Advocare vs. Amway Decision

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Advocare is making great strides towards becoming one of the leading Multi Level Marketing companies (MLM) in the world. Although they are missing the financial mark a little bit, as they are currently ranked #17. Depending on what website you chose to look at. The company on one hand claims to make champions, and on the other, offer distributors the opportunity to obtain financial satisfaction. Unfortunately, most MLM companies such as Advocare do not share with prospective distributors’ vital information pertaining to the business. I would tell you what that is, but that would take the fun out of building up to it.

I am not writing this article to talk you out of anything, or talk you into something, and I have nothing to gain. Some of what I have to talk about is my opinion based on my interpretation of precedence setting case law, such as Amway and Koscot. What is a "precedence setting" case? 

Anytime a case is brought in front of a judge, regardless of type (example-criminal, liability), it has the potential to set a precedence, or a guide for future cases. The legal system has given it the name "stare decisis", which means that they have to honor and respect precedence set by prior cases. The higher federal courts hold precedence over lower courts. That is, until another case comes along and circumvents the prior rules. In this article, I am going to use the Federal Trade Commission (FTC) vs. Amway because that is what all or most current MLM companies are using as a guide.

 The Amway case has set a precedence that can be found in just about every MLM procedure and policy manual. Further circumventing the guidelines set by the Koscot case. But did the FTC get it right?  The unfortunate truth is cases are won, or lost, based solely on a well thought out argument, not just precedence. If two companies are so similar that you can not find a single difference, then circumventing prior standards will be difficult. Unless the attorney making the original argument missed something, and the new attorney can make a sound argument base on that difference. See, Judges have to look at the evidence provided, and make their decision based on that. Well, I think the FTC missed a few important facts in the Amway case, the Judge as well. Information that could have, and should have, put an end to the types of business practices found within the MLM companies we see today. So what did they miss? 

When referring to the 1997 Amway decision, one must also keep in mind that all or most of the arguments made by the FTC was based primarily on the 1975 Koscot decision. Those of you that read my previous article "Advocare vs. Stacie Bosleys Declaration" already know a little bit about the Koscot test. It was used in the Amway case. It technically is a four prong test used by the FTC that defines a pyramid scheme. Many people narrow it down to a two prong test such as what I did. So, if you pay a company for the right to sell their product, you have fulfilled prong one and two. If you then receive compensation for recruiting others into the program, and the compensation is unrelated to the sale of products or services to the ultimate user, you have fulfilled three and four. You would be officially involved in a pyramid scheme, maybe. Many of you might be thinking to yourself that I just put all Multi Level companies in one little box labeled "pyramid scheme". Well, not so fast.  Amway won their case because they convinced the Judge that they had implemented rules to safeguard against the FTC claims. The rules implemented were as follows:

1. Required distributors to show 10 sales receipts from 10 different customers, before they could receive any commission from their downline.

2. Distributor must sell 70% of product previously ordered prior to placing another one.
3. They had a buy back policy.

So what did the FTC charge Amway with? According to the actual docket, or final order, filed May 8, 1979, the FTC made the following accusations:

1. Controlled resale prices in such a way that it constituted unreasonable restraints of trade, and unfair methods of competition.

2. Controlled supply and sales of the product in such a way that limited or prevented sales to certain people and places of business such as retail stores resulting once again in unreasonable restraints of trade, and unfair method of competition in commerce.
3. Controlled who can advertise and methods of advertising, partly in a discriminatory manner, which also resulted in unfair competition as aforementioned in one and two.
4. Used false of deceptive language indicating a distributor could realize substantial income or profit through multiplication, and duplication.
5. Used false and misleading oral and written statements that pertained to the simplicity of making money through recruiting/selling, without revealing the cost of business expenses, and high turnover rate of distributors. 

Unfortunately it is difficult to truly analyze the Amway case. There were around seven thousand pages of transcripts as well as one thousand exhibits used in this case. Most of which are unobtainable. There were more, but you get the point. After reading the final opinion of the Administrative Law Judge, and Commissioner Pitofsky, I started feeling sick to my stomach. I began thinking what a judicial malfeasance this was. Please let me explain. When a Judge writes a final decision, he/she is to do so relying on the evidence provided, and within the scope of the law. In order for a company to circumvent a pyramid scheme claim, evidence has to be provided ensuring the Judge they do not fit within the scope of the Koscot test. The Judge determined they were not a pyramid scheme based on two facts that I could tell. 

