June 1999
Legal
Who Owns Database Information - Spencer Reese
In response to Is Database Purging Fair? (April '99), a reader asked about the legality of a company using purged names as incentive-program leads. Who has the right to the prospect-value of those contacts? Does the distributor whose genealogy is purged have any claim to the names? We posed these questions to MLM Attorney Spencer Reese, and he broke the issue into several elements to answer from a legal standpoint. Here is a summary of the information he shared:
1) Does the distributor whose downline was purged own the downline?
Distributors do not "own" downlines. They have a contractual right to commissions on sales generated by the downline.
Like a commission-sales clerk in a store with regular customers, distributors have the right to commissions on product sold to those customers, but no claim on the people themselves. The customers can go to another store anytime they want, and the clerk in the new store has as much right to commission on his sales as the original store clerk.
In the same way, a distributor has the right to earn commission off downline activity according to the company compensation plan, but each person remains an independent distributor. If someone chooses not to maintain distributor status according to company policy, that person has essentially stopped shopping with the company. The upline and sponsoring distributors can't lock that person into the downline.
The distributor does, however, have the right to contact people after they have been purged, even if the names have been handed off to another distributor as part of the incentive program. (While this is true from a legal standpoint, there are obviously complex relationship issues involved here which are out of the scope of this column --ed.)
2) Does that mean the company owns the names?
The company does not have any more claim to the people themselves than the distributor who first signed them into the business. However, if the company has properly protected the geneologies as trade secrets, it does have an exclusive right to use the downline lists. The company has the right to keep database information for their own use within other rules of the business, including incentive programs. "Other rules" refers to those concerning crossline recruiting and similar issues. This does not imply that a company can simply shuffle and deal out genealogies like cards in a deck just because the lists are protected as trade secrets.
3) Does either side, the company or the distributor, have legal grounds to challenge the other for rights to the list?
If the company has properly protected its geneologies as trade secret information, it has a legal basis for claiming an exclusive right to use the list. If, however, a distributor can identify purged individuals through an independent source, they are free to prospect those people.
Database purging is a familiar issue, and Mr. Reese said that he is in favor of keeping databases up-to-date. Most companies have ways of noting which distributors have become inactive, so their upline distributors can make an effort to contact and reactivate them before the database is purged. Spencer did not want to comment on the ethics of using those purged names as lead lists in an incentive program-- he hadn't ever encountered the issue and did not want to offer an unconsidered answer. He simply stated that there are no legal violations in the scenario. -- TH
Spencer Reese is a partner in the law firm of Grimes & Reese. He is a graduate of the Washington University School of law and is a member of the Idaho, Missouri and Colorado bars. He was formerly in-house counsel for Melaleuca, Inc. Mr. Reese's current practice includes representing and advising multilevel marketing companies on all aspects of their business, including consumer protection, advertising law, litigation, contracts, marketing plan design, regulatory compliance, trademark law, FDA law, policy development and distributor compliance. Grimes & Reese is a supplier-member to the Direct Selling Association and the Professional Association of Network Marketers. Mr. Reese can be contacted at (208) 524-0699, or via e-mail at sreese@nicoh.com. Extensive legal information is available at the firm's website: www.mlmlaw.com
Reprinted with permission from Upline, Upline Legal - June 1999, 888-UPLINE-1, http://www.upline.com
