When MLM Leaders Leave a Company

    Kevin Thompson is an MLM attorney, proud husband, father of four and a founding member of Thompson Burton PLLC. Named as one of the top 25 most influential people in direct sales, Kevin Thompson has extensive experience to help entrepreneurs launch their businesses on secure legal footing. Recently featured on Bloomberg TV and several national publications, Thompson is a thought-leader in the industry.

    I was recently asked to write an article about the appropriate way for a MLM leader to leave a network marketing company.  I hope you find the article below informative.

    With the increasing number of MLMs launching each month, it’s led to a lot of movement among top leaders. Given this abundance of choices, leaders are enticed with the better reputations of newer companies, top positions or cash…sometimes all three.

    These leaders are often times referred to as Master Distributors. The question always arises: what can they do with their existing downline? Clearly, the downline has significant value. With this value, the temptation sometimes leads the leaders to disparage their existing companies, contact everyone in the downline and yell “Who’s coming with me!?”  The question then becomes: how can they maximize the value of their downline without violating their agreement with their existing company.

    In most cases, the downline represents several years worth of hard work and sacrifice…it’s emotionally challenging for a leader to just walk away from it.

    However, the company has a legitimate interest to protect its business from raiding.  The company will argue (successfully in most cases) that the downline was built through a partnership between the leader and the company.  These controversial provisions are incredibly treacherous waters to navigate.

    As my father once told me, “Son, you make money when you buy the house, not when you sell it.”  In other words, the beginning of the deal determines the outcome. So my first piece of advice for top distributors: negotiate in the early stages when joining a new company. If you have enough leverage, a company, especially a newer company, will likely waive the problematic terms in the agreement. Consider it like a prenuptial agreement.

    In the event there was no negotiation in the early stages, we can assume there exists some very common provisions in the Policies and Procedures. When there’s litigation between companies and field leaders in the MLM industry, they most commonly involve a combination of these provisions.

    6 month noncompete. This provision usually precludes a leader from working with a competing MLM for a six month period after their exit.  A “competing” company is usually one that sells products in the same category i.e. Xango and Vemma, both sellers of juice products, would be considered “competing.”

    Nonsolicitation. This provision typically precludes a leader from soliciting people from the downline that they did not personally enroll for a period of two years after their exit.  There are certain companies with broader provisions that preclude leaders from soliciting ANYONE in the downline, regardless if they were personally enrolled. This is, in my opinion, is too restrictive.

    Nondisparagement. This provision precludes leaders from disparaging the business as they’re leaving.  In other words, it prohibits trash talking.

    Assuming the above referenced provisions exist in the Policies and the leader is ready to move,  the question always arises: “How do I recruit my leaders without being sued?”  Unfortunately, there’s no way to guarantee a lawsuit-free future.  However, with some of the suggestions listed below, it’ll help leaders stay in compliance with their existing obligations.

    Noncompete. The noncompete provisions are usually enforceable.  If the new business does not compete in the same category as the old business, it’s not an issue.  If, however, the new business IS a competing business i.e. moving from one juice company to another, there’s no way around it….the leader has to sit out for six months.  I understand that this can be a non-starter for a leader.  After six months of inactivity, there might not be a business left.  Suggestion: do not enroll a “ghost position” while you’re sitting out the noncompete.  Oftentimes, a leader’s “mother” will enroll in the new business in the top position.  If there’s a lawsuit, these tactics are always discovered and look terrible.

