The Economics of MLM Litigation

    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.

    Thompson Burton’s MLM law practice often fields questions from companies looking to sue distributors for various reasons. We also take calls from distributors that are being sued by their former network marketing company.  We’ve seen the same issues litigated, over and over, from both sides, across the country. The surface reasons for these suits are usually the same: cross-recruiting.  Distributor Sam wants to sue Company XYZ because Sam was terminated after joining a new network-marketing venture.  Or Company XYZ sues Distributor Sam for recruiting XYZ distributors for disparaging the company and recruiting other distributors for another venture. We typically represent companies. But on occasion, when I have an “Are you kidding me!?” reaction to a distributor’s facts, we’ll represent the distributor.

    The real reasons for these suits generally can be traced back to bruised egos, or a desire to “set an example.”  “Setting an example” can also be referred to as “Putting a head on a stick.” We recently handled a matter where the other side (a network marketing company) said they’d spend $100,000 to recover $1,000 from our client “just to make an example out of him.”  When it comes to helping clients anticipate costs, both from the distributor perspective and the company perspective, it’s difficult to quantify all of the possible scenarios. If the other side has tremendous resources and wants to send a clear signal to the field in an effort to elicit fear (instead of respect), going toe to toe in a legal dispute is expensive.

    Direct, personal relationships are the foundation of direct sales companies, and these personal relationships are what make multilevel marketing so lucrative and engaging for many people who choose to pursue a career in direct sales. However, when you combine strong personalities, close personal relationships, and money, network marketing becomes a breeding ground for litigation.

    MLM Litigation: Understanding the Distributor/Company Relationship

    Unlike a traditional 9-to-5, distributors in an MLM company are not required to punch a clock each day and do what a boss tells them to do. This freedom is what attracts people to the MLM profession. This freedom is a result of a very simple fact: MLM distributors are independent contractors and not employees.

    What’s It Worth to You: The Nuts and Bolts of the Costs of MLM Litigation

    These cases are never slam-dunks.  Although the contract terms are usually clear, and even if there’s a clear violation on the other side (again, from both the distributor and company perspectives), both sides will have strong legal arguments at their disposal. It’s important for people to understand that it takes more than “being right” to prevail in litigation.  It also takes money.  While one side might have superior arguments, the side will be required to expend significant resources to initiate the lawsuit and aggressively pursue a resolution via arbitration (in most cases).

    While money is the fuel that propels litigation, it’s important to understand that MORE is not necessarily BETTER.  I’m familiar with a matter where a distributor was mega-sued by a very large company.  The distributor went out and hired an expensive firm to match the juggernaut company brief for brief, lawyer to lawyer.  After paying several million dollars in legal fees, the end result was still a $25M judgment AGAINST the distributor.  By going big and “hiring the best,” was the end result any better?  If the distributor had paid a fraction of the cost for budget lawyers, could the penalty have been more severe?  It’s impossible to say.  With litigation, there are no certainties.

    Let’s talk nuts and bolts: Litigation typically costs in the tens of thousands of dollars.  This is true even if the matter is expedited and the party initiating the suit has an excellent case.  The legal fees depend largely on the amount of discovery required, the number of parties / witnesses, court and travel expenses involved, actions/motivations of the opposing party, motions to the arbitrator, legal briefs and a host of other costly components.

    People strongly dislike attorneys, mainly because they hate being surprised with fees beyond their expectations. When people ask “How much will it cost,” it’s always tough to answer.  In some cases, when there’s a failure to communicate early in the relationship or if the matter grows in complexity, an original $50,000 estimate can morph into a $150,000 case.

    For example, the client may think the only thing at issue is a handful of emails. Once discovery begins, the universe of emails regarding a contract may grow from 13 emails to 1,500 emails that the attorney has to review, determine what is relevant, question the distributor regarding what is relevant, and depose possibly numerous representatives on the opposing side regarding the relevant emails.

    Or, for instance, say the opposing company’s attorney decides, as part of a strategy, to cause pain / cause the distributor to settle by filing countless motions, including motions to compel MORE discovery or objecting to the distributor’s responses every step along the way. The distributor’s counsel will be required to spend time responding to these motions and arguing them before the arbitrator, who charges a separate hourly fee, racking up significant time and expenses. Lawyers abusing the legal process to increase costs is real.  It happens all of the time when the big fight the small.

    A good rule of thumb is to expect to expend at least $50,000 if your case proceeds through depositions.  If the matter proceeds beyond discovery and heads towards trial, it could cost an additional $25,000 to $50,000 depending on the complexity of the matter.

    When to Litigate, and When to Let It Go

    It’s important to realize that deciding to file a lawsuit or a demand for arbitration is a business decision. Many times the decision to pursue litigation is an emotional one, fueled by a dislike of a company or another individual, and a sense of deep injustice. I recommend making a pros/cons balance sheet before deciding to pursue litigation. If you’ve already hired an attorney, or you’re thinking of hiring an attorney, they can assist in helping you weigh the pros and cons of pursuing litigation. When it comes to network marketing litigation, be sure your lawyer understands that the normal rules of logic rarely applies in these disputes.  Also, ask for a written budget.  When the fees get out of control, it’s incumbent on your lawyer to clearly communicate the realities of the situation.

    Realize that if your economic damage is $50,000 or less, you will very quickly spend more money litigating the case than you can receive in damages, IF you even end up winning at the end. Alternatively, if your economic damages are over $100,000, you have a strong legal case, and the money to fund your litigation, it MIGHT makes sense to pursue it. But understand, if you file a lawsuit against a company, they’re going to find a reason to counter-sue; thus, exposing you to loss and adding to your anxiety.

    Bottom Line

    Litigation is expensive. If you’ve legitimately and seriously been economically harmed, then it’s worth seriously considering and pursuing. If you don’t have the resources to pursue litigation, and you can’t show great economic damage, then you probably have no business engaging in litigation. If you find yourself in the latter of those situations, just remember: sometimes being the winner really boils down to knowing when to hold ‘em, and knowing when to fold ‘em.

    Do you have any thoughts about this? Surprised?

      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.