New Protection For MLM Distributors

by Jeffrey A. Babener
MLM Legal Attorney
©2011

MLM is not for me - I want my money back." Well that's okay. New legislation in Oklahoma and Texas give you one year to think about it. And the industry is following suit.

If the trends continue, we may see the vast majority of network marketing companies offering the standard benefit of a one year 90 percent refund policy to distributors who have decided that the opportunity was just not for them. How does this work? Let's say you decide to join a network marketing company that sells cosmetics or vitamins or consumer products and you buy inventory to sell to your customers. Under the emerging policies of many companies, you will have up to a year to second guess your decision, cancel your participation in the opportunity, return your product, less a 10 percent handling charge, and get your money back. Just try this trick with your stockbroker, realtor or business broker.

A number of states with such multilevel marketing legislation, such as Maryland, Massachusetts, Wyoming, Louisiana, Georgia, Oklahoma and Texas mandate varying degrees of buybacks by network marketing companies. Even Puerto Rico has such a statute. In the typical buyback legislation, companies are required to buy back inventory and sales aids at 90% of net cost to terminating distributors. Buyback periods range from 90 days to forever.

Over the years, many companies have adhered to the guidelines in these statutes, some have complied only where required, and others have ignored the legislation. Some companies charge back upline distributors for commissions paid on returned merchandise, while others have deducted upline commissions from refunds, which dramatically reduces the actual buyback refund. With such inconsistency and growing incidents of "inventory loading abuse," many leaders in the network marketing industry thought it was time to make a commitment to self regulation and industry standards on buybacks. Such a move, it was thought, would send a message to regulators that the industry can address its own problems without new onerous regulation.

Thus, after sincere soul-searching and with some anxiety, member companies of the Direct Selling Association adopted an ethics rule mandating buyback policies for terminating distributors. Although many of the hundreds of network marketing companies in the U.S. do not belong to the DSA, the DSA, a Washington D.C.-based trade association, does claim more than 100 members, including many of the largest companies in the industry. Adoption of the buyback standards by DSA member companies will impact billions of dollars of annual sales and millions of participating distributors. Because of the number of major companies adopting such policies, the new rules will effectively be seen as a benchmark and new industry standard for network marketing. In fact, the one year buyback standard was the primary source for model legislation subsequently adopted in Texas and Oklahoma (who in return also recognized legitimacy of "personal use" by distributors - an issue important to the industry) - with other states to follow.

The new standards parallel to a large extent buyback policies in many of the states with such legislation. Under the new rules, companies must agree to buy back from terminating distributors inventory and sales aids in resalable condition for a period of 12 months from purchase at 90% of the net cost to the distributor. Upline commissions may not be deducted from the refund. Promotional items or products with seasonal or short lives are not subject to buyback if companies disclose this fact to distributors in advance. In addition, and importantly, the buybacks don't apply to two specific situations where distributor manipulation is taking place: (1) where distributors are disposing of inventory merely to switch to another company or move whole groups of distributors to another competitor (the intent of the rule is to protect the individual who wishes to leave the business, and believes he or she was mistaken in buying more inventory than could be sold); and (2) where a distributor, in order to qualify for a bonus or other benefit, has falsely certified that the previously purchased inventory has been resold.

There is probably plenty of debate in the industry about the appropriate length of time of the buyback. Many in the industry believe that distributors should reasonably know in 60-90 days if the opportunity is not for them. Nevertheless, in light of some regulatory positions that the buyback period should be unlimited, the time period for the DSA rule was chosen at 12 months in order to make a strong statement about the commitment of industry companies to look after the welfare of its distributors.

Adoption of extended buyback rules have drawn applause and praise from state regulators. Many believe that the creation of an industry standard would go a long way toward answering criticism in their states about "hit and run" and "rape and pillage" images of network marketing companies. It was thought that adoption of such buyback standards by industry companies would reduce the need for intervention and enforcement action by state agencies.

Good For You
So what's the first question you should ask when you are recruited to a network marketing opportunity? Ask to see in writing the company policy on buybacks and refunds. The buyback and refund trends are great for those of you looking for a new business opportunity. Don't expect anything but sympathy on your stock losses from your stockbroker. But do expect something more concrete from your network marketing opportunity.

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About the Author:

Jeffrey A. Babener, the principal attorney in the Portland, Oregon law firm of Babener & Associates, represents many of the leading direct selling companies in the United States and abroad. His firm has focus on startup and emerging MLM companies. He has been adviser to such companies as Avon, Nikken, Discover Toys, NuSkin, Excel, Fuller Brush, Cell Tech, Kaire, Sunrider, Melaleuca, etc. He is editor of the industry resource internet site www.mlmlegal.com.  He is a frequent lecturer and has been interviewed on the industry, and published, in many publications. Babener & Associates, 121 SW Morrison, Suite 1020 Portland, OR 97204, www.mlmlegal.com.

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