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lawBlawg

Legal news, opinions and analysis about MLM, pyramid schemes, ponzi schemes and other suspect investment "opportunities."

Thursday, May 18, 2006

lawBlawg's Greatest Hits and Farewell

As you can probably tell from the absence of any recent posts, after 10 years studying multilevel marketing and its economic and legal ramifications, I have moved on to other issues. I have decided to leave this site up as a resource for those who want to understand the nature of these so-called "business opportunities" - in particular, the nature and operation of Amway/Quixtar.

To that end, I have collected ten posts from the archives of lawBlawg that, taken together, will give you the essential analytical framework for understanding MLM in general and Amway/Quixtar in particular.

Greatest Hits

1. Multi-level marketing for Dummies
2. Scamology 101: An Introduction to Pyramid Scheme Math
3. The Single Most Important Word In MLM
4. Market Saturation: A Working Definition
5. Is Quixtar and It's Motivational Organizations A Destructive Cult?
6. Sketchy Products
7. Desperation and Socially Acceptable Behavior
8. Mutual Parasites
9. Free Enterprise and Non-Compete Covenants
10. Let's Talk About the Seventy Percent Rule

Also, don't forget to check out the "Recommended Reading" links on the right side panel of lawBlawg.

Farewell

I've mostly enjoyed my participation in the MLM debates over the years, but my interests have led me in other directions. Unfortunately, I no longer have the time to dedicate to pointing out the fallacies and falsehoods of MLM and its hucksters.

I wish all of you the best in whatever you choose to pursue.



Thursday, November 10, 2005

The Deep, Dark History of MLM

Several months ago I found a fascinating 1986 interview with former Food and Drug Administration prosecutor William Goodrich about the early days of MLM and the FDA's attempts to reign in false health claims in the vitamin and supplement industry. He talked alot about his battle with the founders of what would become the "Amway" model for MLM - Mytinger & Casselberry (who you can read about at Quixtarwiki), whose "Nutrilite" DoubleX vitamins were among the very first food supplements sold in the U.S.

I've previously written about why
food supplements are so often the shill for MLM schemes. But I think Goodrich's interview sheds a little more light on the topic.

The
whole interview is fascinating. Here are highlights of Goodrich's general observations about MLM and his discussion of the FDA's battle with Nutrilite:

The adaptation of house-to-house direct selling sales combined with the pyramid-type method of distribution that was feeding that direct sales technique led to the first big confrontation we had with this problem. Mytinger and Casselberry was the firm involved. Mytinger was a sales-type person and Casselberry was a psychologist or the other way around. One of them was a psychologist and the other one was a salesman. They hit on the idea of creating this pyramid-type distribution pattern and selling a product they called Nutrilite, which was a combination of vitamins and minerals in a base of alfalfa, parsly, and watercress. They put those vegetables in there to make it unique from other products so that they would have a very special product. And they sold the material in strength and double strength at about $19, $20 a month. Now, that was back in the '50s and that was a good deal of money at that time.

But they were very, very successful, first as a result of a book which they wrote called How to Get Well and Stay Well which uses all the psychology techniques; that is, that everybody wants to be well, and if you're sick, first, it hurts, and second, it costs you money. Therefore you want to be well. And the way to get well and stay well is to feed your body right. And if you feed your body right, you take these vitamins and minerals. And if you do that, then you're not going to have these diseases. And if you have the diseases, the vitamins and minerals are going to restore the so-called balance in your body to where the disease can't exist in that kind of an environment. Well, you know the old spiel.

The agency was quite alert to the initial distribution of this product, and they had a citation of Mytinger and Casselberry in Los Angeles on the basis of their first book, How to Get Well and Stay Well. Now, it was a book that didn't pull any punches. That is, it went on and told you that if you had epilepsy or if you had heart disease, this was for you. It didn't make any ifs, ands, or buts about it. It had a lot of testimonials in it. One page had a list of all the diseases you could think of. All those, of course, were supposed to be amenable to Nutrilite Food Supplement.

* * *

After that, we pursued the investigation of Mytinger and Casselberry. We were able to prove in two ways, one of which was through recordings like this that were put in people's houses just to hear what the house-to-house sellers were saying . . . And they were going wild; they were making every kind of a claim you could possibly make. We knew that was so, and Mytinger and Casselberry denied it under oath and on their word to God that it wasn't happening, but we knew it was. So we did a lot of recordings. We entered people into the sales organization. You know, any pyramid thing like that will take anybody and everybody. In order to make those sales systems work, you've got to have quite a cheerleading operation going on. So they ran a Nutrilite News and they ran a lot of meetings at which they had these inspirational speakers and a lot of prizes. The way you'd make money in that, of course, as in any pyramid, is you would make money not only on what you did, but on the business that the people you sponsored did, and you would become a key representative.



Tuesday, November 08, 2005

Did Quixtar Blink?

