Note: this is not a lawyer's perspective.
For the full text of the ruling itself, go to the Amway v FTC page on the MLM Law web site.
Towards the bottom of the Pyramid paragraphs in the discussion portion of Judge Timony's Initial Decision, this paragraph appears:
The Amway system is based on retail sales to consumers. Respondents have avoided the abuses of pyramid schemes by (1) not having a 'headhunting' fee; (2) making product sales a precondition to receiving the performance bonus; (3) buying back excessive inventory; and (4) requiring that products be sold to consumers. Amway's buy-back, 70% and ten customer rules deter unlawful inventory loading. Amway is not in business to sell distributorships and is not a pyramid distribution scheme.
In short, developing distributors must be secondary to developing market. Short of requiring distributors to develop ten customers before being allowed to sponsor (which wouldn't be a bad idea, as it would make the distributor learn how to sell before seeking out other possible distributors), this is as far away from an illegal pyramid plan as one can get while still holding onto the basic pyramid structure.
However, note that pyramid structured plans are legal. Making money mainly off distributors is illegal, whether it's from selling distributorships or selling non-returnable merchandise; but as long as you claim that most of the product is going to people not part of your "sales force," the pyramid is legal. The legality of pyramid plans is even confirmed in the ruling, as quoted below verbatim:
This rule of per se illegality for pyramid plans has not yet been accepted by the courts.
Thus has a thousands scams been launched in the Reagan and Post-Reagan eras: By allowing that Pyramid schemes are legal, many a company with products as tacky as laundry disks, breast enhancers, and dangerous health elixirs have sold their wares through MLMs. All that needs to be shown is that the distributors claim they're selling to customers. Proof is not even needed (see below, in the Ten Customer Rule section).
Before I go on with other subjects, I will note that the Amway corporation, along with its distributors, WAS found guilty of price fixing, the first of five charges brought against it by the FTC. The other four charges, including operating a pyramid scheme (as shown above), were dismissed.
In a number of places in the ruling, the ten customer rule is given praise for its place in insuring that Amway acts as a retailing company and not as an illegal pyramid. Amongst the statements in support of the ten customer rule is the following (edited for
The ALJ found that ... the ten customer rule [is] enforced, and that [it serves] to prevent inventory loading and encourage retailing.
However, In Pitofsky's, OPINION OF THE COMMISSION portion of the ruling, Section II (The Alleged Violations), Subsection B (Distributor Restrictions), Subsection b (Retail Prices); this paragraph show up:
In addition, Amway has tailored some of its otherwise reasonable Rules of Conduct to detect and prevent retail price cutting among distributors An example is the ten customer rule (discussed at page 9, supra), which provides that a distributor must produce proof of retail sales to at least ten customers each month before he can receive his Performance Bonus. This rule has the reasonable purpose and effect of tying compensation to the retail sale of products. But it also serves as a detection device with regard to price cutting, because the 'proof' a distributor must produce is a copy of the retail sales slip, which, by another rule, must 'state the price charged'. This aspect of the ten customer rule also has an obvious in terrorem effect on distributors who might be inclined to sell at less than Amway's suggested retail price.
This paragraph specifically taints the Ten Customer Rule by example. One wonders what other rules Amway had instituted were tainted by this statement, for its general language paints many of the rules as being used illegally by the company, whatever their merits may have been.
One also wonders whether Yager, Britt, and the other AMO groups read this and used it to bend Amway to its purposes. One look and the sharp huckster could see ways to ignore and abuse the company's policies to his benefit.
From section #151 of the FINDINGS OF FACT of the INITIAL DECISION BY JAMES P. TIMONY, ADMINISTRATIVE LAW JUDGE (dealing with the question of saturation):
It is relatively unlikely that the available supply of potential Amway distributors will be exhausted in any particular area. It is predominantly a part-time activity. The population of the country continues to grow.
In short, it seems the judge assumed that:
The third point might have been truER in the past, but even then there were different populations which have had different experiences. Remember, there were whole groups who didn't see the Sixty Minutes segment on Amway because they were attending evening Church service when it aired. However, the image given by the big three national television networks during the seventies and early eighties was of a homogeneous nation with similar dreams and similar knowledge. Any and all differences between people were subsumed under the "white/black" or "lazy, whiny US citizen who claims the nation owes him a living/upstanding foreigner making a living in our free land (and doing the nation a favor by throwing the lazy, whiny citizen out of work)" dichotomies the networks gave people back then.
The World Wide Web has exposed the assumption of homogenity as the farce that it is. No longer is Sixty Minutes needed to find out what's wrong with such "institutions" as Scientology, nor can Food Lion expect that people will forget after one year that they sell some deli foods after the stuff has spoiled. The same with Amway; and while the ability to post without journalistic objectivity allows web pages more slant and vitriol than Sixty Minutes dares allow itself, the web also allows for the pooling of knowledge from disparate peoples who would have never met, never mind grouped together, before.
However, the web didn't cause these people to exist. It's been only since the mid nineteen nineties or so that the web developed in such a way that people from different areas could find out about each other. And it is this preexisting circumstance that makes the judge's assumptions invalid.
Finally, there's the question of market stability, as shown by this DeVos quote:
Twenty-five percent of the population moves every year.
It is statements like this that give statistics a black eye. Even if true, the above statement means nothing.
The fact is, many people move only within what they consider the area they live in. Some people move to homes in better neighborhoods, some get evicted from where they live and move nearby, others move to smaller places because of economic circumstances or retirement, and still others move because of marriage, divorce, or moving off on one's own. And some people just move because they wish to. However these people work the same jobs, chat with many of the same friends, attend the same church (assuming they attend) and would probably buy from the same Amway dealer if they were Amway customers to begin with.
