MLM on MLM action: tortious interference, trade secret, but not false advertising

It Works Marketing, Inc. v. Melaleuca, Inc., 2021 WL 1650266, No. 8:20-cv-1743-T-KKM-TGW (M.D. Fla. Apr. 27, 2021)

It Works is a MLM company that sells health and beauty products that requires distributors to sign a noncompete agreement and provides for arbitration (which allows “any party” to sue in court for IP claims, practically meaning that It Works can choose to sue if it wants). Melaleuca is a MLM competitor; individual defendants were former It Works distributors, but Melaleuca was never a party to the agreement.

The claims are mostly the kind of trade secret/tortious interference claims you’d expect from this setup, and I won’t say much about them, but there is also a false advertising claim about alleged misrepresentations of distributors’ income with Melaleuca. “For example, Melaleuca endorses fake, high-amount checks, which the Distributor Defendants then post on social media and message to It Works distributors to entice them to leave It Works and join Melaleuca.”

In Florida, a non-signatory can use equitable estoppel to compel a signatory to arbitrate claims if (1) the non-signatory shows that the signatory is relying on the agreement to assert its claims against the non-signatory and (2) the scope of the arbitration provision covers the dispute. Here, It Works’ dispute with Melaleuca fell outside the scope of the arbitration clause.

Thus, the court proceeded to address the motion to dismiss, and found tortious interference and trade secret claims properly pleaded.

False advertising under the Lanham Act: Failed because It Works didn’t plead that distributors were “consumers” under the Lanham Act. Solicitations directed to a potential distributor or employee aren’t covered because they aren’t “consumers.” (That isn’t actually an element, but this may be complicated by the fact that MLM businesses have some special reasons to talk carefully about whether their “distributors” are ordinary “consumers.”) Second, It Works relied on allegedly false statements that Melaleuca distributors made, allegedly at Melaleuca’s direction or encouragement, not on Melaleuca advertising. That was a contributory false advertising claim, but It Works didn’t actually allege contributory false advertising by Melaleuca.