I was very interested to read a post by Dave Robison at "On the Road With Dave" regarding Quixtar's changes to its arbitration rules. It was particularly interesting in light of the recent opinion by Judge Richard E. Dorr of the United States District Court for the Western District of Missouri, in which the Judge found Quixtar's arbitration plan unconscionable and legally unenforceable.

What initially caught my attention was Dave's explanation of what these changes entailed:


The option has been added that interested parties can now acquire the services of any member of the American Arbitration Association in the event that suitable arbitration by the JAMS roster is not possible.

As Judge Dorr's order explains, the worst aspect of Quixtar's arbitration is the use of arbitrators (which are basically private "judges" whose decisions are legally binding) who are privately trained by the IBOAI and who owe their work as arbitrators to the IBOAI. This, of course, raises serious doubts as to their neutrality and their fairness. The fact that Quixtar always wins in arbitration (as explaiend in Judge Dorr's order) elevates thouse doubts to a near certainty that the process isn't fair.

When I first read Dave's explanation about how new rule may provide for arbitration before the "American Arbitration Association", it sounded as though there would be an option for IBOs to get out from under this crooked system. That's really not the case. AAA is only allowed to arbitrate if JAMS turns down the case. So the provision Dave is talking about is a just a gap-filler for those rare instances when JAMS can't cover the arbitration, which has actually happened on at least one occassion
according to Scott Larsen (scroll down to his discussion about and links to documents from the Kaldi case). Most IBOs (particularly if they are in a fight with an IBOAI board member or the Corporation itself) can rest assured that they'll be stuck in front of the subset of Quixtar-powered JAMS arbitrators.

So did Quixtar tacitly admit there was something wrong with their arrangement by changing the arbitration process to make it appear to be more fair?

Sorta. But not in the manner Dave suggests.

In the old system, an IBO was stuck arbitrating before a "judge" from the inappropriately named "Roster of Neutrals" who was hand-picked by the corporation and secretly trained by the IBOAI outside the IBO's presence (a process they coyly refer to as "Orientation"). Under the new system, they have the option to arbitrate before a "judge" from the aptly named "Alternative Roster" who has been hand-picked by the corporation but not secretly trained by the IBOAI in a process they coyly call "Orientation." See . . now it's fair. Right?

11.5.14. Roster of Neutrals; Alternative Roster

The Administrator, in cooperation with Quixtar and the IBOA International, shall establish and maintain a Roster of Neutrals, all of whom have attended an orientation meeting offered by the Administrator and presented by the Corporation and IBOA International ("Orientation"), and who satisfy the standards of experience, impartiality and diversity in these Rules. The Administrator shall independently compile an Alternative Roster of Neutrals who satisfy the standards of experience, impartiality and diversity in these Rules but have not attended any Orientation. Neutrals appointed to either Roster shall serve a three-year term.

A participant in a Quixtar-powered arbitration, under Rule 11.5.13, may now "object to the use of any arbitrator who attended an Orientation and that in that case the Arbitrator will be selected from the Alternative Roster in accordance with these Rules."

However, they are still stuck with someone from the approved "Alternative Roster" - a list created by Quixtar and the IBOAI. My guess is that the "alternates" will be the people the Corporation and IBOAI has carefully screened to make absolutely sure they'll protect the business. I wouldn't be surprised if the "Alternative Roster" was the worst of the lot.

So is it a fair process now? I doubt it. I wouldn't sign a one-sided dispute resolution agreement written this way. I think a process that actually wants fair resolution of disputes would allow a fair process for picking the arbitrators - not a process where arbitrators are chosen from an approved roster drawn up by only one party to the dispute.



Monday, November 07, 2005

Quixtar Bets The Farm

It appears that Quixtar has decided to put its mouth where its money is - so to speak.

It has long been observed that the Quixtar is promoted throughout living rooms, Denny's, and Holiday Inn Express meeting rooms as a "non-selling", "non-retail" business in which "prosumers" simply "change their buying habits and recruit others to do the same." This has always been a touchy subject for Amway/Quixtar because, as explained in
this post, Amway/Quixtar escaped being ruled an illegal pyramid scheme by demonstrating that it enforced three rules to ensure that the bonses paid to its distributors were based on actual retail sales. Those three rules were summarized by the FTC as follows:

72. Amway, the Direct Distributor or the sponsoring distributor will buy back any unused marketable products from a distributor whose inventory is not moving or who wishes to leave the business. The buyback rule has been in existence since Amway started. Amway enforces the buyback rule.

73. To ensure that distributors do not attempt to secure the performance bonus solely on the basis of purchases, Amway requires that, to receive a performance bonus, distributors must resell at least 70% of the products they have purchased each month. The 70% rule has been in existence since the beginning of Amway. Amway enforces the 70% rule.

