Network Marketing Incentive Contracts, Is It Ethical?

Kevin Thompson, MLM Attorney


In recent events, Herbalife has come under fire due to their product/distributor ratio and the DSA has come under fire from Avon, due to their forward moving direction. Avon indirectly accused the DSA of protecting Herbalife. However, a very little known fact, hidden deep within the industry is network marketing incentive contracts,  a much bigger issue within the industry than a distributor vs customer ratio as Avon claims. 

Incentive contracts are given to top income earners to sign up with a company to create headline news, creating a buzz inside the industry as many start to question why said person has signed up with said company. It is never revealed that the underlying reason is a contract, often in the form of financial incentives (monthly salaries that ranges between $5,000-$50,000 a month) to a percentage of all sales to exclusive tool sales to an already built team. The incentive is given because the leader will need an income in order to leave their current company and maintain their lifestyle. Otherwise, how would they?

Once the contract is accepted the leader will announce they're leaving and sign up with their competitor, creating excitement and buzz with the new company that just signed such an established person. Where the controversy lies isn't with the new move, it's with the team left behind and certain disruption that's guaranteed. Especially since no mention of a contract is ever brought up. 

Once this change happens many questions are asked with the most important being; Why did the leader leave when just last week they were expressing their gratitude to their company, their income, their team, and the lifestyle they have? Suddenly, all that is changing and they're stating everything that was wrong. Where was this information before? This wouldn't be as much of an issue if distributors were loyal to the company and products instead of individual team leaders within a company. 

It's inevitable, hundreds, sometimes thousands of people will leave and follow their leader blindly into the new company without ever looking back, leaving behind people that they worked so hard to build, all under the premise of a seeming lie. Distruction and chaos is left in the wake, at what cost?

Sometimes, the contract isn't so cut and dry. Top leaders have also sold their teams, something that is perfectly legal and mostly accepted. With a team sale an agreement is usually made with the company; a statute of limitations where the leader can't sign up with any other company for a specific amount of time. (The average being 1-2 years) Leaders get greedy and instead of waiting out the clause, end up signing up with a new company – except through a loophole; as a co-founder and not as a distributor. All because they, too, were offered an irresistable incentive contract.

The ultimate argument is that everyone is an indepependent contractor and they're free to do whatever they want. While this is true, it's a much different story when there's a deep dark secret within the industry that very few people know about and end up making life changing decisions based on people they trust and look up to. 

It is said, with great power comes great responsibility. No one can decide what is right or what is wrong except for the person reading this – but how much would be different if there were more clarity with the decisions these leaders make? 

Recently, Kevin Thompson, the MLM attorney, has brought up many of his own points of what he believes needs to change. One of them, specifically were these agreements: 

Undisclosed Financial Arrangements
It's common in the industry for a company to offer additional compensation to leaders in exchange for them leaving another company. While the agreements never explicitly say We're paying you to leave Organization X and raid your old downline, they might as well. This sort of behavior has spun out of control, causing companies to rip into each other and there needs to be a clear signal at the highest levels that this will not be tolerated.
First, the FTC's Testimonial and Endorsement Guidelines strongly suggests that these sorts of undisclosed deals are fraudulent. I wrote an article on the subject in June of 2010 here.
Second, these sorts of deals are not illegal. It's only a problem when there's no disclosure. If the DSA were to require that these deals be disclosed, it might actually curb the activity.
Third, these sorts of deals are bad for the industry because, candidly, they rarely make economic sense. The leader leaves, boasts about the greatness of the new company, takes very few people with him or her and subsequently crashes. This leaves hyperbolic activity in the industry where companies are trying to out-hype each other.
Fourth, the DSA's Code Administrator, when put onto the case, can easily deduce if a deal has been struck and whether the deal was publicly disclosed.

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