The Electronic MLM

By Jeffrey A. Babener
©  2000

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 us.

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 agreement.

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 acceptance."

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 agreement.

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 valid.

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 pads.

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.

www.mlmlegal.com