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Cool Under Pressure: Managing Distributor Contract Clashes with MLMs

January 13, 2022
Orange lit landscape

Litigator Nicole Westbrook answers three common questions regarding multilevel marketing companies, their distributors and the policies and contracts that can lead to disputes.

By Nicole Westbrook

Multilevel marketing (MLM) companies are a different breed. These direct sales companies do not have employees so much as they have independent contractors or distributors, which leads to more unusual contracts than most commercial contracts.

Distributors for an MLM build their own independent business by direct selling goods to customers and recruiting new distributors in return for a payment of a percentage of their recruits’ sales.

In the MLM world, these independent contractors are usually given a set of policies to live with, akin to an all-or-nothing approach to an independent contractor agreement. The policies or contracts are written for people all across the United States and sometimes, across the world, depending on the laws.

There typically is no negotiation with distributors and no leverage to propose contract changes. An individual has the choice of agreeing to the terms and becoming a distributor or walking away because negotiating a more favorable contract is unlikely. This “take it or leave it” setup can lead to contract clashes and surprises.

What are common contract issues with MLMs that can lead to litigation?

Typically these contracts are very lengthy, 40, 50, 60-pages long. Distributors are not encouraged to hire an attorney, read through all the provisions, and make sure they are understandable and easy to comply with.

Sometimes distributors are not even provided with a complete contract. Instead, the distributor signs a contract that essentially says, “I’ll go online later and read it.” Sometimes the distributor does but more commonly, the distributor does not.

This lack of transparency can lead to trouble going forward for distributors who have not read and do not understand the rules and penalties of noncompliance.

Why do so many distributors find themselves at the mercy of an MLM?

Network marketing companies usually begin small and grow large quickly. When they outpace their mom-and-pop beginnings, the company often has not had time to catch up and fails to behave in a commercially reasonable manner. This becomes evident in contracts that preserve the utmost rights of the marketing company without regard to distributors.

MLMs give themselves wide latitude to operate as they see fit. In many of these contracts, we see MLMs giving themselves broad or even absolute discretion to determine when a policy has been violated and when it has not.

A distributor typically hears about a policy violation via a letter from the MLM. This letter may include a simple request to cease an activity, such as making certain claims about goods, and can reach all the way to the other end of the spectrum, when a distributor receives notification that their relationship with the MLM is terminated.

Unfortunately, abrupt termination is not uncommon. Despite working tirelessly for years to market and sell products to friends and family, recruit and support new distributors, and build a business, a policy provision violation—even if violated unwittingly—can lead to termination.

Distributors who violate contracts and are terminated stand to lose their relationships and the value of the business that they worked so hard to build immediately. This is the time when a distributor has to stand up and find counsel to help them through it.

What legal resources do distributors have when contract issues are in contention?

Timing is typically an issue in MLM contract disputes. As soon as a distributor sees signs of contract issues with their distributorship and network marketing company, the distributor needs to call a competent attorney who has been down this road before and has dealt with these particular MLM issues.

Oftentimes these contracts are riddled with timelines and waiver provisions. Distributors that fail to timely respond to a letter of penalization or other contract dispute from the MLM could end up waiving their right to challenge what the network marketing company has done.

Sometimes a formal appeals process needs to be followed in writing. A distributor should be conscious of the clock ticking and what the proper protocol is in order to effectively appeal the decision.

There may also be opportunities to mediate, arbitrate and litigate disputed provisions. But each of these options may be bound by a timeline and tightly controlled as to what needs to be done and when to address concerns the MLM raises.

During these contract disputes, a key concern for distributors is whether they can continue to operate the business or need to shut it down. Once a distribution channel goes dark, the business typically fails quickly.

If, however, a distributor can find a way to keep its doors open while under appeal, the continuity may very well be a game changer for the distributor. To finesse an open-door, a distributor is likely to need counsel to help navigate through difficult policy issues and usher the distributor through the penalty phase to preserve the business.

Nicole Westbrook, an attorney with Jones & Keller P.C., litigates complex business matters, achieving outcomes that improve lives, and is a trial instructor and frequent writer on legal issues. Nicole can be reached at nwestbrook@joneskeller.com.

This information is not intended as legal advice. Readers should seek specific legal advice before acting with regard to the matters addressed above.