distributor agreements and which demonstrate the extreme degree of control which the MLM company maintains over every aspect of their relationships with their distributors.   Moreover, my analysis demonstrates that MLM distributorships are in essence “pseudo-franchises” and but for the exemptions provided by the Franchise Rule would be subject to the pre-sale disclosure requirements of the Franchise Rule.   The MLM industry cannot credibly argue that MLM is a simple, inexpensive business that should not be subject to any pre-sale disclosure requirement such as those mandated by the Franchise Rule or the Business Opportunity Rule.   Simply put, if MLM companies want to be treated as offering a legitimate business opportunity then they should not be heard to object to providing clear and accurate information to prospective distributors.

1.       MLM Agreements are Non-Negotiable

         MLM distributor agreements are presented to distributors on a take-it-or-leave-it basis.  They are quintessential contracts of adhesion.  Moreover, the MLM recruiter frequently creates a sense of urgency, explicitly or implicitly warning that if the prospect hesitates and wants to time to consider the proposition they will be forfeiting a once-in-a-lifetime opportunity.  There is no opportunity for negotiation, and the recruiter never suggests that the prospect should seek legal counsel, and few would be in a position to do so. 

The only instance in which there is negotiation between an MLM company and a prospective distributor is when the prospective distributor is currently a high level distributor for another MLM company.   In these instances there may be a side agreement (separate and distinct from the standard distributor agreement that applies to all distributors) that may provide additional benefits to the incoming distributor in consideration of their bringing with them their “downline” from their previous company.[4]   The terms and existence of these agreements are never disclosed to the rank and file distributors.

2.      MLM Agreements are Lengthy and Comprised of Multiple Parts

         MLM distributor agreements are generally quite lengthy and comprised of multiple parts which are incorporated by reference in the agreement.    For instance, Herbalife distributors execute a two-page “Application for International Distributorship,” which includes a section entitled “Distributor Agreement Terms and Conditions.”[5]  Paragraph 1 of the Herbalife Agreement states that the agreement includes “the documents which are expressly incorporated into this Agreement of Distributorship,” but does not identify what documents are incorporated by reference.   The documents incorporated by reference are described in Paragraph 8, which states that the “Rules of Conduct and Distributor Policies, the Sales and Marketing Plan, Ordering Procedures and Sample Forms are incorporated by reference.”   These documents are assembled in a “Career Book” of 134 pages which contains detailed provisions governing every aspect of operating a Herbalife distributorship. 

Similarly, Young Living distributors sign a 3-page “U.S. Brand Partner Agreement.”   Paragraph 1 states that the distributor “must personally review and agree to the following documents, which collectively constitute the Agreement:

(a) This Brand Partner Agreement

(b) The U.S. Policies and Procedures for Young Living Independent Brand Partners and Professional Account Customers (hereafter simply the “Policies and Procedures”)

(c) The Young Living U.S. Privacy Policy

(d) The Young Living Compensation Plan Highlights

(e) The Young Living Terms and Definitions for the Compensation Plan (which together with the Young Living Compensation Plan Highlights constitutes the “Compensation Plan”).”[6]

In the aggregate these documents comprise 39 pages and, like the Herbalife Agreement, govern every aspect of operating a Young Living distributorship.

The IM agreement is also comprised of multiple parts, including Terms and Conditions (10 pages), the IM Policies and Procedures (36 pages), the IM Compensation Plan (13 pages) and the IM Social Media Policy.[7] 

3.       MLM Companies Retain the Unilateral Right to Modify the Distributor Agreement

Not only are MLM distributor agreements complex, lengthy and non-negotiable, they generally reserve to the MLM company the unilateral right to modify each and every term and provision of the agreement at any time in their sole and absolute discretion. These clauses leave the distributor at the mercy of the MLM company.    

For instance, Paragraph 8 of the Herbalife Agreement gives Herbalife the unilateral right to add to, modify or amend the Agreement and the Rules “from time to time in its sole and absolute discretion.”   There is no limitation on the substance or format of the changes Herbalife may decide to make, or the manner in which it chooses to make them.   Herbalife has the contractual power to change the basic nature of its distributorships.

