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May 23, 1999 www.mlmlegal.com

Market America Rumor is Bogus
The Case

MLM and direct selling companies have been deluged with inquiries from distributors concerning a recent federal court decision involving Market America. Distributors have reported a rumor circulating on the internet and e-mail that, as a result of the Market America case, MLM companies may not enter into "exclusive dealing" agreements with their distributors. As it turns out, the decision in the Market America case does not stand for this proposition, and distributors have been misinformed.

The dispute between Market America and its distributors arose from Market America distributors recruiting within distributor ranks for a competitive company. Suits and cross-suits were filed after Market America took action against the distributors.

At an early point in the case, the court ruled in favor of the Market America distributors that a "non-compete" clause in the distributor agreement violated North Carolina law as an illegal restraint of trade. The clause prohibited distributors from working for a competitor for 6 months after termination from Market America. In the absence of a limitation on geographic scope of the restriction, the court held that the clause was "an illegal restraint of trade." Subsequent to the ruling, Market America removed the clause from its agreements.

The Court distinguished "an exclusive dealing" agreement from a "post termination non-compete agreement. The court did not take exception to "an exclusive dealing" agreement in reaching its conclusion. Most MLM companies do not restrict distributors from working for more than one MLM company, so long as confidential genealogy lists are not used to recruit, and so long as distributors do not raid their downlines by cross-sponsoring those below their personally sponsored distributors. However, it is also not uncommon for MLM companies, for various business reasons, including uniqueness of product or concern about confusion in the marketplace, to request "exclusive dealing agreements" in which distributors are asked to stick with one company. Distributors may be asked to limit selling of a particular unique line of products to one company, or in some cases, to stick with one mlm company. If distributors wish to sell for another MLM company they are requested to resign and go elsewhere.

Does the Market America decision outlaw "exclusive dealing" arrangements. The answer is "no". Does it outlaw post termination non-compete agreement that are not limited in scope. It apparently does, but the ruling is limited to North Carolina. It appears the internet fed rumors about the import of the case are inaccurate, and that Market America has been used as a "whipping boy" to erroneously confront other MLM companies on the "exclusive dealing" issue.

Other issues continued to jury trial in the Market America case, and will continue in post trial motions as well. Market America prevailed on the issue of the trade secret nature of its genealogical information. The following is a recitation of key points of the case as prepared by Market America:


Market America’s Summary Presentation of Key Points

  1. The litigation produced several significant rulings for direct sales companies:
    1. Companies may include, and rely upon, contractual provisions requiring renewal of distributorship agreements annually and on the basis of mutual assent. Specifically, the Court confirmed that Market America’s contracts with Distributors are one-year contracts, with renewal occurring only if both Market America and the Distributor agree to the renewal. Consistent with this ruling, the Court limited the former distributors’ claims for lost commissions to the period between August 8, 1997 (date of suspension) and December 31, 1997 (end of contract period).
    2. Companies may reasonably expect that confidential trade secret information provided to Distributors will be protected by the courts. The Court, and later the jury, found that Market America’s Pro-Pak information (which includes, in a computer software format, data on production levels and linkages of all distributors in a downline constitutes protected trade secret material.
    3. Companies may enforce contractual provisions imposing fiduciary duties on distributors who serve as trainers or members of an advisory board or in other similar capacities.
  2. The only provision in Market America’s contract with Distributors, which the Court declared invalid, was a covenant not to compete as the provision was worded in 1997. This issue is essentially moot at present for Market America because the Company changed all of its contracts more than a year ago to address the possibility of such a ruling. The Court based its decision on prior court decisions in North Carolina involving employer-employee relationships. Certain North Carolina cases in that context seemingly required a geographical limitation on the scope of such covenants to be valid. The applicability of such cases to the direct sales/distributorship network context is of questionable validity. Furthermore, the Court did not attempt to interpret the law of other states.
  3. The case involved other issues related to the circumstances surrounding Market America’s suspension/termination of its Distributors. The issues included the extent to which Market America libeled and/or slandered the suspended Distributors in materials provided to various Distributors (the jury evidencing more concern about the number of people who received the materials than the content of same), the extent to which the Distributors were damaged by Market America’s not following its own procedures for handling appeals of suspensions (Market America having chosen to resolve the dispute in the then pending litigation instead of its usual internal process), and the extent to which the North Carolina unfair trade practices statute applied to the claims of these Distributors. These matters will not be finally resolved until post-trial motions and appeals have been concluded, which will likely take many months. They all relate, however, to the means by which suspensions and non-renewals should be handled as opposed to the rights of a company to suspend or not renew a distributor.
  4. In short, Market America secured some favorable rulings on important issues of long-term significance; lost on some issues which have no long-term significance and have already been the subject of remedial action; and learned exactly how to handle similar situations in the future so as to preclude or limit liability exposure, while protecting its trade secrets and maintaining its field organization. We feel the case will strongly support the industry’s ability both to protect field organizations from cross-group sponsoring and to require active selling and management.
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