74. Amway's 'ten customer' rule provides that distributors may not receive a performance bonus unless they prove a sale to each of ten different retail customers during each month. The Direct Distributors have the primary responsibility for enforcing the ten customer rule in their own group. The ten customer rule was started by Amway about 1970. Prior to that, there was a 25 sales rule which required the distributor to make 25 retail sales a month without regard to the number of customers. The ten customer rule is enforced by Amway and the Direct
Distributors.

75. The buyback rule, the 70% rule, and the ten customer rule encourage retail sales to consumers.

Take a careful look at the highlighted part of paragraph "73" (known as the "70% rule"). The FTC clearly understood the rule to be intended to prevent distributors from getting bonses just by making purchases for themselves and recuiting others to do the same. The purpose of the rule was to "ensure that distributors do not attempt to secure the performance bonus solely on the basis of purchases."

Now take a look at this:

4.18. Seventy Percent Rule: An IBO must sell, at a commercially reasonable price, at least 70% of the total amount of products he or she purchased during a given month in order to receive the Performance Bonus or recognition due on all the products purchased; if the IBO fails to sell at least 70%, then such IBO may be paid that percentage of Performance Bonus measured by the amount of products that can be shown to have been actually sold, rather than the amount of products purchased, and recognized accordingly. For purposes of this Rule, products used for personal or family consumption or given out as samples are also considered as part of the sales volume.

This is Quixtar's new version of the 70% rule. The main change from the old rule is the addition of that last sentence. Now ask yourself, what wouldn't constitute a "sale" under this new version of the rule? If you buy if for yourself - "sale." If you buy it to give it away - "sale." If you buy it sell it to a customer - "sale." If you buy it to sell it to your downline for their use - "sale." I suppose the only thing that might not constitute a sale would be purchases intended for "stocking up" and which aren't all used in a given month. But that would include almost everything Quixtar sells - bulk packages of household consumables - wouldn't it?

In short, the rule no longer does what the FTC expected it to do. It no longer has any effect whatsoever on whether bonuses are paid on retail volume. In short, Quixtar has officially endorsed the "buyer's club pyramid scheme" concept that has unofficially been its "business plan" as shown by recruiters for the last two decades.

This is a very risky strategy. Despite the fact that they have evaded prosecution as more and more information has gotten out about the nature of their business (particularly the "tools" business) over the last 6-7 years, they can't honestly believe that they'll always be subject to this kind of political protection. In 1979 they were able to say that they had rules they enforced to make Amway a business primarily focused on actually retailing products and bringing money in from someone other than its recruits. Up until this rules change, they could still claim that they had the rule but it was the fault of the distributors for promoting the "plan" incorrectly. Now they have no excuses. Moreover, aside from the federal regulations, there are a number of states that have statutes designed specifically to prohibit "buyer's club pyramid schemes," including Utah's anti-pyramid statute, which Amway and the Direct Selling Association unsuccessfully attempted to change earlier this year.

Does this rules change foreshadow the end of Amway/Quixtar's operating legally in the United States? If the political climate ever shifts, wil A/Q end up swinging in the wind? We'll see.

In the meantime, I'll leave you with the words of the Ninth Circuit Court of Appeals' opinion regarding the purpose and intent of the 70% rule from Webster v. Omnitrition:

Omnitrition has distribution rules modeled on Amway's. However, the existence and enforcement of rules like Amway's is only the first step in the pyramid scheme inquiry. Where, as here, a distribution program appears to meet the Koscot definition of a pyramid scheme, there must be evidence that the program's safeguards are enforced and actually serve to deter inventory loading and encourage retail sales. In Amway, the ALJ made that crucial finding of fact, after a full trial . . .

The key to any anti-pyramiding rule in a program like Omnitrition's, where the basic structure serves to reward recruitment more than retailing, is that the rule must serve to tie recruitment bonuses to actual retail sales in some way. Only in this way can the second Koscot factor be defeated. Omnitrition has failed to prove that as a matter of law its rules operate in that manner . . .

Omnitrition produced no evidence of enforcement of its 70% rule. It merely states that, in order to place further orders IMAs must "certify" that they have sold 70% of the product they previously ordered. There is no evidence that this "certification" requirement actually serves to deter inventory loading. Importantly, the requirement can be satisfied by non-retail sales to a supervisor's own downline IMAs. This makes it less likely that the rule will effectively tie royalty overrides to sales to ultimate users, as Koscot requires.

In addition, plaintiffs have produced evidence that the 70% rule can be satisfied by a distributor's personal use of the products. If Koscot is to have any teeth, such a sale cannot satisfy the requirement that sales be to "ultimate users" of a product.



Friday, November 04, 2005

What Happened In 1979?

A reader recently sent me an e-mail asking the following perceptive question:

"What I don't understand is, the prosecution of KOSCOT was won on the basis of the argument that any MLM that promotes recruitment over retail sales is inherently equivalent to a chain-letter scheme. Yet that argument didn't wash in the Amway case. How did that happen?"