The Young Living Agreement provides at Paragraph 5:    “You [the distributor] understand and agree that Young Living may, from time to time, amend the terms and conditions of the Agreement including any documents made a part thereof. For details, please refer to the Policies and Procedures, including specifically at Sections 1.4 and 10.2.”   Section 1.4 of the Policies and Procedures provides that amendments are effective 30 days after they are published in “official” YL publications, posted on YL’s website, or emailed to the distributor.  Ordering any product or accepting any payment after the amendment constitutes the distributor’s acceptance of the amendment.  The arbitration clause warrants its own provision concerning amendments, which is set forth in Section 10.2 of the Policies and Procedures.

         Likewise, the IM agreement contains two clauses concerning IM’s unilateral right to amend, one concerning the compensation plan and the other concerning the rest of the agreement.   Paragraph 16 provides that “I [the distributor] acknowledge and understand that IM reserves the right to vary or change the terms and conditions of the IM Compensation Plan at any time, including without limitation those terms and conditions related to

eligibility.”  Paragraph 22 provides that “I [the distributor] acknowledge that IM fully reserves its right to amend or modify this IBO Agreement at any time by notifying me of the changes by emailing me or posting the revisions on the IM website (www.im.academy) or in the IM back office, and any such changes to this IBO Agreement may be made effective at IM’s election upon the date of execution, or the date of IM’s posting of the amended IBO Agreement, or prospectively to a date specified in the amendment. This IBO Agreement shall not be modified or amended except as described herein and no amendment shall apply retroactively.”

4.       MLM Agreements Contain Numerous Disclaimers and Recitals Binding on the Distributor

         Another similarity between MLM agreements and franchise agreement is the use of numerous disclaimers and recitals covering such matters as the legal status of an MLM distributor, the distributor’s non-reliance on pre-sale representations, and the distributor’s review of certain documents.  Frequently the agreements also contain merger/integration clauses which provide that the agreement supercedes any prior representations.   These clauses are drafted with a view towards securing an advantage for the MLM company in any future litigation with the distributor.   For example, a distributor who attempts to bring a fraud claim against an MLM company based on a pre-sale earnings claim will have to contend with the contractual provisions disclaiming reliance on such representations.  A prospective MLM recruit, unrepresented by experienced and knowledgeable counsel, could not possibly appreciate the significance of these clauses.

The Herbalife Agreement contains a number of recitals, including but not limited to the following:

Paragraph 3:         I have received and have reviewed thoroughly the contents of a previously unopened Herbalife Member Pack (“HMP”) or Mini HMP.

Paragraph 4:          I am not relying upon any representations as to the financial results I might achieve.

Paragraph 5:         I am aware that the only required purchase to become, succeed or advance as an Herbalife Independent Distributor is the Mini IBP.

Paragraph 7:         I have received and reviewed the Statement of Average Gross Compensation of U.S. Supervisors and the Corporate Policy Statement on Business Methods … I acknowledge these are gross, not net income figures.

         Like the Herbalife agreement, the YL agreement contains numerous recitals including:

Paragraph 4:         You acknowledge and agree that as a Brand Partner you are:

• An independent contractor, and not an employee, agent, partner, legal representative, or franchisee of Young Living

• Subject to entrepreneurial risk and responsible for all losses that you incur as a Brand Partner.

Paragraph 5:         You further acknowledge and agree that you have carefully read and agree to comply with all such documents comprising the Agreement

Paragraph 12 of the YL agreement is a merger/integration clause which provides that “[t]he Agreement, which may be amended from time to time, constitutes the entire agreement between you and Young Living and supersedes any prior agreements, promises, representations, and guarantees, whether written or oral.”

The IM Agreement also contains numerous recitals, including:

Paragraph 2:  I understand that commissions, bonuses, or other compensation earned by me as an IBO (“Compensation”) and rank advancement are based solely upon the successful sale of IM Products and/or Services to customers and that I am not required to purchase any IM Products and/or Services.

Paragraph 8:  I agree that I am an independent contractor for all purposes under applicable federal, state, and local statutes, rules, regulations, and other laws

Paragraph 10: I acknowledge that I am not guaranteed any income, profits, or success, and I will not make any claims of guaranteed profits or representations of expected earnings as an IBO.

