Statement of Policies non-compete clause ruled illegal in a summary judgment that could have far reaching effects for independent contractors with other multilevel marketing (MLM) companies as well

At the heart of a large number of lawsuits in multilevel marketing (a.k.a. network marketing) enterprises, is the question of what rules should govern the business behavior of a distributor (associate, independent consultant, IBO, etc., whatever the designation in the particular company) when that distributor decides he or she wants to work with another company.

For example, here are just some of the questions that arise regarding Distributor A of Company A:

• Can a distributor for Company A participate in other MLM companies or businesses in general?
• Can a distributor of Company A “recruit” or sell the products of Company B to any other distributors in Company A?
• If so, which distributors? Ones they knew before they joined Company A? Only distributors who were personally sponsored into Company A by Distributor A? Or none at all?
• If Distributor A quits or is terminated by Company A, then should there be a “non-compete” clause?
• If so, for how long? What activities would be covered by the “non-compete” clause?

These are not easy questions to answer to make sure that Distributor A has the appropriate freedoms of being an Independent Contractor while making sure that Distributor A does not hurt other distributors in Company A and other distributors in the sales organization that he built with Company A.

In Melaleuca, the associates are called “Marketing Executives” and are, like with other companies, legally defined as independent contractors. The non-compete provision in this case is defined in Melaleuca’s Statement of Policies and Definition of Terms at Policy 20.

The parties’ chief disagreement concerns the applicability and, importantly, the legality of Policy 20 of this Policy as part of Melaleuca’s Independent Marketing Executive Agreement (IMEA).

Below are some of the pertinent sections of Melaleuca’s very long Policy 20. Non-Solicitation and Conflicts of Interest as discussed in Judge Jon J. Shindurling’s Opinion, Decision and Order for Summary Judgment filed December 3rd, 2010 in Bonneville County Idaho:

Policy 20 is a lengthy section of the IMEA entitled Non-Solicitation and Conflicts of Interest. It forms the basis of Melaleuca’s complaint against the Foellers. The Foellers argue that Policy 20 contains an illegal liquidated damages provision and that Melaleuca’s cause of action is barred under Idaho law.

Policy 20 allows Melaleuca contractors to participate in other business activities while they work for Melaleuca. However, the IMEA contains a number of limitations on the competing business activities. The relevant limitation is: “During the period that their Independent Marketing Executive Agreements are in force Marketing Executives and all members of their Immediate Household are prohibited from directly, indirectly or through a third party recruiting any Melaleuca Customers or Marketing Executives to participate in any other business ventures.” –Policy 20 (a)(i).

The IMEA Melaleuca Definitions of Terms defines “recruit” as:

1) To attempt to enroll, enlist, or solicit an individual or entity to join a business, program or organization; or 2) to attempt to promote, influence or encourage an individual or entity to join a business, program or organization; or 3) to present, or participate or assist in the presentation of a business, program, organization or its products. To constitute recruiting, such efforts or attempts may be performed either directly through personal contact or indirectly through a third party.

The policy goes so far as to state that such activities are violations “even if the Marketing Executive does not know that the prospect is also a Melaleuca Customer or Marketing Executive.”

Policy 20 also states:

Violation of any provision of this Policy 20 constitutes a Marketing Executive’s voluntary resignation and cancellation of his/her Independent Marketing Executive Agreement, effective as of the date of the violation, and the forfeiture by the Marketing executive of all commissions or bonuses payable for and after the calendar month in which the violation occurred. –Policy 20(c)(i).

Note that it was this particular provision, Policy 20(c)(i) that was at the heart of Melaleuca’s Motion for Summary Judgment in their case against Rick and Natalie Foeller, NOT the whole non-compete policy. (Non-solicitation clauses are generally regarded as necessary and important parts of any MLM company’s policies.)  But, this is one of the provisions that put real teeth in to Melaleuca’s whole policy.

Melaleuca argued that the quoted provisions of the IMEA allow it to demand repayment of all commission payments since June 2008, when the first violation of Policy 20 was alleged to have occurred.

The Foellers argued that the forfeiture provision of Policy 20 constitutes a liquidated damages policy and an illegal penalty.

Interestingly, the judge argued that it really didn’t matter whether the clause was a liquidated damages clause or not and ruled that the clause was not allowed by Idaho contract law in any case:

However it is not necessary for a provision to be styled as a liquidated damages clause in order for it to be an illegal penalty. “[W]here the forfeiture of damage fixed by the contract is arbitrary and bears no reasonable relation to the anticipated damage, and is exorbitant and unconscionable, it is regarded as a ‘penalty’, and the contractual provision therefore is void and unenforceable.” Magic Valley Truck Brokers, Inc. v. Meyer, 133 Idaho 110, 117, 982 p.2d 945, 952 (Ct. App 1999).

Clauses intended to punish a breaching party are not allowed in Idaho contract law.