The Judge relied on the testimony of Amway representatives, and statutes obtained from reading their procedure and policies pamphlet. What, are you kidding me? No your honor, I swear, we always play by the rules. That is why we implemented the 10 receipts from 10 different customers rule. We also implemented a rule requiring the sale of 70% of the products prior to receiving commissions, and buyback rules. But we forgot to bring our evidence.

See, that is not the way the court system is supposed to work. A Judge, or the accusing council, should ask for proof that the aforementioned statutes are being executed. Maybe obtain all those wonderful receipts from the company and the distributors. It would be really difficult for Amway to show such proof from what I can tell. All distributors were required to ensure that each distributor beneath them fulfilled the 10 receipt rule, not Amway. They only sold to direct distributors (approximately 3,000-4,000), and somehow I get a feeling that those would be the only receipts they would be privy to, unless they could prove otherwise. Amway had the burden of proof not the FTC. The Judge did not obtain written validation of their statements from what I could tell.  The Administrator Just assumed based on testimony and company statute that products were being sold and not stock piled. Really Judge? Direct distributor buys (invests) products from Amway, distributor buys (invests) from direct distributor, distributor buys (invests) from distributor. It keeps going like that until one of them little distributors earns enough to become a direct distributor or drops out. What evidence did Amway offer that proved most of the purchases were not made by distributors? It was not the Judges place to make their argument. This is a quote from the Amway docket:

"It is only after the sponsored distributor begins to buy products that the sponsoring distributor will receive income"

Or this one:

"In order to receive the benefits of sponsoring, Amway distributors must train their sponsored distributors and "stock inventory" to supply them.

Really? Not from the sale of the product?

In the Koscot case, sales were to be made to ultimate users, not distributors. In Amway, the commission (profit) recognized by many of the distributors could easily be the result of personal purchases, and a handful of actual customers. The 10 customer rule and 70% rule are ambiguous at best. There was no indication as to whether or not the personal purchases can result from the sale to other distributors. No indication as to whether or not the receipts should add up to 70% of the products purchased. How much personal use is acceptable? If a distributor sells to 7 other distributors, and uses the rest, does that count? Is there a mathematical formula in place to ensure distributors are not purchasing to make quota? How much can a distributor purchase at one time?

The Judge made the argument, because Amway made $200 million in sales, and they had no trouble recruiting or holding recruits (25% a year), the market was not saturated. That statement was based on what? If the judge said the turnover rate was 75% and based that on actual evidence other than testimony, I would be likely to agree with his thought. A high turnover rate would ensure the business would not get too big, and surpass the population. The accused was in court because they were using deceptive recruiting practices. Amway provided sales information and distributor counts and the Judge took it from there to interpret that as a non saturated market. He pretty much made the argument for them. Well, if I was accusing council I would have had the Judge sit down and do the easy mathematical equation. In 1975, Amway made over $200 million in total sales and had 300,000 distributors. By 1976 they had around 60,000 more. I will assume each one of them purchased $200 dollars worth of products, the primary number used by Amway, and referenced as evidence. So let us see what the math tells us.

  Dist        Purchase   Total Sales:

 300,000 * 200=      $720,000,000. 

They only made $200 million in retail sales? Really?

 Even if I wanted to be nice and use the following math

   Dist        Purchase      Total Sales
 300,000  *   100=            $360,000,000 

That does not include the $7,500,000 they received from the sale of distributor kits. I used $25 to reach the aforementioned total because it is not clear how many distributors actually bought the higher priced kit. Even if I were to go in-between and use $20, it is still a large number at 6,000,000. I forgot, they told the Judge they did not make a profit from that kit. Yes, it appears the Judge took them on their word. I wonder if they had proof of that. Either way, I think it is clear that something is wrong with the numbers. Let me ask you this question. If a company does not provide the Judge the amount paid by each distributor, to obtain inventory, does that circumvent the fact inventory is still purchased from the start? The truth is, not only does Amway distributors have to buy a kit, they also purchase inventory from the person that recruited them, which most likely results in a sale by her/him, and could constitute a customer. How is that any different than Koscot requiring an investment up to $5,000 for inventory? Sorry, I got a little off course.

