Lawsuit contends Amway's profits come mostly out of distributors' pockets

The Kansas City Star/August 12, 2003
By Dan Margolies

Amway Corp. conspired to freeze out lower-level distributors in its motivational business, a lawsuit filed in federal court in Kansas City alleges.

The action, filed last week by five one-time Amway motivational businesses, including two in St. Joseph and two in Springfield, seeks unspecified damages in the millions of dollars for federal antitrust violations.

The lawsuit contends that the vast majority of the company's profits come not from selling products such as soap and cosmetics but from selling motivational materials to its vast network of down-line distributors.

Named as defendants are Amway Corp. of Ada, Mich.; its Web-based business, Quixtar Inc.; and Alticor Inc. of Ada, Mich., the parent company of Amway and Quixtar.

In a brief statement sent by e-mail Monday to The Kansas City Star, the companies said they were in the process of reviewing the lawsuit.

"The plaintiffs appear to be blaming our companies for the breakdown in their long-term business relationships with other independent business owners for the sale and distribution of business support materials and meetings," the statement said. "We believe the lawsuit to be without merit and will provide a vigorous defense."

Attorneys at Shughart Thomson & Kilroy Watkins Boulware, the St. Joseph firm representing the plaintiffs, declined to comment.

The lawsuit is similar to others filed in recent years by former Amway distributors. The cases typically characterize Amway as a pyramid-type scheme in which distributors earn money by recruiting other distributors, with a percentage of each distributor's revenues passed along to those higher up the pyramid.

Many of the lawsuits assert that Amway exaggerates the profits to be made by selling its products and pressures distributors into buying its motivational materials. Like the lawsuit filed in St. Joseph, the lawsuits allege that a few Amway "kingpins" -- those who bought into Amway early on -- control thousands of down-line distributors and make most of their money by selling them motivational materials, known at Amway as the "tool and function" business.

"On knowledge and belief, the Amway kingpins' tool and function income grew to vastly exceed their income from the Amway business by a ratio of nine-to-one or more," the complaint filed in St. Joseph states.

The complaint charges that Amway helped the kingpins monopolize and restrain trade in the motivational arena, using it to subsidize the rest of its business.

Amway "didn't need to pay large commissions and bonuses to the Amway kingpins for sales of soap because those kingpins were raking in millions from the tool and function business, bringing in throngs of new Amway distributors, and training and motivating them to buy soap and bring in yet more distributors," the lawsuit alleges.

The low-level distributors often were told not to focus on selling Amway products but to buy the products themselves and bring in new Amway distributors who would do likewise, the plaintiffs contend.

The lawsuit says distributors were misled into thinking they could attain great wealth by selling Amway products. The reality, it says, is that distributors could become wealthy only by participating in the motivational business, but because the kingpins control that business, "few do attain these riches, regardless of the size of their down-line distributor network," according to the lawsuit.

Among other allegations, the lawsuit says the kingpins used a variety of tactics to control their respective pyramids, including illegal tying arrangements, price fixing and blackballing disfavored distributors.

The plaintiffs in the lawsuit are Nitro Distributing Inc. and West Palm Convention Services Inc., both of Springfield; Netco Inc. and Schmitz & Associates Inc., both of St. Joseph; and U-Can II Inc., of Lakeland, Fla.

All five plaintiffs have filed related lawsuits against some of the so-called kingpins. Two of the lawsuits are pending in state court in Springfield and a third is pending in state court in Florida.

The lawsuits are among a host of actions filed against Amway and some of its top distributors nationwide. Some of the cases have been settled; others have been submitted to arbitration.

In a 1996 settlement in Philadelphia, Amway and two of its top distributors settled by agreeing to give discount coupons to disgruntled down-line distributors. The plaintiffs had contended that Amway and the distributors exaggerated the profitability of selling Amway products and pressured them to buy motivational materials.

The distributors named in that lawsuit -- William Britt of Carson City, Nev., and Dexter Yager of Charlotte, N.C. -- figure prominently in the Kansas City lawsuit, although they are not named as defendants.

Britt and Yager are multimillionaires, often taking the stage at motivational events to talk about their riches.

Alticor, Amway's parent company, reported worldwide sales of $4.5 billion in fiscal 2002, up 9.5 percent. Much of the privately held company's growth came in Asia, which provided more than two-thirds of Alticor's revenues.