The IM agreement also contains a merger/integration clause at paragraph 23 which provides that “[t]he IBO Agreement constitutes the entire agreement and understanding between me and IM regarding the subject matter hereof and supersedes any and all prior or contemporaneous agreements, representations, commitments or understandings, whether oral or written, made by or between IM and me.”

5.       MLM Agreements Restrict the Distributor’s Right to Litigate

         MLM agreements typically contain a panoply of provisions concerning the resolution of any disputes or claims, including clauses requiring the arbitration of all controversies of any kind, choice of venue clauses, waivers of the right to join claims in class actions, jury trial waivers, private statutes of limitation and limitations on the recovery of certain categories of damages, such as consequential, incidental and punitive damages.   It is doubtful that prospective distributors appreciate the significance of these clauses, if they are even aware that they have agreed to them.

Paragraph 17 of the Herbalife Agreement includes a choice of venue clause designating the state or federal courts in Los Angeles, California as the exclusive venue for any disputes, a California choice of law clause, and a one year private statute of limitation for any claims.   Confusingly, the Rules, which are incorporated by reference, include an arbitration clause which provides that arbitration is the exclusive means for resolving any disputes between Herbalife and the distributor.  (Herbalife, pp. 98-100).   The arbitration agreement includes a clause that provides that “Any arbitration under this agreement shall take place on an individual basis; class actions and class arbitrations shall not be permitted.”  The Herbalife Agreement also includes, in paragraph 18.a., a waiver of incidental, consequential and punitive damages.

The YL Agreement also includes detailed provisions for dispute resolution, including mandatory mediation (with the distributor and YL splitting the cost of the mediator), mandatory arbitration, waiver of class actions, waiver of jury trials and waiver of punitive damages (Paragraph 10.2 of the YL Policies and Procedures).

Paragraph 19 of the IML Terms and Conditions, entitled “Dispute Resolution” contains an arbitration clause, a class action waiver and a jury trial waiver.   Paragraph 18 provides that IML will not be liable for “indirect, consequential, special, punitive or incidental damages.”

6.       MLM Agreements Restrict Distributors From Selling or Recruiting for Other MLM Companies

         MLM agreements generally include non-competition or non-solicitation covenants which restrict the distributor’s right to join, sell or recruit for other MLM companies, both during the term of the agreement and after the agreement is terminated by either party.  These restraints on competition are usually not limited to companies selling the same or similar types of products, but extend to all companies utilizing the MLM recruitment model.  This is an indication that the fundamental business of the MLM company is the sale of MLM distributorships as business opportunities, rather than the sale of whatever products or services the MLM company is nominally selling.

Paragraph 13 of the Herbalife Agreement includes a non-solicitation covenant which provides that “During the term of my Distributorship and for one (1) year thereafter, neither my spouse nor I will, directly or indirectly (through or by means of any person, entity or artifice), solicit, promote, sponsor or recruit any Herbalife Distributor or any customer of Herbalife of whom I became aware in the course of my Herbalife Distributorship, to join, promote, sell or purchase products of, or participate (as a salesperson or otherwise) in any multi-level marketing or direct sales company and I will not encourage anyone to do what I have agreed not to do” (emphasis supplied).

The YL agreement has both a non-solicitation provision (Policies and Procedures Paragraph 3.11.1) and a non-competition provision (Policies and Procedures Paragraph 3.11.2), both of which are complex and lengthy.   The non-solicitation provision is both in-term and post-term (12 months) and prohibits solicitation of anyone “(i) who was in the YL Partner’s Team or Support Team at any time during the term of the Agreement; (ii) who had contact with the YL Partner related to Young Living products or business during the term of the Agreement; or (iii) whose contact information (name, address, phone number, or email address, etc.) was obtained by the YL Partner at any time during the term of Agreement.”   Accordingly, the prohibition of solicitation extends not only to persons in the distributor’s downline (which often includes many of the distributor’s friends and family members) but persons with whom the distributor may have discussed YL but did not actually sell any YL products or recruit them into YL.

