Who Owns The Downline?

by Jeffrey A. Babener
MLM Legal Attorney
©2011

The question of "rights in the downline" is one which is clearly headed for the courts within the next few years. Many MLM companies take the position that they are the sole owners of "downlines." Many key distributors market their "downline structures" from one MLM company to another as if downline structure was a piece of property which could be marketed at will. When the "process" of multilevel, as a form of marketing is closely examined, the better argument is probably that neither of these positions is correct.

Multilevel marketing is a form of one-on-one direct selling by which companies contract with independent distributors to market products and compensate those distributors through sales commissions on sale of product produced by their sales organization, as well as offering distributors the opportunity to profit through the differential between wholesale and retail price. A downline is, in reality, a sales organization made up of independent distributors. It is not owned by key distributors, nor is it owned by an MLM company. Independent distributors are free to cancel participation at any time. In fact, those states that have adopted multilevel distribution statutes require that distributors be permitted to cancel participation at any time, for any reason upon notice to the company.

Most companies have adopted sophisticated data processing which provides detailed information on downline sales organizations. In the event a distributor leaves an organization, a company is obviously free to continue marketing through its system of independent distributors. Modern thinking MLM companies also provide availability of data processing information on the sales organization in the distributor's downline. In fact, providing such information is tangible evidence a company may offer to regulatory authorities that its distributors are well informed as to their downline sales organizations. This indicates that the distributor plays a bona fide supervisory selling soliciting function in moving product to consumers. Many statutes now require this bona fide supervisory function as a precondition to receipt of commissions or overrides by distributors. Distributors are free to use information as to their own sales organization as they deem appropriate subject to restrictions regarding confidential information. Companies which attempt to restrict distributors after termination from working with other MLM organizations should seriously consider the federal and state antitrust implications of such restrictions. In California, for instance, noncompete agreements are unenforceable unless based on confidential information.

Companies may not arbitrarily terminate distributors without facing liability. Distributors enter into contracts with companies in reliance on the fact that they will be compensated for building sales organizations. Although many MLM companies adopt one year contracts with distributors, arbitrary or capricious termination of the distributor may clearly subject companies to contract claims as well as possible claims under various state dealer termination statutes. It should also be noted that, in recent years, many state courts have gone so far as to even award damages to "at will" employees, i.e., employees who are not under contract with the company. This line of cases, which has developed claims for "wrongful termination," has produced sizeable awards of both compensatory and punitive damages. Such cases involving MLM companies are still in developmental stages.

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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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