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DSA Hosts Salesforce & Communications Seminar
Legal Matters: Commercial Law Update for Direct Sellers in Europe

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DSA Hosts Salesforce
& Communications Seminar

Nearly 200 direct selling executives and suppliers gathered last month at the USA Today headquarters in McLean, Va., for the Direct Selling Association's 2005 Salesforce & Communications Seminar. The annual two-day event is designed to provide companies with the tools they need to effectively communicate their message to both the public and their sales forces.

"What a great opportunity to network with people in the same industry and with the same marketing and communications challenges we all face every day," said Kurt Wulff, Vice President of Marketing, Relìv International. "I am always impressed by the level of information sharing that takes place at every DSA event."

Kicking off the meeting, Randall Oxford, Vice President, Corporate Communications, Mary Kay Inc. and Chairman of the DSA's Communications Committee, and Leonard Greenberger, Vice President, Potomac Communications Group, shared a sample of results from consumer and seller focus groups held this summer in St. Louis, Atlanta and Seattle. The focus groups were conducted by the DSA as part of its Global Image Enhancement Program, designed to increase awareness of and receptivity to direct selling.

Calling the effort "the most important initiative the association has ever taken," Oxford discussed some of the challenges facing the direct selling industry that were revealed during the focus groups. "Nearly three out of four people have purchased from a direct selling company," he said. However, only 23 percent rate direct selling as an excellent way to shop, with recruiting pressure and inconvenience two issues most often cited.

Following the morning's general session, seminar attendees were able to choose from a number of concurrent workshops on such topics as building successful communications plans, effective prospecting and recruiting tools, facilitating relationships between the field and company employees, and choosing a PR firm. Time was allotted during each session for audience questions and networking breaks, and a luncheon allowed attendees to meet others in the industry.

Day One of the seminar came to a close with an energetic presentation by Ann Clurman, Senior Partner at Yankelovich, a research and consulting firm. Clurman received an enthusiastic audience response as she discussed the latest trends that drive consumers.

After a full day of educational sessions, attendees were transported by bus to the historic National Press Club in Washington D.C. where they relaxed over dinner and enjoyed a keynote address by Dave DeFeo, The Longaberger Company's outgoing president. DeFeo offered a history of Longaberger along with examples of what the company has done to energize their sales force in both good times and bad.

Day Two of the seminar began with a general session presented by Laura Beitler, Senior Attorney, Mary Kay Inc., and Beth Hines, Manager, Global Support Administration, Quixtar Inc. Beitler and Hines discussed ways to ensure that direct sellers adhere to company rules on such issues as logo and trademark usage.

Following the general session, attendees again had the opportunity to choose from a variety of concurrent workshops on topics such as designing a recruiting plan, creating an effective catalog, and best practices in communications. After the final session of the seminar, USA Today Editor Ken Paulson delighted attendees with his luncheon presentation on the First Amendment. Paulson spoke engagingly about the role of a free press in a democratic society.

Closing the event, a Swap 'n' Share and author book signing gave attendees the opportunity to pick up the industry's best examples of recruiting materials, catalogs, books and flyers.

Seminar attendees agreed that the combination of informative sessions, a unique venue and compelling speakers resulted in a rewarding and educational event. "I truly benefited from the broad array of topics covered, from the tactical to the strategic, and enjoyed meeting (and learning from) new friends in the industry," said Bonny Fowler, Director, Corporate Communications, The Longaberger Company. "The USA Today/Gannett location was delightful, and Editor Ken Paulson's closing keynote was a memorable and motivating finale to a great seminar."

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Legal Matters:
Commercial Law Update
for Direct Sellers in Europe
by Nick Mallet

Pending legislation and regulation changes will impact direct selling companies that do business in Europe and the United Kingdom, and prudent companies should monitor these changes closely. Under review, for instance, are laws that seek to define or address what is fair and unfair in dealing with consumers, and the difference (if any) between agents and distributors. Direct selling companies should design their policies with extreme care to comply with pending U.K. and E.U. legislation and regulations to avoid being in breach. Regulatory changes are also on the horizon for liability insurance and Internet domain names in Europe.