The YL non-competition covenant also contains multiple provisions.   One of them is somewhat unusual in the MLM industry in that it specifically mentions another MLM firm, doTERRA International.  YL distributors are prohibited both in-term and for six months post-term from serving in any capacity with doTERRA.   Another provision, which applies both in-term and for six months post-term, prohibits YL distributors who have reached the rank of Diamond and above from serving in any capacity with “any other multilevel marketing, party planning, or other direct sales company, regardless of the type of products or services offered by that entity.”   Here again, the reach of the clause is broadly extended to all other MLM companies and is not limited to businesses (whether MLM or otherwise) which sell the same or similar products. 

Paragraph 20 of the IML Terms and Conditions, entitled “Restrictive Covenants,” prohibits the distributor from soliciting both customers and distributors.   In particular, distributors are prohibited from soliciting current and former IML distributors into “another multi-level marketing, network marketing, or other direct selling business opportunity.”   The distributor agrees that “all Customers/Members Solicited by an IBO for the promotion or sale of IM Products or/or Services are deemed to be Customers/Members of IM and not of the IBO, whether or not the IBO originally introduced such Customer/Member to IM.”  

7.       MLM Agreements Forbid Distributors from Criticizing the Company or its Products

         One development in the evolution of MLM distributor agreements has been the increasing use – and enforcement – of non-disparagement clauses. [8]     These clauses go beyond the MLM company’s right to sue for defamation but prohibit the distributor from make truthful but critical statements concerning the company, the business opportunity or the company’s products. The increasing incidence of victims of MLM scams posting information about their experiences on social media has been followed by an increasing assertion of these clauses by MLM companies in “cease and desist” letters and litigation.   Former distributors are often surprised to find that the contracts they signed preclude them from making negative comments about their MLM experiences.

For example, Paragraph 11.b. of the Herbalife Agreement provides that a distributor  “shall not engage in any practice or activity that could discredit or damage the image or reputation of Herbalife.”   This is an exceedingly broad clause that could apply to just about any comment a former distributor might want to make about Herbalife.

Paragraph 3.20 of the YL Policies and Procedures includes a non-disparagement provision that provides in part that “YL Partners must not disparage, slander, or defame Young Living, other YL Partners, Young Living employees or officers, or Young Living founders.”   In addition, Paragraph 10.6 of the Policies and Procedures provides that a YL distributor breaches the agreement if she is found to be “[e]ngaging [in] conduct that may bring disrepute in any way to Young Living (or any of its officers, agents, or employees), the nutritional supplement and personal care products industry, or the direct sales industry.”   Thus, a YL distributor who criticizes the MLM industry in general, even without mentioning YL, could be found in breach of the YL agreement.

The IM agreement includes several detailed provisions concerning disparagement, including Paragraph 1.3(a)(iv) (“IBOs shall not make disparaging statements about IM, other IBOs, IM officers, employees, contractors, suppliers or agents, services, strategies, sales and marketing campaigns, or the Compensation Plan, or make statements that unreasonably offend, mislead, or coerce others”) and Paragraph 1.3(c) (“Negative and disparaging comments about IM, its services, strategies, the Agreement, or Compensation Plan, made to IM, or to the field, or at any IM meetng and/or event, or disruptive behavior at any meeting and/or event, serve no purpose other than to dampen the enthusiasm of other IBOs and Customers. IBOs must not belittle, disparage, or speak negatively of IM, fellow IBOs, IM services or strategies, the Compensation Plan, or any and all IM directors, officers, or employees, contractors, suppliers or agents. Such conduct represents a material breach of the Agreement and may be subject to sanctions as deemed appropriate by IM.”). [9]

It should be noted that while consumers who make public comments concerning their opinions about a company’s products are protected by the Consumer Review Fairness Act, 15 U.S.C. §45b, it is unclear whether MLM distributors are entitled to protection under this statute.    The CRFA does not apply to “independent contractors,” but fails to define who is or is not an independent contractor.   15 U.S.C. §45b(a)(3)(B).   As discussed above, MLM agreements require distributors to concede that they are “independent contractors.”   It is questionable, however, whether MLM distributors should be considered “independent contractors” for the purposes of the CRFA.   MLM distributors have a dual role in any MLM system; they are both distributors, who buy and sell the MLM products, and consumers who purchase the MLM products for their “personal use.” [10]  At a minimum, MLM distributors who review MLM products which they purchase for their personal use should be protected by the CRFA, notwithstanding the assertions of  MLM companies that they are “independent contractors.”    MLM companies should not be able to evade the application of the CRFA through the simple expedient of including a recital in their unilateral, non-negotiable MLM distributor agreements.

