THE “PERFECT STORM” OF COMPANY-DISTRIBUTOR CONFLICT, REVISITED
by David G. Eisenstein, Esq.
Previously, I wrote about the so-called “perfect storm” of company-distributor conflict. By that I meant what are the “lethal” ingredients of the MLM company dispute with a distributor which results in litigation being filed by one against the other? Now, at least one industry commentator, has raised the question, would the companies and their executives who terminate key distributors, resulting in a forfeiture of the “residual income” previously promised to them back to the company, be guilty of more than alleged civil wrongdoing, possibly violating the Hobbs Act prohibition against “interference with commerce by threats or violence” enacted by the United States Congress, exposing them to potential criminal prosecution? Since the Hobbs Act prohibits “robbery” and/or “extortion” affecting interstate commerce, the short answer to the question, is there potential criminal liability, is YES, depending upon how the terms are defined in this context.
First, let us look at the letter of the law. The Hobbs Act is found at 18 U.S.C. §1951 and defines “robbery” and “extortion” as follows:
“robbery” means the unlawful taking or obtaining of personal property from the person or in the presence of another, against his will, by means of actual or threatened force, or violence, or fear of injury, immediate or future, to his person or property, or property in his custody or possession, or the person or property of a relative or member of his family… The term “extortion” means the obtaining of property from another, with his consent, induced by wrongful use of actual or threatened force, violence, or fear, or under color of official right.
There is no question that distributors believe that their distributorships and their right to receive the “residual income” they have built constitute their “personal property.” In fact, this is the First, and arguably the most important, of the rights detailed in the Distributor Bill of Rights adopted by the Distributor Rights Association at their organizational meeting in March of this year.
The more interesting question deals with Congress’ use of the phrase “from the person or in the presence of another” which seems to require that in order to constitute robbery, the unlawful taking be done where at least two persons, the perpetrator and the victim, are physically present. That would seem to exclude the notion of “robbery” from the growing phenomenon of company terminations of distributors accompanied by the forfeiture of all distributor rights to future, and sometimes already earned, income, at least it would appear to exclude that notion under the federal Hobbs Act, if not under the various definitions and degrees found under the laws of the 50 states and territories, outside the scope of this article, which may or may not contain the physical presence requirement of the federal statute. This article also is not intended to comment on the application of state or federal RICO acts to the situation of termination accompanied by forfeiture of residual income.
But what about the definition of “extortion” under the Hobbs Act, keeping in mind that under the 2003 U.S. Supreme Court case of Scheidler v. NOW the Supreme Court rejected the Court of Appeals finding that the Hobbs Act applied to situations where pro-life advocates effectively closed clinics issuing abortions on demand, by intimidating doctors and their staffs as well as their patients, through actions, which ranged from protected speech to threats, intimidation and violence. The Court, in explaining that in order to have extorted someone, one must have “obtained” another’s property, denied the application of the Hobbs Act to the conduct in question in that case.
What role if any, however, does the definition of “extortion” found in the Hobbs Act have to the “perfect storm” of company-distributor conflict? Careful examination of the Congressional definition of extortion raises doubt as to whether it would apply in this context. The definition of “extortion” ends with the wording, “the obtaining of property from another, with his consent, induced by wrongful use of actual or threatened force, violence, or fear, or under color of official right.”
Analysis of this language requires that, even though the “personal presence” element of the “robbery” definition does not appear to apply, one must still reject the application of the Hobbs Act in the typical company-distributor conflict because generally the distributor does not “consent” to the forfeiture of residual income. Such “consent” does happen from time to time, usually from distributors who are so cowed, embarrassed, or fed up with the company singling them out for termination and forfeiture, that they simply give in to the company’s aggressive stance, which oftentimes sadly will lead to the break-up of a terminated distributor’s marriage and family, or bankruptcy, or both.
I know of no terminations involving the use of actual or threatened force or violence. This is not to say it has not happened. Even if one does “consent” to the “rip-off” however, if he or she does so because of the “wrongful use of…fear, or under color of official right” exercised by the company, the definition of extortion might fit under the Hobbs Act, and federal criminal prosecution might be permissible under such circumstances. This does not necessarily help the victim to recover restitution of his or her “residual income” property taken wrongfully by a company looking to get a windfall of “breakage” or to benefit a “pet” distributor through the termination and forfeiture.
From a proactive perspective, the companies and the distributors might be better served by a uniform policy which requires that even distributors terminated for just cause be allowed a reasonable time (perhaps up to a year) to sell the distributorship they have worked hard to build, as well as the “permanent residual income” they were promised by the company that would always flow from it.
