MLM LAW - Network Marketing State and Federal Laws
by Gerald P. Nehra MLM SPECIALIST ATTORNEY
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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 MLM Network Marketing - Party Plan legal 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 MLM company wants MLM distributors who order their products and services and bring them more MLM distributors. Nothing in the signed or unsigned MLM distributor contract makes the MLM 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 MLM distributor contracts often even contain a legal 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 legal signature means little. It’s when discipline up to and possibly including termination is needed that MLM companies check the files to find the signed MLM 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 legal trouble arises) to obtain a signed document for the files. They should check with their MLM marketing and/or MLM legal consultants to see what works best in their system.
The MLM distributor has different issues that may be tied to signatures. Most MLM Legal distributor applications have a place for the MLM 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 Legal MLM disciplinary action is taken by the MLM company, that the MLM 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 legal documents from the MLM 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 legally pay the renewal fee. Also, if the MLM company communicates with the MLM 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 legal copies into the files latter is recommended for the legal protection of all parties.
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 multi-level marketing issues. His 25 years of legal experience includes 9 years at Amway Corporation where he was Director of the Legal Division. He can be reached at 1710 Beach Street, Muskegon, MI 49441, 616-755-3800, 616-755-4700 FAX. Credentials and Billing Information are available through Fax-on-Demand at 803-548-3299, ext. 3088, and E-Mail Auto Responder at MLMAtty@memo.net. His E-Mail Address is MLMAtty@aol.com
Permission is given to Rod Cook to duplicate this article.
Everybody talks about patents. Direct selling companies that have patented products extol the exclusive and proprietary nature of the goods they market. When consumers hear patent, there is an aura of magic that is added to any potential purchases. So, what are patents - and how do they work? Here is Patent 101 for direct selling executives.
From the beginning, the United States has recognized the importance of providing an incentive to inventors to invent. It is the backbone of our economy and our science. Therefore, the government grants a property right through the U.S. Patent and Trademark Office, for a period of 20 years from the filing of the patent application through granting of a "patent," the exclusive "right to exclude others from making, using, offering for sale or selling the invention in the United States" or from "importing the invention" into the United States. In other words, whoever owns the patent of an invention has a 20 year legal monopoly for the marketing of an invention.
Of course, merely because an inventor has a patent does not mean that he or she is exempt from laws that might restrict the sale of the invention. For instance, the inventor of a new type of nuclear bomb may not market or sell it because federal law prohibits the sale of such products. The patent does not create any exemption from existing laws.
The patent laws provide that any person "who invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement, may obtain a patent." So, first off, the subject matter of the patent must be "useful." A machine that won't perform its intended purpose could be an invention, but it may not be "useful" and, therefore, will not qualify for a patent.
It should be kept in mind that a patent does not cover merely an idea or a suggestion. A complete description of the actual machine or subject matter for which a patent is sought is required of the patent office.
Patent law provides that an invention must be new or "novel." In other words, an invention cannot be patented if:
"(a) the invention was known or used by others in this country, or patented or described in a printed publication in this or a foreign country, before the invention" or
"(b) if the invention has been described in a printed publication anywhere in the world, or if it has been in public use or on sale in this country before the date that the applicant made his/her invention, a patent cannot be obtained."
This is very important. It makes no difference when the invention was made, nor when there was a printed publication or public use of the intention. If the inventor describes the invention in a printed publication or uses the invention publicly, or places it on sale, then the inventor must apply for a patent before one year has gone by. If not, the patent will be lost.
So, what is "new?" Well, it may be an entirely new invention or it may be an improvement on an earlier invention. The important thing is it must be so new that it would be viewed as such to "a person having ordinary skill in the area of technology related to the invention." And, of course, merely substituting one material for another or changes in size are typically not sufficient to make something new.
In the United States, inventors make their application to the U.S. Patent and Trademark Office to the Assistant Commissioner for Patents. The inventor will submit a detailed written document with specifications and drawings, if necessary. And, yes, as with other government agencies there are filing fees. Other countries throughout the world have similar processes for applying for patent protection.
Under U.S. patent law, only the inventor may apply for a patent. If two or more people are involved in the invention, they apply as joint inventors. Merely because a third party provides a financial contribution for a patent invention, it does not mean that the third party can apply as a joint inventor. Of course, and as often happens, the inventor will make an "assignment of patent rights" to individuals who have financed the invention or who have purchased a license for patent rights.
Once an inventor is granted the patent, he or she now has the right to exclude others from marketing the invention. If companies without patent rights offer for sale the patented invention or import it into the United States, the owner of the patent rights may file a patent infringement action in U.S. federal court to obtain an injunction to prevent the continuing infringement and can also obtain damages. Of course, often times, in such actions, the party being sued may challenge the validity of the patent, whether it is a "novel invention," etc., and that must be decided by the court.
The reasons for protecting patent holders is obvious. The future of our economy and science is dependent upon the free flow of new ideas and technologies. Our patent laws give protection to inventors and encourage them to share their inventions with the public, and reward them with a special package of rights for their creativity.