8.       The Distributor’s Customers and Recruits become the property of the MLM Company

         MLM distributors are trained in various methods of recruiting new distributors.  Often distributors are urged to make lists of potential recruits, starting with their family, friends, business associates, fellow members of social groups and other acquaintances.  As stated in the Herbalife Sales and Marketing Plan “The people you personally sponsor as Herbalife Distributors are known as your First Level. They may be friends or family or business associates, or even people you have just met.” (page 15).  MLM companies use a variety of contractual methods to assert control over these customers/potential recruits and to preclude the distributor from recruiting them into another MLM program.

Herbalife accomplishes this by utilizing two contractual techniques.  The first is to define a distributor’s customers and recruits as “trade secrets” owned by Herbalife.   This is set forth in Section 12 of the Herbalife Agreement which provides that “[d]uring the term of my Distributorship and thereafter, for so long as they have economic value, my spouse and I will hold in confidence and trust for the exclusive benefit of Herbalife any trade secrets, formulas, business plans, or confidential or proprietary business information (including, without limitation, genealogies and other compilations of identifying and other data relating to other Distributors or customers), and any other information of commercial value relating to other Distributors or customers, provided by Herbalife or which I develop or obtain while a Distributor, and I will not use them, directly or indirectly, for any purpose other than the conduct of my Herbalife Distributorship” (emphasis supplied).   This clause magically transforms customer data developed by the distributor into trade secrets owned by Herbalife.   Distributors may be surprised to learn that the list of friends and family to whom they sold Herbalife products has now become a proprietary trade secret owned by Herbalife.

The second technique employed in the Herbalife Agreement is set forth in Section 13, a non-solicitation clause which provides that “During the term of my Distributorship and for one (1) year thereafter, neither my spouse nor I will, directly or indirectly (through or by means of any person, entity or artifice), solicit, promote, sponsor or recruit any Herbalife Distributor or any customer of Herbalife of whom I became aware in the course of my Herbalife Distributorship, to join, promote, sell or purchase products of, or participate (as a salesperson or otherwise) in any multi-level marketing or direct sales company and I will not encourage anyone to do what I have agreed not to do.” 

Similarly, the YL non-solicitation clause (Paragraph 3.11.1 of the Policies and Procedures) prohibits the distributor from recruiting anyone “(i) who was in the YL Partner’s Team or Support Team at any time during the term of the Agreement; (ii) who had contact with the YL Partner related to Young Living products or business during the term of the Agreement; or (iii) whose contact information (name, address, phone number, or email address, etc.) was obtained by the YL Partner at any time during the term of Agreement.”   Again, distributors may be surprised to learn that the prohibition of solicitation extends not only to persons whom they successfully recruited into YL but also to persons who they attempted to recruit and even persons for whom they obtained contact information while they were YL distributors even if they did not attempt to recruit them.

         IML also utilizes its restrictive covenants to assert control over their distributors’ customer lists.  Paragraph 20 of the IML Terms and Conditions entitled “Restrictive Covenants” prohibits the distributor from soliciting both customers and distributors.   In particular, distributors are prohibited from soliciting current and former IML distributors into “another multi-level marketing, network marketing, or other direct selling business opportunity.”  In addition, the IML agreement requires the distributor to agree that “all Customers/Members Solicited by an IBO for the promotion or sale of IM Products or/or Services are deemed to be Customers/Members of IM and not of the IBO, whether or not the IBO originally introduced such Customer/Member to IM.”

Thus, through various contractual sleights of hand, ownership or control over the distributor’s customer list is transferred to the MLM company.   It is extremely doubtful that any prospective distributor could possibly appreciate the significance of these clauses, given that they are buried in lengthy, lawyerly fine print. 

9.   MLM Agreements Give MLM Companies Significant Control Over the Operations of their Distributors

Like franchise agreements, MLM agreements give MLM companies a significant degree of control over every aspect of the MLM distributor’s operations.   Generally these controls are set forth in the “policies and procedures” or “rules” which are incorporated by reference in the distributor agreement.

