Litigation

Settlement in Amway class action suit

By Tracy Coenen

The following is a summary issued by Robert FitzPatrick and Pyramid Scheme Alert about the historic class action settlement that was just reached with the Amway Corporation, the largest of all multi-level marketing companies.

Three directors and advisors of Pyramid Scheme Alert, including Robert FitzPatrick, served as experts and consultants for the victims in this case.

Amway has agreed to pay victims and cover litigation costs amounting to over $55 million in cash and products. A judicially administered fund will pay refunds to two classes of victims, those who joined and quit within a year, usually paying only initial fees,  and another group of those who stayed in longer and lost much more. Another $50 million will be paid in other costs incurred by Amway to meet the terms of the settlement.

The suit charged that Amway misled consumers with false income claims, sold them overpriced products and marketing materials, and transferred the lost investments of virtually all new recruits to a tiny few at the top, year after year. The suit accused Amway of operating an illegal pyramid scheme and it argued that Amway’s main revenue source is ultimately the salespeople themselves, and that the company has little retail sales and few retail customers. Amway’s real product is a “business opportunity”. Amway’s revenue, the suit charged,  is driven by recruitment of consumers to make investments in its advertised “business opportunity”, not sales to the general public in an open market. It operates as a closed market, dooming, by its “endless chain” design virtually all who join at the bottom, year after year.

In the usual terms of class action settlements, Amway admitted no guilt, however, it has agreed to pay back millions of dollars to consumers, lower product prices, increase the refund period, pay all the attorney fees of the victims and offer free products to victims. Significant changes are also to be made in the “tools” business, which some claim is the main source of revenue to Amway’s top distributors, not commissions from Amway sales. Failing distributors are induced to pay even more money for “tools” (seminars, CDs, books) they are told will help them “succeed.”

Pyramid Scheme Alert’s analysis of Amway payouts shows that more than 99% of all who sign up never earn a profit. When actual costs are factored, including the related  “tools” business, some estimates put the loss rates at 99.9%

Under terms of the settlement, Amway is  restating its “income disclosure” to reflect that the figure offered to consumers is a “gross income” not net, meaning that it is not profit and does not reflect costs. (Amway’s advertised “average income” is also a “mean” average, so it factors the high incomes of the few at the peak of the pyramid, skewing up the “average.”  The mean average can also mislead consumers to think that the “average” participant actually earns a profit,  masking the reality that the vast majority earn nothing or no net profit.)

The lawsuit was filed in 2007 by the firm of Boies, Schiller, Flexner.  Amway delayed settlement with claims that the victims had no right to sue because the Amway contract requires “binding arbitration.” A Federal court ruled that the arbitration process was unenforceable and unfair. “The federal judge said of Amway’s arbitration requirements, “the requirement ?is substantively unconscionable, and exceedingly so” and characterized the Amway arbitration  as a “stacked deck” in Amway’s favor.

Full post as published by The FRAUDfiles Blog on November 04, 2010 (boomark / email).