Unfair Commercial Practices Directive- Anti-Pyramid Selling Scheme Law
The long-awaited UCPD has been adopted, and must now be implemented by primary legislation in each of the 25 member states no later than December 12, 2007. As suggested by its title, legitimate businesses should have nothing to fear, provided they control the conduct of their representatives in such a way as not to deal unfairly with consumers. For the most part, the test of unfairness relates to average consumers, but in some areas the standard for fair conduct is set higher, the benchmark being consumers who are particularly vulnerable.

One of the particularly helpful features of the UCPD is the inclusion of a specific prohibition, valid Europe-wide, of pyramid selling schemes.

Action: Monitor the progress of relevant impending legislation.

Agency Law
For more than 10 years, commercial agents in the U.K. have benefited from provisions enacted to protect their interests under the Commercial Agents (Council Directive) Regulations 1993. Previously, commercial agents had no statutory rights, negotiating whatever terms they could in an environment in which "freedom of contract" was the watchword. The Regulations gave them a range of minimum rights that they could not validly sign away by contract. Most of these rights were largely unobjectionable (for example, rights to information and to reasonable notice of termination of the contract, as well as the underpinnings for their rights to payment of commission according to certain criteria). Other rights, however, were and remain rather more controversial, primarily those relating to the rights to commission (unless the agent had been in material breach) and to compensation or an indemnity after termination in a wide range of circumstances.

Claims under the Regulations have been relatively rare. This is because many sellers are not in fact agents at all, but distributors who buy and sell products on their own account. The Regulations simply do not apply to these people. To some extent it may be because the Regulations expressly apply only to the sale of goods. Further, agents may not pursue a claim where the agent's activity is "secondary," as determined by reference to an extremely convoluted schedule to the Regulations.

We have occasionally advised clients that they should consider making a provision in their financial statements where the volume and nature of their business is sufficient to suggest that one or more successful claims might be made under the Regulations, but this has been the exception rather than the rule.

However, circumstances change over time and there seems to have been a distinct trend in the last year or so for judges to undermine the confidence previously felt by direct selling companies that a claim under the Regulations would not succeed against them.

For example, there have been cases in which the subject matter being sold by the agent for the company has been held to be "goods" (and therefore within the Regulations) and not "services" (and therefore outside the Regulations) in surprising ways. One of these cases, for example, concerned the sale of cargo space in an aircraft, and another concerned the sale of gas. In a recent case concerning electricity it seems to have been taken for granted that electricity amounted to "goods," and so it will be hard to imagine what "services" will amount to, if anything other than those services that exclude only recruitment agents from the benefits of the Regulations.

In a further attack on the defenses of direct selling companies this year, it has been held no longer necessary for an agent to be actively involved in negotiation with the customer, at least not in the normal sense of negotiation. As a result, companies that sell all or some of their products through agents, even if the agent is acting as a hybrid (i.e., as a distributor for some purposes and as an agent for others), should reconsider their contracts with a view to complying with the Regulations, or restructuring so as to avoid them.

For example, a direct seller engaged by a company as a distributor, but with rights and obligations for the recruitment and training of additional distributors, is very likely therefore to be treated as an agent, entitled to the benefits of the Regulations in those respects.

Action: Review sales arrangements to evade, where possible, adverse effects of the 1993 Regulations.

"Fast Start" Incentives
Nearly all direct selling companies recognize the great advantage that can be gained from the initial high levels of enthusiasm demonstrated by new recruits to the industry. Much effort is expended in trying to harness that energy by providing substantial incentives to reward initial efforts. From a U.K. perspective, the major problems encountered by such a strategy come about from the prohibition on payment for recruitment on the one hand and the £200 limit on purchases within the first seven days on the other. "Fast Start" programs are not, however, necessarily unlawful in the U.K., but they must be designed with extreme care to comply with the U.K. legislation. Generally, a method that involves a true advance payment of sales commission can be made to work.