The Herbalife Distributor Rules contain extensive, detailed restrictions on the distributor’s operations, including Section 8 (“Distributor Conduct”), Section 9 (“Product Import, Export, Business Activities and Personal Consumption”), Section 11 (“Sponsoring and Leadership”), Section 16 (“Purchasing and Sale of Products”), Section 17 (“Customer Retail Receipts and the Customer Refund Policy”), Section 18 (“Payments and Adjustments”), Section 19 (“Activities and Locations”), Section 20 (“Sponsoring and Offering the Business Opportunity”), Section 21 (“Selling Practices”), Section 22 (“Claims and Representations”), Section 24 (“Advertising and Promotion”), Section 25 (“Posting Advertising Materials”), Section 26 (“Electronic Marketing and Promotion”), Section 27 (“Social Media”) and Section 28 (“Marketing by Means of ‘Telemarketing’”).

Similarly, the YL Policies and Procedures include detailed requirements and restrictions on the distributor’s advertising and marketing (Section 5), product sales (Section 6), ordering and returns (Section 8) and sponsoring (Section 9), as well as restrictions on the use of YL’s trademarks, discussed below.

         The IM Policies and Procedures also govern every significant aspect of the distributor’s operations, including Section 1.2 (“Mutual Commitment Statement”), Section 1.3 (“Code of Ethics”), Section 3.0 (“IM’s IBO Responsibilities”), Section 6.0 (“Policy Violations”), Section 10.0 (“Ordering”), Section 11.0 (“IM Opportunity”), Section 14.0 (“Advertising, Promotional Material, Use of Company Names and Trademarks”), Section 15.0 (“International Marketing”).

10.     MLM Agreements Incorporate Complex Compensation Plans

         MLM agreements incorporate by reference the plans under which distributors may qualify for commissions and other payouts by the MLM company.   These plans are notoriously complex and difficult to understand.   In particular it is usually quite difficult for a prospective distributor to determine that they will have to make a certain amount of purchases from the MLM company in order to qualify to earn commissions on purchases by their downline recruits.   The official marketing material put out by the MLM company usually states that the only “required” purchase is the starter kit, ignoring these inventory purchase qualifications.

The Herbalife compensation plan is set forth in pages 3-28 of the Career Book.   The plan includes 28 ranks of distributors, ranging from the entry level “distributor” to “10 Diamond” or “Founders Circle,” with a bewildering array of qualifications, sales volume and recruitment requirements, with the higher ranks requiring increasing numbers of “lines” of recruits in their downline organizations.   There are detailed definitions of the various types of “volume” inherent in the plan, including “Sales volume,” “Add-on sales volume”, “personally purchased volume”, “downline volume”, “personal volume” (which is distinct from “personally purchased volume”), “organizational volume”, “encumbered volume”, “unencumbered volume” and “matching volume.”   It is exceedingly doubtful that any prospective recruit could possibly understand how the plan actually works in practice.

         The YL Compensation Plan, which is incorporated by reference in the YL Agreement, is similarly complex with multiple levels, definitions of terms such as “legs,” “generation” and “compression” as well as colorful charts showing varying levels of commissions at various levels in the plan.

Likewise, the IM Compensation Plan, which is also incorporated by reference into the IM agreement, provides for twelve “ranks”, ranging from “P150” to “C750”, each of which have increasing requirements of sales volume, number of “active members” in each “leg,” and some cryptic requirements concerning the amount of sales volume and number of “customers” required to be in each leg.  While IM uses the term “customer”, it is evident that “customer” is merely the first rank in the IM compensation plan, with each customer being urged to recruit at least two additional “customers” in order to advance to the next level. 

11.     MLM Agreements Provide for the Termination, Renewal and  Transfer of Distributorships

         As with franchise agreements, MLM agreements have provisions concerning the termination, renewal and transfer of distributorships.   Typically the MLM distributor has the right to terminate on notice to the MLM company, while the MLM company can only terminate for cause.   The MLM distributorship is generally renewable, sometimes subject to the payment of a fee.   MLM distributorships are transferable, but the MLM company usually retains the right of approval which it may grant or withhold in its discretion.

