Like every other industry, the
MLM/direct selling industry is reinventing itself electronically on the internet. For many
leading companies, e-commerce will dominate sales and relationships with distributors and
customers. MLM companies will be dramatically impacted by new legislation such as the
Uniform Electronics Transactions Act and proposed legislation such as the Uniform
Commercial Information and Transactions Act.
"The legal question
is whether a click of a mouse indicating agreement to terms is a
valid and enforceable acceptance of an agreement."
The origins are low tech.
Historically, you cannot find a business more low tech than direct selling.
By its very definition, direct selling has meant person-to-person selling.
A general scenario has been one-to-one, one at a time. This has not been
the business of telemarketing, infomercials, saturation catalog marketing
or mass merchandising. Rather, its success has been built one customer
and one recruit at a time.
Times Are Changing
But, that doesn't mean that the tools of the trade for network
marketers are not crossing the bridge to the 21st Century. Today, network marketers sell
and recruit by fax on demand, voice mail, e-mail, internet, and every other method of
electronic telecommunication. They fax in orders, enter orders by touch tone phone and
even sign up new distributors and sell through web sites on the internet.
This brings us to an interesting crossroad in legal history. Are all
of those digital and electronic impulses sufficient to create legally
binding agreements to join network marketing companies and to order products
- all done in a physical place that doesn't even exist, Cyberspace? When
the distributor\customer goes "click-click" with their mouse,
what is happening legally? This is a question that many of us, including
lawyers and judges, will be asking in the next few years. The answer is
that this train of commerce is in motion, and it is going with or without
Is it an agreement?
We have reached the point that all of a company's policies and
procedures can be placed on the web page for the potential distributor's review prior to
indicating his or her assent. The likely situation will be that the web page will ask a
question such as "I agree to review, become familiar with and to abide by company
policies and procedures." The web page will then have two boxes that will allow the
potential distributor to indicate whether or not he or she agrees with the terms and still
wishes to become a distributor. The legal question is whether a click of a mouse
indicating agreement to terms is a valid and enforceable acceptance of an agreement.
Contracts are made by phone every day, such as the purchase of
merchandise from catalog sellers, or when a company is taking orders over the phone with a
credit card guaranteeing payment. Effectively, contracts over the internet are basically
contracts over the phone. Basically, they should be acceptable.
There are some legal glitches, however, with electronic contracts. The
first is the problem of enforceability of a contract where the terms are
set by one party without discussion; and the second problem is the problem
of authentication, or what type of signature is required to create a binding
Take it or leave it.
When one party sets the terms of a contract and the other party has no
real opportunity to negotiate terms, the contract is sometimes referred
to as a "contract of adhesion." Such contracts sometimes, particularly
where they are unfair or overly one-sided, have been held to be unenforceable.
Rather than being bargained for in a normal contract fashion, they are
on a "take it or leave it" basis and sometimes contain terms
unknown to one of the contracting parties. However, the situation where
a potential distributor clicks an assent button without having the entire
policies and procedures in front of the person is no different from the
situation where a person signs up to become a distributor without having
a sales kit. It would seem that by continuing as a distributor after receiving
a sales kit, the new distributor has exhibited acceptance of the terms.
Look to the computer industry.
Since there are no answers to be found at this time in the direct
selling industry, a good direction to look for high tech answers is in the computer
industry. For instance, one federal court recently upheld the enforceability of
"shrink-wrap" licenses contained in boxes of software. The court held that the
vendor is "master of the offer," and "may invite acceptance by conduct ...
a buyer may accept by performing the acts the vendor proposes to treat as
The court listed numerous, similar examples where such contracts are
upheld. For example, the purchase of insurance where the policy is delivered after payment
of the premium, the purchase of an airline ticket where the customer receives it later,
complete with a long list of terms. In the case of many consumer goods, disclaimer of
warranty is often included inside the box. The court noted that it was basically trying to
avoid returning "transactions to the horse-and-buggy age."
What is the best approach for network marketing companies? Probably,
the best approach is to include the company's entire agreements and policies and
procedures in an Online application form and to require acceptance of these terms
explicitly before considering a contract form.
Is it absolutely essential? Probably not, as cases are developing. It is
simply the best route to go
The electronic signature.
But what about the signature? Everyone knows that you have to have a
signature to have an enforceable contract. Well, actually that's not true. Under the
Uniform Commercial Code, which has been adopted in all states and governs commercial
transactions, a signature is required for the sale of goods priced more than $500. This is
an outgrowth as what is known as Statute of Frauds first passed in England in 1677. Of
course, they didn't have e-mail and fax communication in 1677. We have come a long way.
Although this legislation may be applicable to the purchase of goods, it
probably is not applicable, says many courts, to distributorship agreements
themselves. Nevertheless, it is best to have a signature on a distributor
But what is a signature?
As times have changed, courts have recognized different methods of
"assent" as signatures. For instance, in 1869, courts held that a typed
signature at the end of a telegram constituted a signature. In the 1980s, courts held that
the faxed signature was a signature. Later, courts held that photocopied signatures were
signatures. Thus, it is comforting to know that all of those facsimile distributor
agreements that distributors have been sending in to companies over the years are probably
What about those e-mail messages and those mouse clicks? Are those electronic
signatures? Well it appears the courts are headed in that direction. And
so is Congress. Congress recently passed the Uniform Electronics Transactions
Act, which approves electronic signatures made from electronic signature
MLM's use click agreements.
Electronic signatures with electronic signature pads are a different
issue than the so-called "Click Wrap" agreements for consumers which require
affirmative answers to enter into some type of transaction.
In general, a strong trend in the courts is to hold electronic
documents enforceable. There is pending before the states a proposed bill called UCITA,
Uniform Commercial Information and Transactions Act. It would deal with "Click
Wrap" agreements. However, there are at least half the attorneys general who have
registered opposition to such legislation.
How do leading MLM companies handle this? Some require a click through
of answers, credit card information, they provide the consumer a downloadable pdf of the
agreement, and later they require that a signed contract be submitted. Others, though,
require paper contracts in telephone sign-ups, but not with respect to internet sign-ups.
With respect to internet sign-ups, they collect credit card information and personal
identity information for future identification use, such as a mother's maiden name.
At this time, it was agreed at a recent Internet Council of the Direct
Selling Association that the best policy with distributors is:
(1) To require the prospective distributor to "click" through
the various portions of the distributor agreement and policies with an indication of
understanding and acceptance,
(2) Collect credit card or other personal identity information, and
(3) Require the submission at a later date of a signed distributor agreement
Back to the future.
So, will low tech direct selling embrace high technology? The answer is
that the industry has no choice if it is to remain a viable channel of distribution.
Although, getting signed distributor agreements and orders is probably the best and safest
policy for network marketing companies, it appears that the future will welcome digital
signatures and electronic commerce by network marketers.