Non-Competes in Network Marketing: The controversy continues

    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.

    The issue of non-competes came up after Team Beachbody announced it was adding a non-compete to its policies and procedures. As reported over at Business for Home, Beachbody published the following statement:

    As we strive to make the Beachbody Coach opportunity the best it can be and to protect all of your hard work helping people and building organizations, we regularly review our policies to ensure we remain competitive and in line with other leading network marketing companies. . . Effective today, Beachbody Coaches, at any rank, may not participate as a distributor or representative with any other network marketing business while they are enrolled as a Beachbody Coach.

    This announcement sparked a firestorm online, leading many to question whether these sorts of non-competes are (a) fair, and (b) actually enforceable.

    In all likelihood, Beachbody never expected this sort of announcement to spark this debate. In reality, the majority of network marketing companies have a similar non-compete. Instead of picking on Beachbody and discussing their motivations, whether it be to stop the bleeding of exiting distributors or to “stay current with the times,” let’s shift our focus towards a discussion of the more important issues of enforceability and fairness.

    Are Non-Competes Enforceable?

    In most instances, yes. In 2013, Thompson Burton litigator, Cole Dowsley, published an article regarding the enforceability of non-competes in network marketing companies. Generally, in most states, the non-competes are enforceable against distributors (I’ll refer to distributors as “Independent Professionals” or “IPs”). In most states, non-competes are enforceable as long as they are “reasonable under the circumstances.”

    The factors to consider when measuring “reasonableness” include: whether the non-compete seeks to protect a legitimate business interest, the economic hardship imposed on the restricted party, and whether such a covenant would be contrary to the public interest. As an example, restricting a doctor from practicing medicine for a prolonged period would be contrary to public interest.

    What Do Non-Competes Look Like?

    Contrary to what most people think, not all non-competes are created equal. Some are loose, some are incredibly restrictive. Usually, they look something like this: During the term of this Agreement, any XYZ distributor must not sell, or entice others to sell, any competing products or services, including training materials, to XYZ Customers or distributors.

    The key language above: “During the term of this Agreement…” This means, after someone resigns or is terminated by the company (after the term of the agreement), they’re free to immediately join another network marketing company. In the more aggressive non-competes, as in Nerium’s policy, the non-compete survives termination (meaning the restriction extends beyond termination / resignation). In Nerium’s non-compete, it says, “For the term of this Agreement and for two (2) years after termination hereof, for any reason, Brand Partner agrees not to sell any product that [competes].” Nerium’s two-year restriction is, in my opinion, both abnormal and ridiculous. Usually, when the non-compete survives termination, it rarely extends beyond six months after resignation / termination.

    Why Do Network Marketing Companies Have Non-Competes?

    Network marketing companies typically insert non-competes in their agreements for the following reasons:

    (1) it provides a disincentive for leaders to participate in other companies;
    (2) it provides the company with leverage against a leader’s perceived bad behavior, such as recruiting from someone else’s downline;
    (3) companies argue that leaders are given proprietary information in the form of access to downline structure and contact information. In exchange for this access, the company wants to ensure the information is not used for the benefit of a competitor;
    (4) companies argue that they want to use every resource available to protect the income of downline IPs from any person that might raid the organization i.e. “Steve in the downline is no longer able to afford his car payment because his upline stole his group…it’s up to us (the company) to protect Steve.”; and
    (5) non-compete violations are generally easy to prove.

    When companies have a pattern of suing IPs, using the non-compete as the main bullet can backfire. The field, viewing their peers with sympathy, get startled, which leads to less enthusiasm, which leads to fewer sales, which leads to less money, which leads to more people leaving. Litigation against IPs rarely leads to a net-gain.

    Are Non-Competes Fair?

    Since we’ve established that non-competes are generally enforceable, it begs the following question: Are they fair? I’m not asking about the meaning of “fair” in the legal sense, I’m asking about the meaning in the right vs. wrong sense. As lawyers, we try to avoid the gooey subject of fairness. Fairness is very subjective and opinions often vary.

    With that being said, I have an opinion. The company has a strong interest in ensuring there’s stability in the downline. When an IP leaves a company, the company can and should take measures to prevent leaders from recruiting downline members. The company can accomplish this objective by way of a non-solicitation clause. The non-solicitation is another common clause in network marketing agreements. The non-solicitation clause restricts an IP’s ability from recruiting people he or she did not personally enroll. It does NOT restrict an IP’s ability to occupy positions in other companies.

    In my opinion, companies can protect their downlines without restricting peoples’ theoretical ability to derive income somewhere else. On the rare occasions where people can actually derive income from two sources, companies CAN allow it as long as the IPs successfully navigate their non-solicitation clauses. While some people find this idea of “multiple streams of income” impractical, it’s beyond the point because the non-solicitation clause serves as a check on the very behavior that leads to the disruption i.e. recruiting.

    Smart Minds Disagree

    This has been a widely debated subject for several years. And since there’s room for disagreement on both sides, there’s really no consensus on the subject. Four years ago, when we initially wrote about non-competes, I was of the opinion that non-competes would eventually fall by the wayside due to market pressures. While non-competes are enforceable, I thought that eventually networkers would start demanding their removal. But that never happened; thus, the discussion continues. I’ve seen people in our profession fall on all sides of this issue. When distributors stand up and contest these agreements, they’re rarely supported and oftentimes ridiculed. This lack of consensus creates an environment where these sorts of provisions can exist.

    Conclusion

    In my opinion, it’s a tie. The field has strong arguments in disfavor of non-competes, the companies have strong arguments in favor of them. But since we have a tie, there needs to be a tie-breaker. Of the two sides, the field is at a dramatic disadvantage to contest these clauses. In a lot of cases (not all cases), the company abuses its position to crush IPs with modest resources. These IPs are real people and any sort of termination / litigation is very unnerving and, in most cases, debilitating. Companies should wield this power very sparingly, in my view. Plus, it’s hard enough for people in the field to derive income. Since IPs are gracious enough to lend their time and energies to sell a company’s product, I believe it’s overkill for companies to restrict their long-term decisions.

      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.