         Paragraph 9 of the Herbalife Agreement provides that the term of the agreement is indefinite, subject to Herbalife’s procedures, and that the distributor may cancel at any time.   Paragraph 10 of the Herbalife Agreement provides that Herbalife may terminate if the distributor violates the agreement, including the Rules or applicable law.  In addition, Paragraph 10 of the Herbalife Rules provides for the resignation of distributors.

Paragraph 15 of the Herbalife Agreement prohibits the transfer of the distributorship without the written consent of Herbalife, which may grant or withhold consent in its “sole and absolute discretion.”   Section 13 of Herbalife’s Distributor Rules include additional details on the distributor’s ability to transfer (pages 76-77).  Section 14 provides for transfers of distributor in the event of divorce (pages 77-79).   Section 15 provides for the inheritance of a distributorship (pages 79-80).

Paragraph 8 of the YL Agreement provides that the agreement will terminate if the distributor voluntarily terminates the agreement, if the agreement terminates “automatically” through the distributor’s inactivity, or if YL terminates.   It is unclear whether the intent is to give YL the right to terminate without cause, since YL’s Policies and Procedures have several references to YL’s right to terminate for cause.   For instance, Paragraph 1.5 of the YL Policies and Procedures provides that YL can terminate the agreement if the distributor violates any law, regulation or any of YL’s policies and procedures. 

Paragraph 3.6 of the YL Policies and Procedures provides that YL may deny a request to transfer a distributorship in its “sole and absolute discretion.”

Paragraph 9 of the IM Agreement, as well as Paragraph 4.8 of IM’s Policies and Procedures, provide that the distributor can terminate at any time.  Paragraph 9 also provides that IM may terminate “pursuant to the IM Policies & Procedures or by giving written notice to me if I breach any part of this IBO Agreement.”   This creates an ambiguity since Paragraph 4.9 of the Policies and procedures gives IM the right to terminate the agreement “for any reason”, including but not limited to violation of the Agreement or Policies and Procedures, violation of the Compensation Plan, violation of any law or regulation, or “engaging in unethical business practices or violating standards of fair dealing.”   The clause “for any reason” could be read to mean that IM can terminate for a reason not involving any violation or misconduct by the distributor.

         Paragraph 24 of the IM Agreement provides that the distributor “may not assign this IBO Agreement, or any portion thereof, or any of the duties, obligations or liabilities contained herein, without the prior written consent of IM, which consent may be withheld, conditioned, or delayed in IM’s sole discretion.”

12.     MLM Agreements Restrict Use of the MLM Company’s Trademarks

         Like franchise agreements, MLM agreements include a license for the distributor to use the MLM company’s trademarks in connection with the distributor’s business.   As the trademark owner, the MLM company must control the use of its marks; the requisite controls are set forth in the distributor agreements.

For example, Section 14 of the Herbalife Agreement provides that “During the term of my Distributorship and in perpetuity thereafter, I will use Herbalife’s trade name, logo, trademarks and intellectual property only if and to the extent expressly permitted by Herbalife in writing.”   The Herbalife Distributor Rules contain numerous restrictions on the distributor’s right to use Herbalife’s trademarks, including Section 8 (“Distributor Conduct”), Section 9 (“Product Import, Export, Business Activities and Personal Consumption”).  Section 5.4 of the YL Policies and Procedures provides similar restrictions concerning the distributors’ use YL’s trademarks and copyrighted materials, as do Sections 14.1 and 14.2 of the IM Policies and Procedures.

Conclusion

         MLM distributorship agreements are drafted unilaterally by MLM companies, are non-negotiable, and can be amended at will by the MLM company.   They are as complex, lengthy and sophisticated as franchise agreements.   And, like franchise agreements, they are filled with contractual land mines that are designed to secure an overwhelming advantage to the MLM company in the event of any dispute with the distributor.

The primary distinction between franchises and MLM distributorships is that franchises explicitly require a relatively large up-front payment from the franchisee, generally followed by ongoing royalty payments to the franchisor, while the payments by MLM distributor to the MLM company are spread out over a period of time and generally characterized as purchases of inventory, as required to qualify for commissions and bonuses under the typically complex MLM compensation plan.    This distinction does not justify a regulatory scheme in which franchisors must provide detailed, pre-sale disclosures to prospective franchisees on a wide range of topics, while MLM companies are not obligated to provide any disclosures at all to prospective distributors.    I urge the Commission to correct this anomaly and to require at least a modicum of transparency and fairness in an industry which has been demonstrably responsible for tremendous harm to its participants.

