In 1988, Shak1ee Corporation brought suit against an 18-year distributor after he recruited other Shaklee distributors to sell for other direct selling companies. The suit sought an injunction to stop the distributor's activities. While the litigation was pending, the distributor was terminated. Shak1ee amended its suit, asking damages for breach of contract. The U.S. District Court which heard the case decided in favor of Shak1ee and affirmed that the corporation was authorized under its contract to terminate the distributorship. However, the court denied any contract damages to Shak1ee. The distributor appealed the decision and also countersued against Shak1ee for a variety of claims including breach of contract, breach of fiduciary duty, conversion, fraud, and unjust enrichment. The U.S. Ninth Circuit Court of Appeals recently affirmed the trial court's decision, and Shaklee's right to terminate the distributorship. Most of the distributor's counterclaims were denied. Some aspects of the U.S. Court of Appeals' decision could be of interest to other direct selling companies. Noncompetition Clauses Shak1ee's "statement of privileges and responsibilities" (P & R) prohibits Shak1ee distributors from promoting another direct selling company while selling for Shaklee. Termination is specifically mentioned as a sanction for violation of that provision. The distributor's original contract bound him to "any company rule", including those in the P & R. The distributor claimed that the contract term was too ambiguous to be enforced. The court found that the terms of the contract were clear and unambiguous in stating that distributors "may not promote, directly or indirectly, another direct selling company or its products while remaining a Shak1ee family member." The court also held that California law clearly establishes that contracts can prohibit current employees from competing with their employers, and extended this reasoning to "supplier-distributor relationships" like that between Shaklee and its distributors. Whether or not competitive activities of distributors who have stopped selling for the company can be prohibited was not addressed. Termination as a Rel2risal for Criticism of the Coml2any The court found that the distributor's claim that he was terminated as a reprisal for his criticism of Shaklee's management policies did not deprive Shaklee of its right to enforce the contract terms. The court thus affirmed the primacy of the company's ability to exercise its contractual right and that the exercise of that right cannot be the basis for a claim of tortious interference. The distributor's claim of damages for disruption of his relationship with his down-line distributors was rejected. "Retirement Benefits" According to the Court decision, Shaklee pays bonuses to certain qualified distributors who have been approved for so-called "reduced activity" status, based on the continuing performance of downline distributors. The terminated distributor claimed that these bonuses were "retirement benefits" to which he was still entitled. However, company rules provided that participation in this program was available only to those who complied with all applicable Shaklee rules and regulations. Accordingly, the court found that the distributor was not entitled to participation in the residual bonus program, for the same reason which caused his original termination. For more information, contact the DSA legal staff.