That brings me back to the claim the Judge made pertaining to market saturation, or the lack thereof. What is product saturation? Basically, for our purpose, it is a point in time when a product becomes difficult to sell due to certain conditions, such as too much competition in that area, loss of interest in that product in that area, or a combination of both. As people from each level of MLM companies recruit, their downline grows wide and deep, making it difficult to perform traditional person to person sales. Imagine trying to sell these products prior to the internet. In this case, the Judge took a low turnover to be congruent with a non saturated market.

  From what I read there was total disregard of certain facts found within the Koscot case. It is the responsibility of the Judge and the accusing council to ensure all applicable case law is read and understood. Well, accusing council did make the saturation argument, but in my opinion, missed something. One of the key points made in the Koscot case pertained to a distributor quota. The only argument made by the accusing council in the Amway case was that an endless chain of recruiting would result in market saturation, which would make it difficult for those at the lower level to be profitable. This is a valid argument. Accusing coucil probably should have reiterated that argument using diagrams so the good Judge could see what product saturation looks like when the distributor count multiplies. Distributor count goes up, prospective customers go down. It just makes sense, right?

Imagine if everyone stuck with the program, and continued to recruit. The company does not tell you if the market is saturated in any particular area, but they could. Companies such as Advocare still let you enroll. Although the quota argument was denied by the Judge in the Koscot case, it still should have been used here. Koscot required distributors to recruit two distributors a month. The Judge relied on a mathematical progression to show how quick the market could become saturated. Indicating the requirement of two distributors a month had the potential to expedite the saturation. 

Imagine, if Advocare was able to maintain 50,000 distributors. With that, each of those distributors was able to recruit 3 new distributors in a month, and that continued every month just to obtain a rookie bonus. How saturated would the market get? It would be around 900,000,000 resulting in total saturation in less than a year. Here is the hypothetical analysis I used, which down plays the issue and it really cuts them a break. I actually reduced the amount each time significantly.

Month          Recruits       Distributors

1. 50,000              * 3=             150,000
2. 100,000            * 3=             300,000
3. 250,000            * 3=             750,000
4. 600,000            * 3=             1,800,000
5. 1,000,000         * 3=             3,000,000
6. 2,000,000         * 3=             6,000,000
7. 5,000,000         * 3=             15,000,000
8. 14,000,000       * 3=             42,000,000
9. 41,000,000       * 3=             123,000,000
10. 120,000,000    * 3=             360,000,000
11. 300,000,000    * 3=             900,000,000
12. 800,000,000    *3=             2,400,000,000

Remember Advocare has over 100,000 active distributors according to their income statement. Making claims that you can go wide and deep to infinity is not exactly the truth as you can see. The Judge in the Koscot case used the number 51,000 to represent distributors, and determined the market would saturate quickly. Same goes for Advocare. There were approximately 200 million people living in the United States at that time. We have 318.9 now according to Google. Good thing Advocare is in control of the number of distributors. I know that was an intuitive conjecture. Advocare would never lie about market saturation anyway, right? They tell you right on their website and their policies that individual results depend on things such as "location". What they are trying to tell you is that product saturation in your area maybe a concern. I am here to tell you it is a concern. Because I was jumping all over the place let me take a shot at summing this up.

Amway did not win their case based on any evidence I was able to read about. That is just my opinion at this point that I will try to support with using the case law provided. When you read the case law provided, you will notice witness names behind many of the opinions. That means they relied on their testimony, most of which pertained to the now well know "Amway Rules". All the court had to do is compare the evidence with precedence, and base their ruling on that and not their own personal dissertation, or political agenda. 