This is an excellent question. Before I answer it, let me give it a little context.

Background

Koscot Interplanetary was a multilevel marketing scheme that sold a line of cosmetics through independent sales people in the network marketing model. The company was owned and operated by Glenn W. Turner, and experienced phenomenal growth in the late sixties and early seventies. It was coupled with another Turner company called Dare To Be Great that sold motivational tapes, books and seminars to Koscot distributors. The two schemes attracted the attention of state and federal regulators, including the Federal Trade Commission and the Securities and Exchange Commission ultimately resulting in criminal and regulatory convictions agaisnt the Turner and his two schemes under anti-pyramid scheme laws and for violations of securities laws. The various state and federal prosecutions of the Turner's two schemes generated many formal court opinions.

The most important of these formal opinions was the FTC's opinion in
In re Koscot Interplanetary, Inc., which is the first federal case that sought to unerstand the relationship between multi-level marketing and pyramid schemes. In analyzing this relationship, the FTC wrote the following:

Respondents' marketing plan contemplates upon the payment of consideration, participants would thereby acquire the right to engage in two income-producing activities, one of which contemplated the sale of similar rights to others for which substantial compensation would be paid, while the other contemplated the sale of products or services. Since implicit in the holding out of such rights is the representation that substantial rewards would be gained therefrom, and since the operation of such plan due to its very structure precludes the realization of such rewards to most of those who invest therein, such plan is inherently deceptive.

Furthermore, such plan is contrary to established public policy in that it is generally considered to be unfair and unlawful and is by its very nature immoral, unethical, oppressive, unscrupulous, and exploitative. Therefore, such plan was and is inherently unfair and the operation of the Koscot marketing plan by respondents, having caused substantial injury to the participants therein as well as to other members of the public, constitutes an unfair and deceptive act and practice and an unfair method of competition in violation of Section 5 of the Federal Trade Commission Act.

The Commission has previously condemned so-called "entrepreneurial chains" as possessing an intolerable capacity to mislead. Such schemes are characterized by the payment by participants of money to the company in return for which they receive (1) the right to sell a product and (2) the right to receive in return for recruiting other participants into the program rewards which are unrelated to sale of the product to ultimate users. In general such recruitment is facilitated by promising all participants the same "lucrative" rights to recruit. As is apparent, the presence of this second element, recruitment with rewards unrelated to product sales, is nothing more than an elaborate chain letter device in which individuals who pay a valuable consideration with the expectation of recouping it to some degree via recruitment are bound to be disappointed.

Indeed, even where rewards are based upon sales to consumers, a scheme which represents indiscriminately to all comers that they can recoup their investments by virtue of the product sales of their recruits must end up disappointing those at the bottom who can find no recruits capable of making retail sales.

By the end of In re Koscot, it appeared that the FTC was ruling any multilevel marketing scheme a pyramid scheme. Carefully re-read that last paragraph.

So what happened in 1979 when the FTC seemed to do an about face on the grandaddy of MLM - "Amway Corporation"?

Prosecutorial Mistakes

In 1979, FTC chairman Robert Pitofsky issued the FTC's final order and opinion regarding the FTC's prosecution of Amway. The opinion found Amway guilty of making false income claims, but, importantly, held that Amway was not an illegal pyramid scheme. The important lesson to understand in In re Amway is not the conclusion, but how the FTC arrived at that conclusion.

FTC prosecutors, fresh off their success in Koscot, apparently believed that the only thing necessary to prosecute an MLM as a pyramid scheme was to demonstrate the use of a compensation plan that encouraged recruiting. They missed the more precise point of Koscot - namely that the key element of a pyramid scheme was "recruitment with rewards unrelated to product sales . . . to ultimate consumers." Consequently, as you read In re Amway, pay particular attention to the sources cited by Pitofsky for his conclusions that Amway in 1979 was primarily a product retailing business because it had and enforced rules that served to tie bonuses to retail sales to consumers.

All of the evidence about Amway's rules and enforcement came from Amway witnesses: Walter Bass (the first president of the Amway Distribitors Association), Steve Van Andel and Rich DeVos (the company's founders), Steve Bryant (Amway's general counsel), Lawrence Lemier (Amway's business rules director), and Bill Halliday (another Amway lawyer). Notice as you read the opinion that there is no discussion of any evidence or argument put on by the FTC prosecutors that Amway's purported enforcement of those rules did not actually result in most of the products being sold to outside customers. There is no discussion of any argument or evidence from FTC prosecutors that the majority of the products were sold to the so-called distributors for their own use and consumption. And most importantly, notice that there is no mention of the "tools" business. That last oversight is glaring given the lessons the FTC should have learned from the critical role motivational "tools" played in Glenn Turner's scheme.

