Looking Past The Paper

In a recent article, I wrote, "I have had regulators from seven key states say to me personally or to an audience I was in, the equivalent of, "We look past the paper to what is really going on in our state."" I have also said on more than one occasion that the single most regulated act in MLM is the offer of the income opportunity to a prospect. Well, the Federal Trade Commission made both of those points for me recently in the Jewelway case. A legally designed program (the paper) only gets you half way home, if that far, as bad sponsoring conduct is not saved by the paper.

Federal investigators went to Jewelway opportunity meetings and did not like what they saw and heard. Note that I did not say that they did not like what was written in the Jewelway literature. They clearly were "looking past the paper." I will leave for another article an analysis of whether the Government response was appropriate for the circumstances. (It wasn't.) My purpose here is to make the point again that companies and distributors must PROPERLY IMPLEMENT a legally designed program.

There can be no required product purchase to become a representative of a company with an MLM compensation plan. The cost to get in must be "zero" or at most an at-cost, non-commissionable charge for a starter kit. The paper was O.K. The Jewelway representative had people believing they had to buy product to get in.

There must be retail sales to make money as a representative of a company with an MLM compensation plan. The paper was O.K. The Jewelway representative had people believing they could make money just through personal consumption.

There can be no earnings representations made to prospects by representatives of a company with an MLM compensation plan. The paper was O.K. The Jewelway representative made specific income representations.

What can companies and representatives do? The companies must monitor sponsoring conduct to ensure it is "by the book." Personal visits, required tapings, certification, refreshers and the are all possible ways to keep their finger on the pulse of what is happening in the field. Representatives must first and foremost realize the importance of studying the corporate literature and avail themselves to corporate training on how to sponsor. Entrepreneurs are by nature creative, but during an opportunity meeting is not the time. Presenting an income opportunity is high risk. The company must design the technique properly and the representative must implement the technique properly.

Gerald P. Nehra is an MLM-specialist, private practice attorney. He is one of only a few attorneys nationwide whose practice is devoted exclusively to direct selling and multilevel marketing issues. His 33 years of legal experience includes nine years at Amway Corporation, where he was Director of the Legal Division. He can be reached at 1710 Beach Street, Muskegon, Michigan 49441-1008, 231-755-3800, 231-755-4700 fax. His e-mail address is GNehra@mlmatty.com.

With so much business being done with faxes and electronic mail, the signed contract seems to be going the way of the 8 track player. What about the law that you need my signature to hold me liable? Well, not always.

First, let’s get the c.y.a. out of the way. I recommend that ALL contracts be dated, witnessed and signed by both (all) parties, preferably in blue ink so it is more obviously an original signature and not a copy.

Now we talk practicalities. Oral contracts are legal. The issue is not usually legality, but enforceability. Let’s examine the lack of a signed contract from two perspectives, that of the company and that of the distributor.

The company wants distributors who order their products and services and bring them more distributors. Nothing in the signed or unsigned distributor contract makes the distributor do those things. They are a volunteer army, who can do nothing if they choose (and often do.) The significant document is the product or service ORDER. Numerous orders create a course of dealings of the parties bringing payments or obligations to pay to the company. These documents, much more than the distributor contract, are important in the sense that they are convertible to cash that goes to the bottom line.

The distributor contract often even contains a clause making it cancelable at any time by the distributor by giving written notice to the company. If you were a bank lending officer, which would be more impressive, lots of orders, or lots of cancelable at any time distributor contracts?

When everything is fine, the lack of a signature means little. It’s when discipline up to and possibly including termination is needed that companies check the files to find the signed distributor application. It is evidence that these rules were in effect (right here on the document you signed) and you broke that one. Companies who do paper-less sign up have many choices after the fact (and before any trouble arises) to obtain a signed document for the files. They should check with their marketing and/or legal consultants to see what works best in their system.

The distributor has different issues that may be tied to signatures. Most distributor applications have a place for the distributor to sign, but not a place for the company to sign. If the distributor contract is viewed as an offer it needs to be accepted. Most often, something other than the return of a signed contract is the acceptance. Sending a welcoming letter or package, issuing an identification card, or merely starting to accept orders closes the loop. Again, when all is going well, flaws in the formal process mean little. It’s when an expected bonus check does not arrive, or a disciplinary action is taken by the company, that the distributor starts reading the fine print, (or tries to find the fine print.) If a distributor seeks to hold the company to a particular clause (such as arbitration, or written notice of changes in the compensation plan) it is always better if completed paperwork is available. Keeping in a file all correspondence and documents from the company is a very good idea. Of particular importance is paperwork used in the annual renewal of the distributorship. Distributors are urged to save their canceled checks used to pay the renewal fee. Also, if the company communicates with the distributor by e-mail, send it to the printer before deleting it and save it in your paper file for a rainy day.

Bottom-line, paper-less sign ups work. Getting signed copies into the files latter is recommended for the protection of all parties.

The information you obtain at this site is not, nor is it intended to be, legal advice. You should consult an attorney for individual advice regarding your own situation.