…

Melaleuca states that the amount requested is reasonable because it exactly matches the damages Melaleuca suffered as a result of paying commissions to the Foellers. This argument is unconvincing based on the evidence currently before this court. Melaleuca seeks to retroactively take money paid to the Foellers for sales commissions; there is no argument or evidence that these commissions were not tied to profitable sales as a result of the Foellers’ work as contractors for Melaleuca or that these are recognizable damages. Rather it appears that, lacking other evidence, Policy 20(c)(1) acts solely to “deter a breach or to punish the breaching party.”

There remains a genuine issue of material fact as to what damages Melaleuca suffered as a result of the Foellers’ recruitment of Melaleuca customers and executives into Max. Summary judgment is not appropriate on this issue and will be denied.

In other words, there was no evidence presented that Melaleuca did not profit from the sales that produced those commissions, in fact, there was no evidence that Melaleuca had been damaged at all by the Foellers’ alleged breach of Policy 20. If the judge allowed Melaleuca to reclaim those commissions paid after the alleged breach of the contract, it would allow an “illegal penalty” (and policy provision) that sought only to punish the breaching party to be enforced and, very probably, an injustice to rendered.

Over the years, how many times have we heard of companies taking away a distributor’s business over alleged violations of similar rules in the company’s P&Ps?

In many of those cases, might the forfeiture of the distributor’s entire business and income stream be an “arbitrary” penalty that bears no “reasonable relation” to the real damages sustained by the company and be “exorbitant and unconscionable?” There is no question that may be true many times, and not true other times.

Should not the punishment fit the crime?

It is important that these matters be handled in a way that is just for all concerned.  And that rarely is as easy as taking away a business and income stream that a distributor, and independent contractor, may have worked many years to build over policy infractions that may have cost the company little or nothing in actual damages.

[Bold fonts are inserted by the author of this post.]

?Natalie Foeller’s Facebook page carried this post dated the 3rd of December:

Attention all networkers: I have been hoping that this day would come….Melaleuca sued us 1 1/2 years ago and so far has not won any motion against us. Today, they had their biggest loss. Melaleuca proudly say they never lose a case, well they sure did today! This is a huge set back for Melaleuca and a huge win for those that will come up against them in the future!

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Glenn’s COMMENTS & OPINION

Mannatech (Australia and USA) did the same to me (Glenn) back in 2007.

A group of the top Mannatech distributors did not like me because I was making waves in the internet marketing and got popular on my international conference call. They made up stories and blatantly lied to Mannatech. Mannatech took their word for it did not investigate properly.

They terminated me without warning citing solicitation. I fought them, at my own cost and with no legal representation for nearly six months, and won my distributorship back again. However they could never prove fault on my behalf.

In 2008 I got a corporate job as Sales and Marketing Manager in Amega Global, a new MLM to Australia. I felt obliged to terminate myself from Mannatech due to a potential conflict of interest. The paperwork was never confirmed accepted by them.

In June 2010 (12 months later, after Mannatech’s non-solicit clause had expired) I put out some marketing info on a new MLM (LiveSmart260) to my email lists, Mannatech did it AGAIN… They attempted to put the 12 month solicitation clause after temination into effect… even though I had been terminated for 12 months!

They claimed I was only terminated from them from March 2010 when they entered my termination into their system. They would not accept the legal (effective) date on the signed termination form!

They blatantly refused to correct the termination date in their system, however, after months of bullying by Mannatech we mutually agreed on 1 Jan 2010 as the effective end of rights and responsibilites following termination (under extreme duress on my part).

Here’s My Beef

Distributor lists are NOT confidential information owned by the company. They are  JOINTLY OWNED.

MLM companies say they OWN the customer list. No matterwhere it comes from. They say I have no right to use it after I cease being a distributor, even though as part of my business requirement was to build a business network at MY cost.

MLM company customer list and solicitation definitions are too draconian! They do not take into account how a business network develops. They do not even take into account relationships that existed prior to becoming a distributor with thaat company.

A HUGE change is due and I welcome the ruling against Melaleuca (a company with the MOST draconian rules I have ever seen)

I know of an Australian couple who fought Melaleuca for this same reason.. They settled out of court but they were minus $250,000 in legal fees! It apparently cost Melaleuca 10 times that!

MLM companies think that if a distributor (or ex distributor) sends an email promoting another opportunity (MLM or otherwise) to one of their distributors then that distributor will stop producing an income for them.

That is totally false and built totally on fear of loss!

If THAT distributor is so ready to jump to another company/opportunity then so be it. They were not locked in in the first place and ANY opportunity that came along would interest them, from me or otherwise.

I make the comparison to a Catholic talking to a Jew with the intent to being converted to Judaism. If it was meant to happen then let it happen. If not the Catholic will stay with their faith and say thanks but no thanks. Everyone is still happy.

I believe this is how it should be in MLM. Let people make up their own mind and get on with business of seeking and keeping happy customers and ditributors, not trying to hold onto the ones that are not interested anyhow.

That’s my rant for now… I could talk on this topic for hours. I will not bore you with more here so call me to talk to me if this has happened to you or you need advice as to how to proceed if it IS happening to you.

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