I would be curious how many people move to an area different enough to entail a new job, new church, new local friends AND A NEW AMWAY DEALER, again should that person be an Amway customer. I'm sure THAT statistic would be well below the twenty-five percent figure DeVos stated above.
Only one fourth of all Amway distributors engage in sponsoring, and there has been no decline in the percentage of Amway distributors who sponsor over the last five or six years.
More importantly, how many Amway distributors don't sponsor but sell Amway products to willing customers? What's happening to the other three quarters?
Later on, in the Saturation section of Pitofsky's OPINION OF THE COMMISSION, this paragraph comes up:
From my observation of the demeanor, inconsistencies and uncertainties in the testimony of the witnesses called in support of the complaint in this regard, I believe the reason for their failure was more accurately described by a marketing expert who testified about this subject: 'I think generally speaking when a salesman tells you that a market is saturated, he has become discouraged for some reason, usually he is simply not making the sale effort that is required.'
Where I come from, this is called Blaming The Victim. There are a lot of other items which can affect the person's ability to sell: Class level of the salesman (since this business seems to depend on untrained salesmen, class comes into play), reputation of the company (obviously much better back in 1979, with the "shop the world of Amway, so easy to do" campaign still running, the Sixty Minutes report in the future and the World Wide Web MAYBE a construct in some obscure science fiction book), previous experience, whether the person was trained properly or not, whether the person is a salesman type or not, the economy, and even changes brought about by societal perceptions and technological changes. Before the advent of K-Mart and similar stores (reaching its zenith in Wal-Mart), you needed salesmen and catalogs to bring many items to people not in major cities; while catalogs (by themselves and through their electronic cousins on the World Wide Web) has made a comeback, the traveling salesman has continued his decline into the netherworlds of the damned. In many ways Multi-Level Marketing and Telemarketing have become the last refuge of the traveling salesman; while such scounderelous representatives are black marks on the institution of salesman, it's but yet another sign of how badly the door-to-door salesman is thought of today.
In section 24 of the FINDINGS OF FACT of the INITIAL DECISION BY JAMES P. TIMONY, ADMINISTRATIVE LAW JUDGE (dealing with the Amway Corporation's organizational history), it is stated:
At about the same time that the American Way Association was formed, Mr. Van Andel and Mr. DeVos began distributing through the Ja-Ri organization a liquid detergent called 'Frisk' which they renamed 'LOC' (liquid organic compound) and which is still one of the principal Amway products. This product...was one of the only biodegradable liquid detergents available at that time.
Further down in paragraph 178, the same judge comments, in reference to competitor's record of detergent manufacturing:
The three largest manufacturers of soap and detergents at first resisted the demand for non-phosphate detergents during the early 1970's, brought about by concern with the environmental impact of phosphate detergents. Several companies attempted to make and sell a non-phosphate detergent. . . [but only after the success of
Seems impressive, doesn't it? A company that was ecologically concerned back before even "commie pinkos" knew there was such a thing as an environment. Not only that, but this company sold a product that required a reduced amount to be used before others were forced to do so, as noted by the judge down in section #182 of Findings of Fact (edited to remove price comparisons so as to highlight usage amounts):
In 1967,. . .SA8 use direction was 5/32 cup per washload and Tide was 1.75
Impressive, isn't it? Amway doing by choice what P&G was forced to do by law.
But after you applaud the Amway corporation for being ahead of its time on this, let me remind you that this brag is a natural for MLM companies. Indeed, between ecology, health and alternative remedies (usually interlocking concerns in that people who have an interest in one area have interests in the other two), MLMs have a lot of space to set themselves apart from mainstream products.
Indeed, part of the MLM mentality seems to be an unhealthy distrust of socity at large. This may be because of how MLMs work. After all, you're now telling people to buy something of possibly dubious value in a way that makes people cringe; just looking around at the world around you might make you think again about selling soap. Better to distrust the society at large, if your beliefs already seperate you from the society at large, then so much the better.
In section #186 of the FINDINGS OF FACT of the INITIAL DECISION BY JAMES P. TIMONY, ADMINISTRATIVE LAW JUDGE (dealing with the markets in which Amway competes in), it is stated in reference to customer loyalty:
Amway's products have very high consumer acceptance. A market study in the record shows that of 37 brands of laundry detergent, Amway's product, with only a very small market share and no national advertising, was third in brand loyalty. Amway's dishwashing liquid soap led all 16 brands surveyed in consumer acceptance. In each of the markets for automatic dishwasher detergents, detergents for fine clothing, bleaches, rug cleaners, and laundry additives, Amway's products were second in brand loyalty. Professor Cady, a marketing specialist from the Harvard Graduate School of Business Administration, testified that:
What this means overall is that consumers are obviously well served by the products that Amway supplies them with. In fact, they are so well served that, in the face of a large number of available substitutes, they purchase Amway products to a degree which is almost unknown to other brands in the market.
The first question that comes to mind (for the typical Amway/Quixtar and MLM skeptic) is whether this statistic was based only on distributors. However, I met quite a few people between 1973 and 1989 who had good things to say about Amway products and WEREN'T selling the stuff. Indeed, as late as the year 2000 I chatted with someone who's still using their producs, satisfied with them even though he had no thought of becoming a distributor.
So obviously it's not the products. It's something
the web address for this page is http://hunza1.tripod.com/amway/1979case.html