Amway distributors were encouraged to make $200 purchases, sell those purchases to other distributors, and sell to customers. With that, they were allowed an unknown percentage of personal purchases. The distributors did not earn commission until the purchase of the products, period. Judge determined that as long as they had in place the "Amway Rules” that alone prevented inventory loading. But it seems as though they forgot to require proof from defendants that the rules actually worked. Judge also forgot that it is Amway's responsibility to ensure that the rules are working, not distributors. To put it simple, there did not seem to be any evidence ensuring the "Amway Rules" did anything other than cause a smoke screen that continues to this day. The Judge and Commissioner, in my opinion, breached their fiduciary responsibility. By utilizing intuitive and seemingly invective ideas or conjectures to overthrow the Koscot precedence, without requiring adequate proof, is an inverted attempt to debauch our legal system. Sorry, got a little crazy there. 

Koscot prong one and two required a purchase of inventory in trade for the right to recruit. Amway required the purchase of a "kit" ranging from sixteen to twenty-five dollars prior to being able to recruit, and inventory to be purchased from a direct distributor. I believe Amway separating the two, belittles the actual investment. Prong one and two, in my opinion, are definitely satisfied. The next two prongs require commissions to be earned from the recruiting process, and commission is not connected to actual sales. That does not mean just because sales take place, that this part of the test automatically fails. There is case law that supports that belief, and is also supported by the Direct Selling Association. Amway and the court both indicated that commission was not realized until distributors purchased products (Inventory). Using their own evidence, sales are to be according to policy. A distributor can sell at wholesale to other distributors, to themselves, or to other customers, without Amway being involved in over three quarters of the transactions. Remember, Amway only controlled direct distributors, according to their statement. The only evidence they provided to offset the claim was the infamous "Amway Rules" found within their policies brochure. To put it simple, the Judge was supposed to validate that all the evidence supported the defendants claim that most commissions were the result of sales to "ultimate customers" and not purchases by distributors. Providing statutes without viable proof that they work, does not open the door for judicial interpretation. 

Listen, I get the whole economic ramifications of shutting down MLM companies such as Amway or Advocare. But how long do we let it go on, knowing that people everyday, are being recruited without being made aware of what they are really getting into. Yes, these companies have products people want, and do buy. Unfortunately Advocare is not telling you the truth in regards to your market area. Imagine, trying to compete with your local gym. In my city, Stability fitness markets the product. We have a population of around 20,000 including children. 

If I were Advocare, I would be concerned, and let me explain why. Advocare earns a commission from the sale of their kit, and I am going to venture to guess, so does the recruiting distributor or advisor. Advocare promotes stocking inventory with their get to advisor deal, and requires only 5 verification sales receipts compared to Amway's 10 (here). Does Advocare enforce the 70%, buyback and receipt rules? Somehow I get a feeling using the internet we could find someone that would be able to validate that for us one way or another. Advocare gives indication to the distributors on their website, although not clear, that where you live can determine your earning capabilities. Why else would a company provide such information? Should Advocare be required to maintain a count of investors in each area, and provide that information to all distributors? Many of the deceptive business practices used by Amway can be seen with Advocare. Except Advocare distributors take it to a whole different level. See, Amway was using the numbers $100, $200, and $1000, to demonstrate possible earnings. They did that without making it clear that most distributors (99%) would only make an average of $33-$55 a month. The court did not like that so much. That is funny because I see Advocare distributors such as Danny McDaniel using big numbers all the time, just visit his website. They also talk about their earnings without provided proof of such earning. I think I will leave it there for now.

The point is this. Advocare shares with everyone the fact, most distributors will not make money. But people keep joining with the intention that they are going to make it big. The one percent (or five percent if it makes you happy) are in the right place, know the right people, and are probably taking extra steps to ensure quota is filled. This type of business model results in Advocare being the boss of your business. They decide if you broke the rules, and can stop you in your tracks. If you want to take the judicial route, you have to travel to their home town, which will cost you even more money, just read their policy. Think about it, if everyone were allowed to continue selling the product without periodic Advocare interruption, you could recruit as wide to infinity and three levels deep, just listen to Danny McDaniel. Just go straight to 1:15, although he does say it more times than that in that video. I am here to tell you infinity and wide as you can go will lead to saturation. Advocare will still make money, even if it does get too big. But like I said, they have the control of your business. They can have as many distributors as they want. Unfortunately that is the truth. Why do you think so many people drop out? Do you really think they are not trying to succeed?

Thanks again for reading, and please give me your thoughts. 


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