Anyone with a social media account has likely recently seen a friend start a side-hustle selling products to their network through a direct sales company. The direct sales industry has experienced a renaissance since the Great Recession and shows no sign of slowing down. Direct sales companies have changed the way many people buy and sell products, and they have allowed many sellers to engage in potentially lucrative work with great flexibility. But are these sellers opening themselves up to unexpected liabilities? The direct sales industry is no longer driven by inert plastic food storage, but instead now includes knives, skin care, toothpaste, essential oils, diet meal replacements, supplements, and many other products that have the potential to cause injury. As sellers of goods, what liabilities do direct sales consultants take on, and are these sellers taking appropriate steps to protect themselves and their assets?
In a direct sales business model, products are sold by individual consultants or representatives directly to their cultivated customer base. The sellers are not employees of the manufacturer, but rather make profits based on commissions and incentives.
Product liability laws hold manufacturers and sellers strictly liable for injuries caused by their defective products. Although state laws vary on the standard, typically a product may be considered defective and unreasonably dangerous due to a design defect, a manufacturing defect, or a marketing defect. Design defects which make a product dangerous are present from inception, and are inherent in the product’s design itself. Manufacturing defects arise when an otherwise safe product becomes unreasonably dangerous as a result of an issue in the manufacturing or assembly process. Marketing defects are defects in the labeling or warning that cause a product to be considered unreasonably dangerous. A party injured by a product may allege any type of defect when seeking to recover against someone in the chain of distribution, including the seller or manufacturer of a product.
Consultants in direct sales business models are typically users of the products themselves, and will personally speak for the safety of their products. However, despite the best of intentions and belief by these direct sellers, the types of products being sold by direct sales companies have become increasingly similar to those products that are the common subjects of lawsuits. Accordingly, even if the actions are seldom meritorious, direct sales companies (and individual direct sellers) should be aware of litigation trends and risks.
For example, beautification products, such as skin care and makeup, are current powerhouses in the direct sales industry, but in some instances have been alleged to cause injuries to consumers. See, e.g., Bathory v. Proctor & Gamble Distrib. Co., 36 F.2d 22 (6th Cir. 1962) (litigation resulting from scalp injury alleged to have been caused by a permanent wave hair product). Because these products are typically used on or around the consumer’s face, a product defect has the potential to cause disabling or disfiguring injuries, as was the case in Walker v. Maybelline Co., where the court awarded damages to a mascara user who had accidentally scratched her eye with the applicator wand, causing infection and the eventual loss of sight in the eye. 477 So. 2d 1136 (La. App. 1985). Similarly, a number of direct sales companies sell kitchen supplies, including knives — another product that has the potential to cause disabling and disfiguring injuries when misused. E.g., Nugent v. Utica Cutlery Co., 636 S.W.2d 805 (Tex. App. 1982). And finally, a growing number of companies sell nutrition supplements or diet products — again, products with a history of alleged injury and resultant litigation. E.g., Gorran v. Atkins Nutritionals, Inc., 464 F. Supp. 2d 315 (S.D.N.Y. 2006).
What can sellers do to protect themselves?
First, sellers should understand their potential for liability. Many direct sales consultants are recruited by peers and begin selling with the belief that they can make a little money on the side with a flexible schedule. Before entering the market, sellers should understand the laws of the states where they do business as well as the risks posed by their products in order to assess the potential for their liability. Sellers should also evaluate their relationship with the manufacturer, and understand whether the manufacturer indemnifies sellers, or provides any legal assistance in the event of a lawsuit. Sellers may want to inquire into whether the manufacturer has been named in any lawsuits and should understand the design and labeling history of the products.
Second, sellers should pursue incorporation in order to protect personal assets in the event of a lawsuit. However, sellers should understand that incorporation does not protect from the financial burden of having to defend oneself in a lawsuit — despite the strict liability standard in products law, many cases are winnable, though not without cost.
Third, sellers should assess their current insurance coverage and evaluate whether additional insurance is warranted. Insurance can cover settlements or jury verdicts, as well as associated legal costs, in the event of a lawsuit.
In conclusion, direct sales companies can be a great way for people to engage in the market and make money selling a product that they believe in, but sellers should understand the potential for their liability as they occupy a step in the chain of distribution. Sellers should take actions to protect themselves and their assets.
Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.
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