JUDGE CLUBS QUIXTAR REBELS

Last Wednesday we reported on the civil war between Quixtar (a.k.a. Amway) and the company's top multi-level marketing distributors (a.k.a. "independent business owners").  The first battle was at the local courthouse over what if any injunctions would be issued at the outset of litigation over Quixtar's attempt to rein in kingpin distributors using high-pressure sales tactics to push expensive motivational seminars and materials (a.k.a. "business sales materials") on new Quixtar recruits -- i.e., the "tools" racket.  Kent County Circuit Court Judge Paul Sullivan made his decision on Friday.

The Quixtar rebels lost the battle.  Sullivan issued a preliminary injunction that enforces the contract they signed with Quixtar as distributors of the company's products.  The injunction binds the distributors to maintaining confidentiality about their affairs with Quixtar, entering into no competition with the company, and submitting their disputes with the company to arbitration rather than the courts.  Basically the kingpins are stuck with the contract they signed with Quixtar.

Also a big defeat for the rebels was a separate ruling by Sullivan that Quixtar can prohibit them from selling "tools" produced by TEAM.  TEAM is a lead Quixtar distributor operated by kingpin Orrin Woodward that the company fired recently because of its abusive "tools" trade.  That firing set off the storm of litigation across the country by TEAM and other Quixtar distributors, some of which landed in Sullivan's courtroom last week.  Sullivan's decision is a big blow to the rebel distributors, because the sale of TEAM-produced "tools" to dupes at the bottom of the multi-level marketing pyramid is a large source of revenue for many of them.

All in all, Sullivan's rulings on Friday do not bode well for the kingpin distributors.  A judge issues a preliminary injunction in cases like this only if he finds (among other things) that the party requesting the injunction is likely to prevail in the end.  That means Sullivan has concluded that Quixtar is likely to win the case.  If so, Quixtar will have dismantled its existing network of distributors and put them out of business before resurrecting itself as Amway, which fits with plans announced by the company a couple of months ago.

So this civil war would appear to serve the company's interests, but to what specific end?  Is Amway cleaning itself up to operate as a private-label manufacturer, or is it purging the kingpin distributors who have a lock on the "tools" trade so that it can have that nasty piece of business all to itself?  If the latter, the Amway gang would of course need to get control of a multi-media firm to produce the "tools" and then hotel and convention facilities to host seminars to pitch them.

Oh, that's right.  They do.

Comments

[GeorgeH]

That's one for the good guys.

[Steve Goulet]

These IBOs are like spoiled children with too much control over the baby sitter. Now the parents are re-asserting control, like they should have years ago.

I would be very surprised if Amway started marketing the "tools" themselves after cleaning up this mess. My guess is that this is at least partially driven by politics. Specifically, Dick Devos running for Governor in 2010. Their polls and focus groups probably revealed the distrust sewn by Quixtar IBOs, and how those perceptions prevented a win in 2006. Here in Michigan the negatives associated with the Quixtar brand have got to be incredibly high.

The other reason I think they are doing this will sound corny, and Bill, I know you will disagree. But I think they are just trying to do the right thing. Having worked with employees and managers at Quixtar and Alticor for years, I can attest that they are respectful, honest, hard working people with integrity. Unlike some of the IBOs that have apparently ruined their reputation.

But the mess they are in, and have helped create, is obviously their fault. I just don't think it was a conscious choice on their part to foster corruption and deceit. Once the "tools" business took hold it was almost impossible to stop without doing serious damage to the company. Thousands of jobs would be at risk.

So they were faced with a choice to either nibble around the edges and gradually weed out the ne’er-do-wells, or make drastic changes and risk everything. The former strategy has failed over the years, and now they are taking some fairly bold steps to try and make a difference.

[The Executive Director]

Hi, Steve.

I surely have no compassion for the Quixtar kingpins. As I said in the previous article, it takes a lot of chutzpah for them to claim to be victims of the Amway pyramid scheme.

As for the integrity of Amway employees, no doubt most of them are fine people. However, I have had the misfortune of knowing top executives there, and integrity is not something that comes to mind.

Perhaps the second generation does want to clean up Amway's act. I don't preclude that possibility. My lack of certainty that they do rests upon the genuine difficulty in distinguishing Quixtar from an illegal pyramid scheme. Very little what Amway manufactures to sell through Quixtar actually gets sold to real retail customers. Only a small percentage does. The rest is consumed within the Quixtar network of distributors.

The reason is simple. The prices of these goods are way too high to make any sustainable retail market for them. The second generation of Amway has not been unaware of this. Indeed, they are well aware of the sky-high prices they are charging Quixtar distributors for these goods. They know that because of this, Quixtar distributors cannot realistically sell the stuff to genuine customers at a profit. They know that the only way a Quixtar distributor can make money is to develop a "downline" (i.e., recruit sub-distributors) who will buy these goods through them on the hope they in turn can sell them.

The most successful Quixtar distributors then double-up on what they can sell to their downlines by pushing motivational seminars, books, tapes, and gimmicks (i.e., "tools") on them. The new generation at Amway is well aware of this, too. In fact, a match made in Hell is formed. Both Amway and the Quixtar kingpins make money from the same downlines: Amway by selling kits of overpriced goods; the kingpins by selling "tools".

Consequently the only purpose of the multi-level marketing network is to recruit new marks into it, not to expand retail sales to customers outside of the network. That is what makes it an illegal pyramid scheme. As I said, the second generation at Amway know all the facts behind this and haven't done anything to change it. That is why I find it hard to believe they don't have dirty hands in this matter, and I have my doubts about wanting to clean them.

Regards, Bill