Action: Proceed with caution.

Supply of Products "Not for Resale"
The U.K., in common with many other countries, has rigorous controls on the sale of certain products; for example, those in the health and nutritional field. Compliance with these laws is often a time consuming and costly process, involving submission of technical dossiers, market surveys, and even site visits by the U.K. regulators to the overseas source factories. On the other hand, personal imports are not regulated. For example it would be ludicrous if a traveler who bought and partly used some tablets for a headache in a foreign country had to apply for a license to import those products back to the U.K., even though they were obtained only for personal use. A number of direct selling companies have attempted to exploit this limitation by starting operations by means of shipment to end consumers from non-U.K. addresses and imposing an obligation on consumers not to resell the product. Although this structure has been used, it is fraught with problems and often amounts not so much to a legitimate avoidance of U.K. legislation, but to unlawful evasion and therefore breach.

Action: Proceed with extreme caution.

Insurance
Since January 2005 insurance mediation services in relation to general insurance business (e.g., product liability, personal liability or public liability) have become regulated by the Financial Services Authority (FSA). This applies even where the insurance mediation activity is but an incidental part of a business.

Direct selling companies are often in a better position to obtain insurance for their sales force than the members of the sales force themselves. Similarly, it is often very much in the interest of the direct selling company that it should ensure that there is adequate insurance coverage both for the direct seller and for itself concerning the direct seller's activities.

Questions are being asked in the industry as to whether this casts the direct selling company in the role of an "intermediary" between the insurance provider and the sales force. At first glance this seems far-fetched, as the direct selling company is not in the business of selling insurance and takes the policy out partly for its own benefit, to cover reputational risk as well as actual liability if something goes wrong in the selling process.

The definition of insurance mediation is, however, extremely broad under the regulations and is intended to cover every possible link in the distribution chain for regulated insurance products. The FSA has yet to issue specific guidance, but the prevailing legal view is that a direct seller who is an employee of the direct selling company does not create a problem in this respect because the company can properly be said to be taking out insurance on its own account. The problem is likely to arise where a direct seller is an independent contractor, as is normally the case. For the company to arrange insurance in such instances would amount to insurance mediation services, whether or not it is being charged for. This issue should be kept under review by direct selling companies. The FSA's interpretation, as and when it opines, will inevitably prevail and dictate future behavior in the industry.

Action: Review sales structure and consider what may be done.

On Your Marks, Get Set, Go-for ".eu" Domain Names
Businesses wishing to register Internet Web domain names under the new European ".eu" address must do so quickly or risk a dispute and possibly losing out to other companies racing to stake their claims.

The ".eu" register will be in operation on April 6, 2006. However, applicants can begin to register from December 7, 2005, and the European Commission has said that those first in the queue will get priority. Businesses should register through the European Registry of Internet Domain Names (www.eurid.eu).

The phased registration system is a welcome means of preventing companies from having to ransom their domains from "squatters," but trademark owners and others should not assume that they will automatically be granted a particular domain name.

Within the pre-April 2006 "sunrise period," ".eu" domain names will be allocated on a first come, first served basis. Owners of U.K. or even other trademark registrations could be denied the ".eu" domain name by other trademark owners with registrations for the same mark in a different country, or the same mark for a different class of goods or services.

Action: Apply as soon as possible.

Nick Mallet is a partner in the U.K. law firm Martineau Johnson and since 1980 has specialized in advising direct selling companies in Europe. He is secretary and one of the founders of the Legal Affairs Committee of the U.K. DSA. For further information please contact Mallett via telephone (0870 763 1234) or e-mail (nick.mallett@martjohn.com).

These notes are not exhaustive and should not substitute for obtaining legal advice in individual cases.

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