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This MLM Legal information in this MLM Legal Book is not to be substituted for an MLM specialist lawyer. Although the laws in the book (over 140 pages) are as up-to-date as possible, the laws concerning MLM-Network Marketing change by court decisions (MLM case law) and other rulings. Retails at $79 by itself. If you buy it with The MLM Startup Book, your price is $210 for both.
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WELLMAN & WARREN LLP
ATTORNEYS AT LAW
24411 Ridge Route, Suite 200
Laguna Hills, California 92653
Scott W. Wellman
Scott R. Warren
Cathy Pham Zotti
Stuart Miller *
Khuong Dan Tien**
Juan A. Muñoz de Cote***
Retorno Julieta 52,
CP 11930 Mexico City, Mexico
*Admitted in CA and NY
**Admitted in CA
**Admitted in Mexico only.
June 15, 2007
RE: Quick Review and Analysis of FTC v. Burnlounge case
I have just reviewed the Complaint filed by the Federal Trade Commission on June 6, 2007 against Burnlounge, Inc. and some of its key executives and distributors. After reviewing the case, I thought it was important to let you all know the issues that are being raised by the FTC and how they procedurally acted.
First, procedurally, the FTC filed a lawsuit against the Company, the CEO and four top independent distributors. The filed it on an ex parte basis, which means that the Defendants only had 24 hours notice of the hearing on the matter. They also executed a freeze order, freezing all of the assets of both the Company and the individual defendants, thus making it difficult for them to mount a defense. They have pled in the complaint for the return of all money earned, penalties, the rescission of all contracts, and the permanent ceasing of activities. Do I have your attention now!
The claims that are raised by the FTC are really two-fold and not too complex. They claim that the Company was an illegal pyramid scheme and that they made Unfair and Deceptive income claims. I will address these each individually in some detail.
First, the allegations of an illegal pyramid scheme. While the FTC admits that the company sold over $2,000,000 in digital music titles over the past year; the basis for the claim was that the company sold only sham products to disguise the illegal pyramid scheme. The FTC analysis came down to one of simple economics. They stated on numerous occasions that the start up packages sold by Burnlounge (especially the highest priced one which was “hard sold” by the distributors) produced almost all of the commissions earned by the distributor base. In fact, the best case scenario, under the FTC analysis, was a $17 for start-up in the binary for every $1 generated by music sales; and the worst case scenario was a $346 to $1 ratio.
In other words, the FTC scenario alleges that “but for” the start-up binary commissions and the promise of same, no one would make any money in the plan. In fact, the FTC goes on to state that most people, up to 87.5% don’t make even their initial investment back. While I am not very familiar with the make up of the Burnlounge various start-up packages, it is fair to say by the FTC analysis that they did not feel there was anything of value included, which a person outside of the network would purchase.
What does this mean to you? It basically means that your program must be self sustaining through retail sales to end-user consumers and that the majority of distributor income must come from the retail sale of products to end-user consumers. Under this analysis, Binary compensation plans that pay out bonuses( training or however they are defined) on start-up packages, will need to insure that the earnings from distributors are highly weighted from the sale of products to end-user consumers and not from binary bonuses which relate to the recruitment of others (although disguised as start-up package sales).
In many cases, a start-up package may be a package of products, which are in turn retailed to end-user consumers. This was not part of the FTC analysis, so I can only assume that the Burn Lounge start-up packages did not include product of any value or which could be resold.
The second issue that the FTC focused
on was the presentation by the Company and the individuals of the plan.
They cited example after example of lofty income claims. They state that
the majority of people did not earn the amounts claimed, in fact, to the
contrary, most people did not even earn their initial start-up package price.
They further stated that the Company and the individuals made these claims,
knowing they were false and deceptive, and made no attempt to provide warnings
to the prospects that many people( if not most in their case 87.5% by FTC
analysis) will not earn as much as they spent to join. The FTC reiterated
this need for warnings several times in the complaint and attached evidence.
I would strongly recommend that every company include this warning
prominently in its materials and in every presentation.
An additional aspect of the presentations that the FTC claims was Unfair and Deceptive was the fact that the focus was on the sale and promotion of the highest priced package. In fact, in 2007 the Company had added a “free” position, but there was never any emphasis on it in the presentations. Indeed, in the Burn Lounge plan there was no mechanism in place for a person to join for free and earn there way through the compensation plan to the highest level. To participate in the higher levels of commissions, a person must pay for the higher levels of packages. This is not acceptable. You must have a mechanism in place that will allow a person to join the program for free or at cost and earn their way through the plan through sales volume and performance. A company may not just pay lip service to this plan either, having it but hiding it will not suffice, it must be disclosed, promoted, and discussed.
While it is still early in the Burnlounge litigation, and the outcome is far from decided, it is very difficult to defeat the FTC, especially when they have frozen your assets. It is also impractical to remain in business after a lawsuit and restraining order from the FTC, since all momentum is lost and confidence in the company with the field distributors will be lost. That is why it is so important to be proactive and keep you legally compliant. I hope that this review and analysis has been helpful to most and a wake up call to some. If you have any questions, as always feel free to call me at anytime.
Scott R. Warren
Wellman & Warren LLP
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