In short, it is apparent that the prosecutors did not put on the right case against Amway. Since then, the law has evolved to more precisely understand when an MLM is actually a pryamid scheme. As explained in
this post, the crucial factor is whether the bonuses paid to the network of distributors actually comes from outside the network as real profits (from retail sales to non-distributor customers) or whether the majority of the money is simply pyramided up from purchases made by the so-called distributors themselves.

Why hasn't the FTC re-opened the inquiry with the lessons it has learned since 1979?

Nobody knows for sure, but I have some ideas that I think explain it:

(1) Political payoffs: The Amway/Quixtar leadership has given positively obscene amounts of money to Republicans in general, and the current administration in particular, absolutely guaranteeing a blind eye will be turned as long as this administration is in office. Return "favors" have included: appointing an antitrust lawyer, Timothy Muris, from the law firm that does Amway's large scale litigation, "Howrey Simon Arnold & White", to head the FTC; appointing an economist, David Scheffman, who testified in defense of Equinox Int'l (another pyramid scheme very similar to Amway, that was successfully shut down by the FTC), as the chief economist for the FTC for several years; giving the Chinese government a break on its human rights records with regard to MFN trading status so that Amway could lobby to get the
Chinese ban on direct sales removed; and a $283 million tax break in 1997 that exclusively benefitted Amway Corporation. The author of that tax break? Former Amway salesman, leader of the Congressional "Amway Caucas", and current criminal indictee in Texas, Congressman Tom DeLay!

In fact, Bush is surrounded by Amway bigwigs. Those
secret tapes of private conversations with the President that leaked out earlier this year were made by former Amway "diamond" and regular speaker at functions, Doug Wead. You can listen to Wead complaining about the corporation trying to cut into his tools profits here. Billy Zeoli, a frequent Amway speaker and head of a right-wing Christian film company, "Gospel Films, Inc.", also has the President's ear as a member of the "Council for National Policy." Add to that the "Amway Caucus" in Congress which includes DeLay and North Carolina Congresswoman Sue Myrick and a pretty clear picture emerges of why Amway continues to be untouched by federal regulators.

And guess which two families are the largest private political contributors in the United States . . . with
100% of it going to Republicans and covservative PACs , according to a study by the Center for Public Integrity. . .

. . . you guessed it:
the DeVos's and Van Andels. Amway/Alticor and the families, when considered together as an "organizational donor," contribued over four and a half million dollars in 2003 and 2004, placing them above the entire AFL-CIO and the "American Trial Lawyers Association" on the list of the largest organizational donors in the last two years.

(2) Public pressure: As in "not enough of it." Regulatory agencies respond when people complain. Period. People need to continue to write the FTC, their elected representatives, and their state's attorney general (the only regulators likely to do anything so long as Amway is in the White House).

(3) Cost: Taking on a corporation as huge as Amway/Quixtar/Alticor will be expensive. Regulators will not do in unless they absolutely know the administration will go to bat for them, the public is well informed and behind them, and that they have a substantial chance of prevailing.

Perhaps the times are a changin'.

We'll see.



Friday, October 28, 2005

China Opens Door to Amway; Or Does It?

In 1998, the Chinese government banned direct sales businesses in China, thereby prohibiting companies from selling products on a face to face basis through independent sales representatives away from a fixed retail location. According to AP, the justification for the ban was that it was "hard for consumers to tell the difference between their sales networks and fraudulent pyramid schemes." In 2004, China agreed to re-open the country to direct sales, but would only allow direct sales companies to operate under a new set of regulations.

As I reported earlier, the Chinese government has been struggling with the process of drafting appropriate regulations and licensing firms to operate in the Chinese direct sales market. The regulations, as they evolved, will allow direct sales - but they apparently will not allow multilevel marketing. As reported in today's Shanghai Daily, Chinese law, beginning next month, will prohibit direct sales companies from using a compensation plan that pays a distributor for his or her group's sales. The Shanghai Daily reports:

AMWAY Corp said yesterday its sales may fluctuate between a 10 percent drop or rise this year as its business model faces a tough transition with China forbidding payment based on team sales starting next month.

From Tuesday, all Amway China sales representatives will draw commissions directly from the company based on their individual sales performance, said Vincent Hwang, general manager of Amway China East.

Sales teams, in which authorized agents can generate additional commission from sales representatives they recruit, will no longer exist as payment based on team sales is illegal under new regulations released in September this year.

Thus, Amway distributors in China will apparently be allowed to sell products directly to Chinese consumers and collect a commission from the company for their sales, but they will not be able to recruit a pyramid of distributors beneath them and collect a commission on the volume of sales by their recruited team.

Also interesting, the Shanghai Daily reports that Amway has also decided to up its commissions from 3% - 21% up to 9%-30%.



