Most network marketing companies have adopted some sort of cross-sponsoring prohibition. Under this rule, distributors may not cross-sponsor their distributors into other company programs or market products of other companies to their distributors, with the exception of their personally sponsored distributors.

There are a variety of business reasons pro and con regarding such restrictions. From the company standpoint, the company wishes to stop raiding of its organization. From the distributor standpoint, distributors resent intrusion into their independent contractor status. The smart network marketing company knows that, irrespective of the legal issues, such rules must be applied with sensitivity and good judgment so as not to label the company a bully, nor destroy morale among its distributors.

Despite the business reasons pro and con on such restrictions, it is frequently asked whether or not such a restriction is an unlawful restraint on trade under antitrust laws. The short answer is probably that such restraints by network marketing companies are legitimate restraints under the antitrust laws.

Cross-sponsoring rules would probably come under antitrust laws which regulate "exclusive dealing" contracts. Exclusive dealing contracts between a distributor and a manufacturer are reviewed for enforceability under the principles of antitrust law. This type of clause could be considered a violation of the Sherman Act as an unlawful refusal to deal, or a violation of the Clayton Act as exclusive dealing.

In general, antitrust laws do not prohibit a manufacturer from choosing to deal with distributors who promise to devote sufficient time and energy to the manufacturer's product, at least where there is no evidence that the agreement substantially lessens competition or tends to create a monopoly.

In one case involving Volkswagen, the court held that a dealer completely failed to show the existence of an exclusive dealing arrangement where Volkswagen required the dealer to sell other manufacturers' products from a separate salesroom. The determinative fact was that Volkswagen did not require the dealer to purchase only Volkswagen products, it merely required the dealer to sell them from a different facility. In addition, the dealer failed to show that the limitation on dealing products of others would "substantially lessen" competition or tend to create a monopoly in any line of commerce.

Most MLM companies do not prohibit a distributor from selling the products of other companies. They merely require that the distributor not sell others' products to customers that were not personally sponsored by the distributor or at company meetings. This is similar to the limited restrictions involved in the Volkswagen case. It is akin to requiring the distributor to sell other products from a separate showroom.

Even if a court found the restriction to constitute an exclusive dealing arrangement, the arrangement would not violate §1 of the Sherman Act unless it was found to be an unreasonable restraint of trade. An exclusive dealing arrangement does not constitute a per se violation of the Sherman Act. It is, therefore, analyzed under the antitrust "rule of reason."

Under a rule of reason analysis, several factors are examined in reaching a determination of the reasonableness of a restraint on competition:

As applied to this situation, the exclusive dealing arrangement would likely not constitute an antitrust violation unless a court believed it probable that performance of the contract would "foreclose competition in a substantial share of the line of commerce effected."

In addition, it is unlikely that any distributor could show a substantial lessening of competition in the product line or business (for example vitamins, cosmetics) resulting from the restriction on company distributors. This is especially true because most companies do not restrict the sale of other products, just the manner of sale.

Therefore, as it would not appear that the restriction on MLM distributors prohibiting them from selling other programs or products to company distributors other than their personally sponsored distributors would lessen competition in either the specific product line of commerce or between multilevel programs in general, the restriction is most likely enforceable and not an unreasonable restraint of trade under the Sherman and Clayton Acts.

CONCLUSION