MLM Legal Perspective: Are Non-Compete Agreements Binding on Distributors?

Guest post by +Cole Dowsley, Thompson Burton litigator. This is controversial subject in the network marketing profession. When independent distributors join a network marketing program, should they be “stuck” by way of a noncompete? Short Answer: legally, noncompetes are enforceable (in most cases, not all). When two adults sign a contract, it’s hard to get provisions thrown out. But, in my opinion,….the market might soon demand that companies remove these restrictions. Cue, Cedrick Harris. Harris, one of ViSalus’s top leaders, publicly (and respectfully) resigned from the company. His main gripe: the lack of flexibility to work other programs. As distributors get more educated in this area of the law, they’re going to start demanding that companies remove the restrictions. And when that happens, the restrictions will disappear. — Kevin Thompson

Guest Post

independent contrator non-competeMost people think of non-compete agreements as a contract between an employer and an employee. However, this is not the only relationship where covenants not to compete may be valid. There are a number of other relationships in which courts have enforced non-compete agreements, including non-compete agreements between a business and an independent contractor and non-compete agreements between a buyer and seller of a business. Covenants not to compete may be included in or ancillary to a variety of business contracts, such as MLM distributor agreements and joint marketing agreements.

One of the most common questions is whether a business can require a “1099” independent contractor to execute a non-compete, and if so, whether the agreement is enforceable as to the independent contractor.

As noted in my recent blog post regarding the general enforceability of non-compete agreements, the law governing non-compete agreements is state specific. In Tennessee, the Court of Appeals has determined that covenants not to compete may be applicable to the independent contractor relationship.Baker v. Hooper, 1998 WL 608285 (Tenn. Ct. App. 1998). Courts in other states have reached the same conclusion. In the independent contractor context, non-compete agreements will generally be treated in the same fashion as employer/employee agreements. The U.S. District Court for the Middle District of Tennessee explained the law, as follows:

Although these provisions [with independent contractors] arise outside the employment context, and are entered into between companies with relatively more bargaining power than the average employee, they are still restraints on trade, and the Court concludes that Tennessee courts, if called upon to consider these provisions, would view them in essentially the same light it views non-competes in the employment context.

As such, the provisions are enforceable under Tennessee law only if they are reasonable under the circumstances. Tennessee courts have instructed that the factors to be considered in assessing reasonableness include whether the covenant not to compete seeks to protect a legitimate business interest, the economic hardship imposed on the restricted party, and whether such a covenant would be inimical to the public interest.

Affinion Benefits Grp., LLC v. Econ-O-Check Corp., 784 F.Supp.2d 855, 866 (M.D. Tenn. 2011)

For a general discussion of the factors courts in Tennessee consider when determining the reasonableness of non-compete agreements, see my recent article on the subject. In the independent contractor setting, courts will likely place an emphasis on whether there is a legitimate protectable business interest under the circumstances of the case. The cases in Tennessee emphasize that there is no legitimate interest in protection from competition, only from unfair competition. In making this determination, a business must show the presence of special facts above and beyond ordinary competition that would give the independent contractor an unfair advantage when competing with the business.  Such facts might include whether the independent contractor had access to confidential or proprietary information, such as business secrets, confidential pricing information and confidential customer lists. Unfortunately, there is no simple rule to easily determine whether or not an independent contractor non-compete agreement is reasonable and enforceable; it is a highly fact-driven analysis and the determination will depend on the unique circumstances of each case.

Do you have questions or concerns regarding a non-compete agreement? Contact the Business Litigation & Dispute Resolution Attorneys at Thompson Burton PLLC, who are regularly called upon to prepare, review, negotiate, and litigate non-compete agreements on behalf of businesses and individuals.

Zeek Rewards News Update: Former Zeek Affiliates File Class Action Suit, ViTel Pulls Rescue Plan

Truth & Justice

Scott Rogers called me today concerned over the report that his company ViTel was lumped in as some Penny Auction Reload Program for Zeek Rewards Affiliates. He told me after talking with his Board, they are pulling the plug and issued the following statement.

ViTel Wireless

Vitel has announced that it will discontinue the “Rescue Offer” to Zeek affiliates.

Our heart goes out to any and all of the individuals and families worldwide that were affected by this unfortunate travesty. We, as industry professionals and human beings saw a need to reach out and help in any way we could. We did not want to sit back and do nothing while our fellow colleagues suffered a great loss. Thousands of lives have been turned upside down by this tragedy and it has left yet another black eye on the industry.

Initially, Vitel decided to launch a “Rescue Offer” or Free enrollment to anyone affected. The intentions of Vitel, have and always will be, to look out for the independent business owner and operate above and beyond expectations of just another company.

Our company has always operated with the highest level of integrity, heart and commitment to the fellow network marketer. We believe in this industry and the entrepreneur, who seeks to change his or her lives. Vitel believes success comes from hard work and a strong commitment to do the basics. Our representatives earn commissions from selling Name brand products and services in the wireless, home services and energy markets. We also offer an exclusive benefits network that saves members on a variety of services from travel to roadside assistance. We do not promote or support, get rich quick programs or investment opportunities.

Vitel does not want to be associated with any company or companies looking to gain advantage from victims of the Zeek scandal. In the wake of all the negative publicity surrounding re-load scams and companies targeting fallen victims of this fallout, Vitel will no longer promote the “Rescue Offer” to Zeek affiliates.