Thursday, October 20, 2005

Mutual Parasites

This is an excerpt from the famous "Postma Memo" - an internal memo between executives of the Amway Corporation detailing the company's own internal study of the "systems" that run Amway/Quixtar. The memo is absolutely required reading for anyone considering Amway/Quixtar and doing their due diligence:

The motivation business could not exist without the Amway business, yet in all seriousness, these Diamonds feel that their Amway business is impossible without the motivational business. It has been clearly stated to me by more than one Diamond in this group that if anything is done that negatively affects the tools business, they would leave the business.

But the parasitic relationship is mutual, as this excerpt from a 1988 deposition of Rich DeVos, co-founder of Amway/Quixtar, demonstrates:

Q. What happened in the area of the tools abuses, the private tools abuses addressed at that meeting?

DeVos. Well, those abuses continued to this day, There are a variety of people who complain to me continually about some of those abuses, so that's an ongoing challenge that the organization faces.

Q. And let me ask you this, in your tape there you said that you would expect that the position that the company is taking, expressed in these various speeches, including the one we just heard, would be costly to the company; what did you mean by that?

DeVos. Well, I said to some of our staff there that I thought that it would cost us a few hundred million dollars in volume—I think I said $300 million—as we went through a correction phase.

Q. And did it cost $300 million in volume?

DeVos. I think we lost upward of $300 million in volume as we tried to go through this adjustment period.

Q. It is a position that you took in the early part of 1983. Have you deviated from that position in the Amway Corporation since then, with respect to your Ten Points and the subject matter contained therein?

DeVos. Well, let's just say that we dealt with it the way we did. We did put some people under notice that they were doing things wrong. We pursued of course re-education but we never pursued it to its ultimate goal of really nailing anything down. In the meantime, the volume came down and we started to work at trying to hold the business together but the problem persisted in any case.

Thus, Quixar/Amway now depends for its continued existence on the motivational "tools" systems, and it is from the motivational tools systems that the kingpins make most of their money under the guise of promoting a network product marketing business.



Friday, October 14, 2005

"It's Not 'Amway.' It's 'Mindbenders International'"

Almost as interesting as the Postma Memo, a confidential internal report written by high ranking executives of the Amway Corporation in 1983 about the motivational tools systems operated by Bill Britt, Dexter Yager and Ron Puryear, is another memo from 1983 entitled: "Amway Distributor Compliance With The Code of Ethics and Rules of Conduct" which was produced by the Amway Corporation as part of the civil discovery in the Cairns lawsuit in Ohio.

The memo discusses the illegalities in the Amway (now "Quixtar") motivational "tools" systems, consisting of tapes, books and rallies, the risk of this secret business to the future of the corporation and a planned attempt (which ultimately failed) to reign in the black hats. The memo identifies the key "problem" as follows:

Widespread illegalities inherent in Amway distributor designed "systems" of tapes, books, and rallies. While most of these "systems" were conceived in the late 1960's and early 1970's as genuine "support" programs to help Amway distributors develop their Amway businesses, entrepreneurial "higher pins" discovered and developed programs for substantial, separate, additional income, under the Amway "umbrella."

Appendix 'A', a confidential memorandum to Policy Committee of August 1982, provides you with all the background as to how these "support systems" escalated to what we believe is now a threat to the future security of Amway Corporation, at least in the United States. As this document - "Challenge of the '80's" - points out, the escalating profits and pressures of these businesses lead to an alarming rise in violations of the Code of Ethics and Rules of Conduct.

Subsequent legal evaluations disclosed that the disproportionate (to Amway) sales, intensity and solicitation of these "tools/systems" are illegal, per se, under several U.S. federal and state laws.

The goal was to set up an internal police force to get the following word out to the high ranking distributors who were selling these motivational systems :
  1. That operating and/or participating in a solicitation, sales and/or distribution scheme involving only non-consumer items - particularly motivational tapes - violates state pyramid/chain distribution laws, and could lead to Amway distributors being indicted and/or convicted of criminal fraud.
  2. That regulatory agencies, particularly state Attorneys Generals, are increasingly sensitive to the ongoing emergence of such programs.
  3. Increasing proliferation of Amway distributor participants publicaly stating "We're not in Amway", or "Amway is just a supplier", etc., could become selffulfilling prophecy.
    Particularly where "organization names are used to "replace" the Amway name - e.g. "Mindbenders International"
  4. That Federal Trade Commission and Anti-Trust Laws are being violated through price fixing and collusion.
  5. That Amway will help the "systems" entrepreneurs and participants restructure their support programs to provide legal, non-coercive, voluntary programs.
  6. That all Amway Rules of Conduct must be adhered to and all Direct Distributors must become fully understanding of the Rules and regularly communicate them to their own personal group.
  7. That "peer" group leaders state in public to their "organizations" that corrective statements have to be immediately implemented to correct misstatements such as:
    "No Selling" "Not Amway" "Must Have Tape of the Week" "Must Attend Rallies to Succeed"

Did they succeed? No. They failed miserably. Although the name they avoid using is now "Quixtar," the abuses persist. Take a look at the memo and ask how closely it describes the systems that still operate under the Amway/Quixtar umbrella.