    Nonsolicitation. This provision is usually the most difficult to navigate.  This provision limits a leader’s ability to do what he or she does best: communicate.  I’ve prepared a list of suggestions to help leaders stay in compliance with this provision:

    • Stay away from email blasts. Without a doubt, there are members on your email list that were NOT personally enrolled by you.  If there’s a single email from you to someone that was not personally enrolled, it’s smoking gun evidence of a violation.
    • Stay away from facebook updates. There’s a growing argument in the law that facebook updates can be considered solicitations.  And without a doubt, there will be people connected with you on facebook that were not personally enrolled.  Why create room for the argument?
    • Delete your facebook profile and create a new fan page. After leaving a company, it’s wise to delete the old profile and create a new facebook fan page.  First, deleting  your profile publicly communicates your intentions of honoring the agreement, which will be important in the event of a dispute. Second, it eliminates the likelihood of error.  Again, one update on your facebook profile can be hazardous.  In the future, segment your “friends” in your personal profile, separating friends and family from your MLM promotional efforts.  Regarding the fan page, fan pages are one directional….people “Like” the fan page if they desire to receive information from the individual (or brand). They’re “opting-in” to receive information, which undermines any argument that the leader is specifically targeting members from the downline.
    • No Solicit Certification Forms. If a leader really wants to go the “extra mile,” I’ve seen it done whereby an extra form is signed during enrollment.  This form is a one page document where the new distributor certifies, via their signature, that they were not solicited by the enroller.  Is it bulletproof?  It has yet to be determined.  However, it demonstrates some extra effort by the leader to honor the contract, which can never hurt.
    • Website. If the leader was using a website to promote their old company, it’s not advisable to continue using that website to promote the new business.  The argument can be made that the leader, using a platform built while building the old MLM, was using that platform to reach non-personal recruits.  However, if the content on the site is not specific to any one particular company, there’s not an issue in posting an update there.    

    Nondisparagement. Leaders, in their effort to explain why they’re joining the new company, oftentimes talk trash about the old company.  I’ve spoken with leaders in the past that have expressed frustration about this provision.  In their minds, their only leverage against a powerful company is “the truth.”  The problem with “the truth” is that it’s oftentimes a negative impression of the business and it gives the company additional strength in litigation.  In most agreements, there’s a confidential dispute resolution process.  Airing out the grievances in public only bolsters the company’s position, it does not weaken it.  With the larger MLMs that have weathered several storms, they’re not going to budge at the threat of “going public” never works.

    • Avoid saying anything negative about the former company with ANYONE, including your most trusted leaders.
    • No anonymous smear campaign.  It just doesn’t work.
    • If you insist on talking about your old company, stick to the facts, avoid opinions.

    Conclusion

    Will these strategies guarantee success?  No. Unfortunately, it’s incredibly easy for a company with resources to file a lawsuit regardless if they’re wrong. And the economics of MLM litigation rarely make it worthwhile for a distributor to file a lawsuit in the event they’re wrongfully terminated.  

    At a minimum, the strategies will reduce the likelihood of litigation and certainly help in the event of litigation.  At the end of the day, the contract between the company and the distributor will govern the situation.

    Talk Fusion decision included below:


    UNITED STATES DISTRICT COURT – MIDDLE DISTRICT OF FLORIDA – TAMPA DIVISION

    TALK FUSION, INC., a Florida Corporation, Plaintiff, v. CASE NO: 8:11-cv-1134-T-33AEP J.J. ULRICH, et al, Defendants.

    ORDER
    This cause comes before the Court pursuant to Plaintiff Talk Fusion’s Motion for Preliminary Injunction (Doc. # 2). Magistrate Judge Anthony E. Porcelli has filed his report recommending that the motion be granted as set forth in the Report and Recommendation (Doc. # 58). All parties were furnished copies of the Report and Recommendation and were afforded the opportunity to file objections pursuant to 28 U.S.C. § 636(b)(1). Talk Fusion filed an Objection to the Report and Recommendation (Doc. # 59), and Defendants filed a Response to the Objection (Doc. # 63).

    After conducting a careful and complete review of the findings and recommendations, a district judge may accept, reject or modify the magistrate judge’s report and recommendation. 28 U.S.C. § 636(b)(1); Williams v. Wainwright, 681 F.2d 732, 732 (11th Cir. 1982), cert. denied, 459 U.S. 1112 (1983).

