MLM Defense: FTC Earnings Claims and Nonsolicitation Clauses

Jones & Keller, P.C.
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Nicole Westbrook, Jones & Keller in Denver, Colorado, and Spencer Reese, Reese & Richards in Utah, discuss FTC proposed rules on earnings claims and nonsolicitation clauses for network marketing companies and their independent distributors.

FTC GOING AFTER EARNINGS CLAIMS

Last June, the Federal Trade Commission (FTC) lost its authority under section 13(b) of the FTC Act. That section of the statute had traditionally been used to get injunctive relief against defendants See more +

Nicole Westbrook, Jones & Keller in Denver, Colorado, and Spencer Reese, Reese & Richards in Utah, discuss FTC proposed rules on earnings claims and nonsolicitation clauses for network marketing companies and their independent distributors.

FTC GOING AFTER EARNINGS CLAIMS

Last June, the Federal Trade Commission (FTC) lost its authority under section 13(b) of the FTC Act. That section of the statute had traditionally been used to get injunctive relief against defendants whom the FTC deemed bad. The problem was of course that it denied due process to the defendants.

The U.S. Supreme Court issued a decision last June that stripped the FTC of its 13(b) authority. To rebut that ruling, the FTC has been seeking other means to obtain injunctive and monetary relief against defendants. The Commission has decided to attack deceptive earnings claims against network marketing companies as the most likely avenue for their success.

The FTC has taken two steps in that direction. First, the FTC has relied on their penalty offense authority, something it has had for a long time. The second is that they issued a proposed notice of rulemaking in March 2022. If a deceptive earnings claims rule is promulgated, the FTC will be entitled to automatic injunctive relief and damages. We do not know when the rule will be issued — it could take years but network marketing companies should use this time judiciously and prepare for a rule.

MLMs must get out in front of where the FTC is going and Nicole Westbrook and Spencer Reese share some tips on how. Listen in.

NONSOLICITATION CLAUSES

Nonsolicitation clauses come into play with MLMs when a distributor leaves one MLM to join a separate network marketing company. It used to be easy for an MLM to pick out a solicitation in correspondence between a distributor and his or her former downline. However, solicitation is much more subtle today. Social media has drastically changed the landscape.

Social media is how distributors communicate and is a tool for raiding. Some distributors will post on their social media page a seemingly innocuous item, such as, “I had a great run with Company X and its products are wonderful. I will always use them. But I am moving on to my next project.” That alone is a very subtle invitation for followers to contact them in a way that allows the distributor not to technically violate the nonsolicitation agreement. Instead, the distributor was contacted by individuals and simply responded to their inquiry.

That explanation will not cut it. The activity is going to be a violation of a nonsolicitation policy if Company X’s policies properly address social media usage. If there is ambiguity in the contract, however, this activity can lead to costly litigation. The more open to interpretation the policy, the more likely a company and its former distributor will go to trial.

The legal issue is who owns these social media databases? Do these databases become company property as soon as a distributor signs up? Does it apply to pre-existing accounts? Listen in as Attorneys Nicole Westbrook and Spencer Reese discuss from various perspectives the issue of nonsolicitation clauses, which cause more anguish and angst between companies and distributors than all other policies combined.

About the Attorneys

Nicole Westbrook is a litigator in the law firm of Jones & Keller. She practices complex commercial litigation in all facets of plaintiff and defense work for large, national cases with multiple parties as well as high stakes litigation. She is an instructor for NITA and a frequent writer and speaker on legal issues and litigation practices. Reach out to Nicole at nwestbrook@joneskeller.com.

Spencer Reese is a partner in the law firm of Reese & Richards, where he counsels and represents start-up businesses and established firms in the direct sales and multilevel marketing fields, as well as companies marketing dietary supplements and cosmetics through traditional distribution channels. He regularly contributes articles to industry publications and is a frequent speaker at industry events.

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

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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