For more information on the products and services we offer please visit or

Affiliates file class-action lawsuit against Zeek, Burks

By Nash Dunn
The Dispatch
Published: Wednesday, August 22, 2012 at 5:29 p.m.
Last Modified: Wednesday, August 22, 2012 at 8:32 p.m.

Nearly 100 Zeek affiliates have filed a class-action lawsuit against Rex Venture Group, Zeek Rewards and chief executive officer Paul Burks, claiming damages from the company’s “fraudulent, unfair, deceptive and illegal acts.”

The state court action, filed in Davidson County Superior Court about 4 Wednesday afternoon, seeks damages for all affiliates and demands a jury trial.

The lawsuit is being brought by about 82 named affiliates. Numerous other unnamed individuals could be inserted into the lawsuit at a later date, the filing said.

Most of the affiliates included in the lawsuit are from North Carolina, including numerous individuals from Davidson County. Affiliates claim to have lost amounts ranging from $1,000 to $10,000.

The lawsuit targets Rex Venture Group and Zeek Rewards, which was shut down by the U.S. Securities and Exchange Commission last week after an investigation that alleges the company was operating a $600 million Ponzi scheme. It also targets Burks, the company’s top executive who allegedly personally took and siphoned off millions of investor funds.

The lawsuit is also aimed at upper-level affiliates who, over time, solicited others to join the program, knowing it was a Ponzi scheme all along, according to the filing. Those upper-level affiliates, who were not named in the lawsuit, allegedly received significant sums of cash from Zeek Rewards in the weeks and months leading up to the SEC action.

The SEC put a halt to Zeek’s assets Friday, in fear that the company would soon collapse.

The affiliates who filed suit Wednesday are mostly from North Carolina, and in particular the Triad region. All are seeking various sums of money. Two plaintiffs, Jose and Sara Chavez of Davidson County, invested $7,000 in Zeek Rewards, claiming they need their savings to provide medical care for their daughter who has leukemia, according to the lawsuit.

Another plaintiff, Davidson County resident Preston Everhart, invested $3,000 in Zeek Rewards and is deployed in Kuwait with the Army National Guard.

Lexington Attorney J. Calvin Cunningham, who represents the plaintiffs, was unavailable for comment Wednesday afternoon.

Several affiliates listed in the lawsuit were also unavailable for comment.

The court-appointed receiver, Charlotte attorney Kenneth Bell, began his investigation into Zeek Rewards on Monday. Bell, who will collect and marshal remaining investor funds, has also set up a website,, and email,, for affiliates.

You can read the full article by Nash Dunn of The Dispatch Here

MLM Attorney Kevin Thompson Brings Focus To Self Deception A Cancer Holding The MLM Industry Back

MLM Attorney Kevin Thompson

MLM Attorney Kevin Thompson,is someone I have grown to trust both as a friend and as my own attorney. His ability to think things through before he makes any statement is one of the attributes I have come to find makes him a great attorney inside of the network marketing profession.

When I read Kevin’s most current article titled: Self Deception: a cancer holding the MLM industry back

MLM Attorney Kevin Thompson

Several things stood out:

1. He took as much responsibility for this issue as anyone. I too must take responsibility! As a matter of fact anyone who states they love the Direct Selling Industry, and especially the Network Marketing/MLM community should stand up and take responsibility also.

2. He points out that if we, as the MLM aka Network Marketing community do not stop trying to keep the gray areas, then we will give the judicial system no choice but to clear up the gray areas for us.

3. Unlike critics, who just want to gripe and moan about Network Marketing aka MLM being pyramid and ponzi schemes, Kevin Thompson actually offers a solution, a starting place if you will where we can begin the conversation on providing a truly black and white differentiation between a legal direct selling aka Network Marketing aka MLM company and what would truly be defined as a Marketing Scam.

You can read Kevin Thompson’s full MLM Legal Editoral by clicking here, after watching the video below.

I also suggest reading this great ebook by Kevin Thompson “Saving The Network Marketing Industry, By Defining The Gray

Self Deception from Kevin Thompson on Vimeo.

FTC Publishes Final Guides Governing Endorsements and Testimonials

FTC publishes final guides governing Endorsements, and Testimonials. These changes affect Testimonial Advertisements, Bloggers, Celebrity Endorsements.

Most of you who subscribe and read our Blog, know we have written articles on this issue over the last year. These changes are HUGE for the little guy, and we all must work to get the word out.

We need to set aside our difference of opinions for a second and make sure we are getting the word out to everyone we can.

As I have said in the past, we do not need the Government coming in and cleaning up our great profession. So if you are a Networker who markets on the Internet, or an Affiliate who runs several niche websites or Blogs, take time right now to spread the word.

You can read the FTC press release here.

Text of the Federal Register Notice FEDERAL TRADE COMMISSION 16 CFR Part 255

Text of the Revised Endorsement and Testimonial Guides FEDERAL TRADE COMMISSION
16 CFR Part 255 Guides Concerning the Use of Endorsements and Testimonials in Advertising

Remember get the word out to all your friends.

To protect yourself I suggest checking out Michael E. Young Esq. who is the Founder of the Internet Attorneys Association.

Living An Epic Adventure,

Troy Dooly