    In the absence of specific objections, there is no requirement that a district judge review factual findings de novo, Garvey v. Vaughn, 993 F.2d 776, 779 n. 9 (11th Cir. 1993), and the court may accept, reject or modify, in whole or in part, the findings and recommendations. 28 U.S.C. § 636(b)(1)(C). The district judge reviews legal conclusions de novo, even in the absence of an objection. See Cooper-Houston v. S. Ry. Co., 37 F.3d 603, 604 (11th Cir. 1994); Castro Bobadilla v. Reno, 826 F. Supp. 1428, 1431-32 (S.D. Fla. 1993), aff’d, 28 F.3d 116 (11th Cir. 1994).

    Talk Fusion objects to the Report and Recommendation to the extent that it does not enjoin Defendants from recruiting Talk Fusion Associates who joined Talk Fusion after May 9, 2011, and objects to and requests that the Court allow a computer expert to assist Talk Fusion’s counsel in the review of any customer lists provided by Defendants Ulrich and Read. Defendants respond that the limitation on the injunction to preclude Ulrich and Read from recruiting Talk Fusion Associates who joined before May 9, 2009 was a sound finding based upon the fact that Defendants Ulrich and Read would only be privy to Talk Fusion’s Associates until the day they were terminated. Defendant Ulrich also requests that the Court  allow the parties to appoint an independent third party to review his Confidential Customer List as well as Talk Fusion’s list of “Active” Associates, to compare the lists and to report the findings in order to expedite the process and prevent any partiality on behalf of Talk Fusion’s representatives.

    Upon consideration of the Report and Recommendation of the Magistrate Judge, all objections thereto and responses to objections timely filed by the parties and upon this Court’s independent examination of the file, it is determined that the Magistrate Judge’s Report and Recommendation should be adopted, Talk Fusion’s objection regarding the May 9, 2009 limitation overruled, and Defendants’ suggestion regarding a third party to review the Confidential Customer List incorporated. The Court, however, declines Defendants’ suggestion to further restrict the preliminary injunction to “Active” members who joined Talk Fusion before May 9, 2011.

    Accordingly, it is ORDERED, ADJUDGED, and DECREED: (1) The Magistrate Judge’s Report and Recommendation (Doc. # 58) is adopted and incorporated by reference in this Order of the Court.

    (2) Plaintiff Talk Fusion’s Motion for Preliminary Injunction (Doc. # 2) is GRANTED as follows:

    A. Mr. Ulrich and Mr. Read are enjoined until November 9, 2011 from recruiting Talk Fusion Associates for any other network marketing business, unless:

    i. An Associate was personally sponsored by the individual seeking to conduct network marketing; or
    ii. An Associate joined Talk Fusion after May 9, 2011.

    B. If Mr. Ulrich and/or Mr. Read wishes to conduct network marketing business in which prohibited Associates may be recruited, albeit unintentionally, Mr. Ulrich and/or Mr. Read shall supply the prospective Customer List for screening to an independent computer expert mutually selected by the parties. Talk Fusion shall supply the necessary information to the independent computer expert to allow for a comparison of the lists and a determination of any overlapping. The Customer List and the information supplied by Talk Fusion shall only be viewed by the independent computer expert and not provided by the independent computer expert to opposing counsel. The independent computer expert shall have seven (7) days to notify the parties of any conflicting or overlapping names to be removed by Mr. Ulrich and/or Mr. Read from a given network marketing operation.
    C. WowWe shall be enjoined from aiding Mr. Ulrich or Mr. Read in the solicitation of prohibited Talk Fusion Associates, or soliciting Talk Fusion Associates in concert with Mr. Ulrich or Mr. Read.

    D. The Defendants shall be enjoined from using or disclosing Talk Fusion’s confidential and proprietary information and trade secrets, and shall immediately return any such information if in their possession.
    DONE and ORDERED in Chambers in Tampa, Florida, this 11th day of July, 2011.