I am adding a link to the memo to the "Recommended Reading" section of the side bar.




Friday, October 07, 2005

New Things Afoot In Missouri

This post is an update on two new developments in the Missouri federal court between Ken Stewart's and Brig Hart's businesses and Quixtar/Amway/Alticor.

First, the plaintiffs' attorneys, following up on their successful (so far) challenge to Quixtar's severely messed up mandatory arbitration system, have now asked that the documents showing the corruption in the system be removed from the scope of the court's protective order (i.e. "declassified").

You can read their "Motion to Declassify" the evidence
here. But here's the meat of it:

The Court’s September 16, 2005 Order and, in particular, the finding of unconscionability, has significant implications for the public at large. Arbitration has become commonplace as an alternative to litigation, and there exists a strong federal (and state) policy favoring the enforcement of arbitration agreements. Judicial findings of unconscionability of arbitration agreements, however, are anything but commonplace, and the public would be well served by having access to the evidence in this matter supporting this Court’s findings, and in better understanding the boundaries separating enforceable and unenforceable arbitration agreements.

Further, this Court’s Order potentially impacts the hundreds of thousands of Amway/Quixtar distributors who are purportedly required to arbitrate under the Amway arbitration program. The Amway arbitration agreement, as this Court noted, was offered on a “take it or leave it” manner, and without any opportunity for negotiation. Amway’s influence over the JAMS’ arbitrators rose to the level of substantive unconscionability. Further, since the inception of arbitration in 1998, Amway has never lost in JAMS-administered arbitrations (save a few counterclaims). The evidence supporting these findings would not only be of great import to those distributors who have heretofore challenged the Amway arbitration provision (and failed), but also to those who may yet challenge the same. Amway has successfully used its unconscionable arbitration program as a shield to protect it from its distributors and to keep it out of the public eye for nearly eight years. However, simply because Defendants have selfdesignated documents and discovery as confidential in this matter does not equate the same into a protectable trade secret or otherwise. If anything, the details of an arbitration program mandated in lieu of court, such as Amway’s, should be open for public scrutiny, rather than cloaked with confidentiality as it has been by these Defendants since 1998.

Second, "Stewart & Assoc. Int'l, Inc." and "B.L. Hart Enterprises, Inc." have filed a new lawsuit against Amway/Quixtar/Alticor. It's full of interesting tidbits, but the gist of this one is that Amway/Quixtar/Alticor is alleged to have breached the distributorship agreements by suspending the distributorship compensation and benefits allegedly in response to the filing of the other lawsuit in 2003. According to the Complaint, Amway/Quixtar/Alticor then terminated Hart Enterprises in 2004 for violation of the company's anti-competitive, anti-free enterprise "non-compete" rules.

Finally, they list some other beefs with the company, including the interesting claim that when the "Team In Focus" diamonds were forced out of Amway/Quixtar, the company violated its contracts by not reassigning the downlines of the TIF diamonds to Stewart and Hart.


Special thanks again to "Loser" at "Quixtar Sucks" for hosting the documents. It's compelling reading. Enjoy.



Monday, September 19, 2005

Fed Judge Slams Am/Quix Arbitration as 'Unfair', 'Unconscionable'

As regular readers of my blog know, I have been closely following a federal court lawsuit between Amway/Quixtar/Alticor and former "Crown" distributor Ken Stewart's tools business (joined by the tools operations of Charlie Schmitz and Brig Hart). Stewart's tools business ("Nitro") sued Amway/Quixtar/Alticor alleging fraud, tortious interference, civil conspiracy, antitrust violations and a number of other claims. The central issue in the case thusfar (and the issue I've been watching) is whether Amway/Quixtar's arbitration process is legally enforceable.

On Friday, September 16, 2005, Missouri Federal District Court Judge Richard E. Dorr ruled that the arbitration process was procedurally and substantively unfair and unconscionable and, therefore, legally unenforceable.

I'll have a link to the full text of Judge Dorr's 26-page opinion up soon (UPDATE: "Loser" at quixtarsucks.blogspot.com has posted a copy of the order). In the meantime, here are some key excerpts from that opinion:

The Court also finds that any agreement of Plaintiffs to arbitrate under the Amway Rules of Conduct is not valid for a second reason -- unconscionability . . .

On "procedural unconscionability":

In this case, the Amway arbitration provision was offered in a “take it or leave it” manner. The hallmark of “unequal bargaining position” is clear – to continue to be an Amway distributor, the agreement must be accepted. While Defendants contend that distributors had ample time to review the arbitration provisions before renewing or allowing the automatic renewal to occur, they do not refute that the arbitration provisions were given in a manner that required the distributors to accept the arbitration agreement as written or to quit the business all together.

