IT HOLDS THE KEY TO PROTECTING your company from legal and reputational harm.
IN RECENT years, a growing number of class action lawsuits have been filed against some of the direct selling industry’s leading companies. The fact is, no one is immune when class action lawyers get you in their crosshairs.
The best way to prepare for the worst-case scenario is to check your arbitration clause. Is it up to snuff? Does it include the specific language it requires to protect your company from harm?
In today’s hyper-litigious reality, the unfortunate truth is that direct sellers can make easy targets for class-action lawsuits. “One of the big things we have to worry about in direct selling is a class action,” says Spencer Reese, J.D., Partner with Reese Poyfair and Richards, a law firm that specializes in serving the direct sales industry.
Because of the size of these classaction cases and the legal notices that have to go out to all members of the class, they can be very damaging to a company’s business. Most allegations, Reese says, are brought by “disgruntled former distributors, but the real driving force is law firms are trolling for classaction business.”
In these types of cases, Reese says, direct selling companies are often accused of running a pyramid scheme. “These cases can result in very substantial judgments, verdicts or settlements against a company,” he adds.
When distributors band together as a class and bring a case against a direct selling company, the results can be extremely devastating financially. “While Stream has never undergone an arbitration, we’ve learned valuable lessons in the past few years about the U.S. court system,” says Mark “Bouncer” Schiro, CEO of Stream. “I’ve found that during litigation, we spend the vast majority of our dollars on discovery. The exchange of information, which might not even be relevant, is expensive and time-consuming.”
Arbitration In Lieu Of Court Case
However, according to Schiro, discovery burdens can be dramatically reduced if both parties agree to participate in arbitration in lieu of a court case. “The worst-case scenario is a big, ugly public trial with a runaway jury,” Schiro says. “Arbitrations are generally quick, efficient, and private. This is a huge difference from a jury trial, where you usually get people who know nothing about the direct selling industry, and just want to get back to their normal lives.”
“Distributors generally prefer to fight their fights on the internet in the court of public opinion. —SPENCER REESE , J.D, Partner, Reese Poyfair & Richards
This is one of many reasons it’s so important for direct selling companies to have well-worded and carefully considered arbitration clauses in their independent contractor agreements.
“The arbitration clause should be included in your Independent Distributor contract,” Schiro says. “Prospects should sign the arbitration agreement when they enroll, and the arbitration clause should be front and center. We encourage our prospects to think and ask questions before they sign on the dotted line.”
Reese advises direct sellers to include a class action waiver in their independent contractor agreements. That waiver requires distributors to agree that if they ever have a dispute with your company, they’ll resolve it individually instead of through class action. “I’m in favor of class action waivers, certainly for larger companies who are targets for class actions because they have deep pockets,” Reese adds.
In The Court Of Public Opinion
The costs of a class-action suit brought on your company can often be even greater than those that occur as a direct result of the proceedings in a courtroom. This is because once a lawsuit is filed in court, it’s a matter of public record. Disgruntled distributors or even settlement-seeking plaintiffs’ attorneys may decide to publish all or part of the court documents on the internet.
“Distributors generally prefer to fight their fights on the internet in the court of public opinion,” Reese says. “I know one plaintiff’s lawyer who, when he files a case against a direct selling company and if they’re not in confidential arbitration, will create a Facebook page and dedicate it just to that lawsuit. He’ll put it up there and spin the facts and post every pleading that is favorable to him and his case.”
Naturally, a company will want to respond and tell their side of the story. The problem is that by responding it makes the page more visible because the interaction increases its search engine ranking. Thus, it calls more unwanted attention to the subject, causing reputational harm to the direct selling company.
This is not just a PR or search-engine marketing problem, warns Reese. “When a prospect goes to an opportunity meeting the first thing they do afterward is Google the company. And the higher the page ranking, the quicker that page comes up. Whether the claims are true or not doesn’t matter—the mere existence of the case scares these prospects away. It hurts the company’s business, but they can’t quantify it.”
“Prospects should sign the arbitration agreement when they enroll, and the arbitration clause should be front and center.” —MARK “BOUNCER” SCHIRO, CEO of Stream
Add A Confidentiality Provision
To prevent such a nightmare from becoming a reality, your company should look again at your arbitration clause. If it’s properly drafted, Reese says, it will include a confidentiality provision, so the parties aren’t allowed to disclose details.
“Before the internet, people didn’t have an opportunity to publish, or to voice their positions,” Reese says. “Once the internet came along—and particularly social media—everybody’s now a publisher. So, it’s very easy to make a case public or make a dispute public. This can be very damaging to a company. And if you don’t have a confidential arbitration provision, you open yourself wide up to that.”
The way to prevent such reputational harm from happening in the first place is to focus on your arbitration clause. If you haven’t reviewed it in a while, now is a good time to revisit it with the help of a good attorney, preferably one who knows the direct selling industry’s unique challenges. It’s worth the attorney fees to develop the right arbitration clause.
Every company is different, and you need to talk to a lawyer who knows your unique situation, Schiro says. “Like anything in life, if it’s worth doing, it’s worth doing well,” Schiro adds.
Well-drafted arbitration clauses can greatly improve the process and help save money while poorly drafted ones can complicate the process and cost your company extra money. However, by thinking ahead about the likely disputes your company could encounter and be required to arbitrate, you can help to shape a more favorable outcome.
“At the end of the day, it’s all about fairness,” Schiro says. “Prospects should be viewed and respected as potential business partners that deserve openness and honesty. If we’re asking people to join the Stream opportunity, they need to know what they’re entering into.”
Arbitration Clause Options
WHEN DRAFTING an arbitration provision, there are a number of clause options you might want to include in your language. According to the American Arbitration Association, companies can provide for any or all of the following options in their arbitration clauses:
• Number of arbitrators
• Arbitrators’ Qualifications
• Locale Provisions
• Governing Law
• Documents-Only Hearing
• Duration of Arbitration Proceedings
• Assessment of Forum Fees and Attorneys’ Fees
• Opinion Accompanying the Award
• Non-Payment of Arbitration Expenses