Note: This post is taken from one of my comments on the FTC’s ANPR on proposed revisions to the Business Opportunity Rule.

                                                     


[1]    “Beyond the chance to control one’s income, direct selling also typically offers low barriers to entry, says DSA’s Franco. Startup costs are minimal and there’s often little or no training required to become a consultant.”  Martin, Heather, Global Good: Why Direct Selling Succeeds Beyond Our Borders, Direct Selling News (June 21, 2018), available at https://www.directsellingnews.com/global-good-why-direct-selling-succeeds-beyond-our-borders/   

[2]   https://www.franchise.org/faqs/what-are-the-most-important-sections-in-the-franchise-agreement  

[3]   YL’s system permits distributors to satisfy their monthly inventory purchase qualifications with purchases for their personal use. Paragraph 6.2 of the YL Policies and Procedures, entitled “Excessive Purchases of Inventory”, contains a version of the Amway “70% Rule.”  It provides that “To be eligible for commissions YL Partners must not stock excessive inventory and must sell to end consumers at least 70% of the inventory purchased for resale (and not personal use) before purchasing additional products. By ordering product, YL Partners certify that they have sold or used at least 70% of all product previously purchased for resale.” (emphasis supplied).   This is a significantly weakened version of the Amway 70% Rule in that a distributor could be in compliance without making any retail sales simply by certifying that all of her purchases were for “personal use.”   Such purchases do not qualify for the Franchise Rule’s wholesale purchase exemption.  Accordingly, YL distributors who elect to satisfy their inventory purchase requirements through personal use, and thereby exceed the threshold during the first six months of operation, should be considered franchisees under the Franchise Rule.

[4] See, e.g. Boswell v. Babcock, Case No. 20-cv-06571 (N.D. Cal. 2020) (discussing side agreements between founder of MLM company and a high level distributor).

[5]  A copy of the Herbalife “Career Book”, which includes all of the various documents referenced here, is submitted herewith as Appendix A.    The Application for International Distributorship (“Herbalife Agreement”) is at pp. 45-46 of the Career Book.  

[6]  Copies of these Young Living documents are submitted herewith as Appendix B.

[7]   Copies of these IM Academy documents, except for the IM Social Media Policy, are submitted herewith as Appendix C.   IML’s Social Media Policy is apparently not publicly available but presumably it is consistent with the social media rules described in IML’s website.   https://immasteryacademy.zendesk.com/hc/en-us/articles/360041618412-What-are-the-DO-s-and-DON-Ts-for-social-media-

[8] See, e.g. Lifevantage Corp v. Domingo, 208 F.Supp.3d 1202 (D. Utah 2016) (denying defendants’ motion for summary judgment on MLM company’s contractual non-disparagement claim); FreeLife International, Inc. v. American Educational Music Publications, Inc., Case No. CV07-2210 (D.Ariz. 2009) (same).

[9] In the past three years IM has filed six lawsuits in federal court seeking to enforce non-disparagement clauses against IM distributors.   See International Markets Live, Inc. v. Watson, 2:21-cv-01363 (D.Nev., filed July 20, 2021); International Markets Live, Inc. v. Delaney, 2:21-cv-01241 (D.Nev., filed July 1, 2021); International Markets Live, Inc. v. Charles, 2:21-cv-01185 (D.Nev., filed June 22, 2021); International Markets Live, Inc. v. Huss, 1:20-cv-23080 (S.D.Fla., filed July 24, 2020); International Markets Live, Inc. v. Fazal, 2:19-cv-02024 (D.Nev., filed November 22, 2019); International Markets Live, Inc. v. The Wealth Builder Global International, LLC, 2:19-cv-02027 (D.Nev., filed November 22, 2019).  

[10] See, e.g., Direct Selling Association press release, “New Economic Analysis Affirms That Purchasing Products For Personal Use Is Acceptable In Direct Selling,” dated October 21, 2015, available at https://www.dsa.org/events/news/individual-press-release/new-economic-analysis-affirms-that-purchasing-products-for-personal-use-is-acceptable-in-direct-selling

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