There was no other entity with which Plaintiffs could contract to participate in a similar business. Moreover, negotiation of the arbitration clause was unheard of. Defendants admit that a distributor could not sign the distribution agreement without the arbitration provision.

Defendants’ position is that there was only one contract with all of its distributors . . . The above discussion concerns the procedural unconscionability based on the “take it or leave it” option presented to Amway distributors. The plaintiff tools businesses are one step removed from this procedure as their involvement is vicarious at best. Thus, if Plaintiffs were held to be bound by Amway’s arbitration agreement, it would be the result of a procedure where Plaintiffs never had a choice. Accordingly, the arbitration requirement is procedurally unconscionable
.


On "substantive unconscionability":

Plaintiffs in this case have raised grave doubts as to the fairness of the hearing they would receive if in arbitration with JAMS and the neutrality of the arbitrators that would be chosen. Mainly, Plaintiffs oppose the selection of the arbitrators by Defendants and the training Defendants provide to the arbitrators. Plaintiffs have submitted videos and DVD’s of Defendants’ training sessions with the arbitrators and these exhibits show Defendants counseling the arbitrators on the nature of their business. It is this Court’s opinion that the procedure utilized by Defendants to screen, train and ultimately hand-pick their panel of arbitrators does not come close to passing any reasonable test of fairness and neutrality required for a legitimate arbitration proceeding.

Amway’s “training” covered a two day period and then a third day of “interviews.” The training covered subjects including profiles of the people who started and now run Amway, the benevolent and independent culture of Amway, procedures to the utilized in arbitration, and a summary of various complaints the arbitrators could anticipate. The arbitrator candidates even participated in some “role playing” as successful Amway distributors. Also included throughout the two days were assurances that Amway was not a pyramid scheme and that the business was legitimate. Defendants claim, however, that the training was not out of the ordinary nor improper as the panel was not specifically told how to resolve possible issues they would see. On the videos, the Defendants state they will not discuss the meaning of the Rules of Conduct that are not absolutely “black and white.”

It was most interesting that the issue presently before this court was included in a particular “training” discussion at one point, complete with diagrams from Defendants’ counsel regarding what was appropriate and inappropriate in the scenario. The videos run almost ten (10) hours, but suffice it to say that it appears clear to this court that the training atmosphere and content of the discussions was designed to produce a very favorable view of Defendants. Coupled with the training session was the selection process being utilized by Defendants, both to select its initial group for training, then after personal interviews, to pick the final panel of arbitrators from which all arbitrators for Amway disputes would be chosen.

While there can be basic education of arbitrators regarding specialized subject matter, there is a point where basic education can be extended to subtle manipulation on issues which could be expected to be considered by the arbitrators. This limit has been passed by Amway’s preparation of the arbitrators at JAMS. While JAMS may be a respected organization, the Defendants have called the neutrality of this particular arbitration arrangement into question. Also telling is the fact that Defendants have never lost in arbitration, with the exception of a few counterclaims. . .

While the parties are allowed to choose their own arbitrators, the pool of candidates for this choice is limited by Defendants to those arbitrators whom Defendants have already pre-selected in a process that involves an initial screening, then training with a heavy dose of goodwill for Defendants and their manner of operation, then after personal interviews, being hand-picked to be on the list of arbitrators (so long as Defendants deem them to be acceptable). Arbitrators are to be neutral, and allowing such training and influence over the arbitrators as Defendants have in this situation is both unreasonable and unfair.

Although this court has found that none of the Plaintiffs have submitted to arbitration, the court also finds that, in the alternative, arbitration with pre-selected JAMS arbitrators as presently set up by Defendants is unconscionable.


For more background on this case, check out the following:
From lawBlawg:



Tuesday, August 30, 2005

Classical Music

Let me introduce you to Amway . . . Amway old school, that is!

Recruit, train and motivate (mp3)

What is this thing called 'Amway'? (mp3)
(courtesy of
Scott Larsen's AmQuix.info)

"I said 'Mister . . . in this soap . . . there's a new life . . . there is hope . . .'"

That must be some soap.

Creeped out yet?



Saturday, August 27, 2005

In a Nutshell

This was written about Vegas, but it's also a very apt description of the basic principle of multilevel marketing:

The latest slot machines are electronically connected to a central computer, allowing the casino to track the size of every bet and its outcome. The music, flashing lights, and sound effects emitted by the slots help hide disguise the fact that a small processor inside them is deciding with mathematical certainty how long you will play before you lose. It is the ultimate consumer technology, designed to manufacture not a tangible product, but something much more elusive: a brief sense of hope. That is what Las Vegas really sells, the most brilliant illusion of all, a loss that feels like winning.

- Eric Schlosser, "Fast Food Nation"