Amway v FTC
Complaint and Final Order

By Jeff Babener

FN1 Many of respondents' allegations of procedural misconduct were repeated by respondents' counsel on the first day of the trial and are the subject of an additional order, recently entered herein, denying respondents' motion to dismiss.

FN2 Another reason for the delay in closing the record involved the condition of the record. Numerous exhibits were lost or misplaced. At least sixty exhibits had to be replaced with substitutes. The transcript of testimony had numerous errors. Almost all of the changes were stipulated by the parties. The reporter is submitting corrected pages of the transcript during the time that this decision is being prepared, too late for reference herein. Eleven orders were entered concerning this subject, e.g., orders dated March 16, 1978, and June 15, 1978 (denying motion to dismiss of June 6, 1978).

FN3 See also Holdridge, Tr. 781-82 and CX 833 for a similar episode.

FN4 'PV' meant purchase volume. (CX 61-T) (See CX 615-C.) Since 1975 this has been called 'BV' or 'business volume.' (Finding 52) (See CX 605F) The name was changed to avoid confusion with 'point value' added in that year. (Finding 51)

FN5 Synthetic detergents have largely replaced soap for laundry and dishwashing purposes in the last 30 years, being chemically different and much more effective. (Diassi, Tr. 5573-74) 'Biodegradable' means that the ingredients of the detergent are broken down by natural biological action, helping to eliminate foaming problems in lakes and streams. (Halliday, Tr. 6095, 6154)

FN6 to some extent the effect of these practices on consumers has been mitigated by the growing concentration and power of food chains and their tendency of using soap and detergents as loss leaders. (Diassi, Tr. 5534; Finding 176)

FN7 In typical oligopolistic conduct, the major soap companies were slow to react to public demand for non-phosphate detergents in the early 1970's, allowing successful entry by at least one manufacturer selling through food stores. (Finding 178)

FN8 Amway's turnover rate among distributors is better than most direct selling companies. (Findings 148, 162-163)

FN9 There is some evidence that one of the distributors suggested to Mr. Van Andel and Mr. DeVos that the product 'Frisk' be distributed. (Halliday, Tr. 6541) The preponderance of the evidence, however, supports the finding that the genesis of Amway was vertically imposed. Cf. Sandura Company v. FTC, 339 F.2d 847, 857-58 (6th Cir. 1964).

FN10 Stopping a practice after a visit by government investigators does not show permanent abandonment. United States v. Parke, Davis & Co., 362 U.S. 29, 47-48 (1960).#e have been continued, [87] and an order may issue to prevent it, even upon a showing that it was been discontinued or abandoned. [FN11] Here, Amway had an explicit policy of retail price fixing in the middle 1960's, and, until 1972, a written policy of preventing distributors from competing with each other. This evidence raised a presumption that these policies have continued or could be resumed.

Count Price Fixing

The Rules of Conduct of the Amway Sales Plan published in 1963 required that distributors sell Amway products to consumers at the specified resale price. (Finding 109) It also provided that no unauthorized discount be given on sales to other distributors, and fixed the resale charge for freight. (Finding 109-111) The record does not show when Amway stopped using this sales manual or whether distributors were ever clearly notified that it does not express Amway's policy. [FN12] Such resale price maintenance is per se unlawful. Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911). [88]

The Career Manual for Amway distributors published in

1968 specified that distributors should not cut the retail price in fundraising drives. The fundraising drive policy was changed in 1969, upon the recommendation of the ADA, so that the retail sales now are made by the distributor rather than by the fundraising organization. (Finding 112) By implication at least, this change was made with the intent to control resale prices. While the policy requiring the distributor rather than the fundraising organization to make the retail sales might be reasonable in itself, when coupled with unlawful intent it became an unreasonable restraint of trade. United States v. Columbia Steel Co., 334 U.S. 495, 522 (1948).

While much of the evidence of price fixing agreements is relatively old, it raises a presumption of continuity which respondents have not rebutted. [FN13] After express contracts were no longer used, the other vertical restraints on advertising, selection of customers and source of supply controlled price competition. The customer protection rule alone stopped all competition for a retail customer for 30 days after a distributor made a sale to that customer. (Finding 90) The purpose of

FN11 The Court in P.F. Collier specifically declined to follow Bearings, Inc., 64 F.T.C. 373 (1964), relied on by respondents. 427 F.2d at 275 n. 13.

FN12 On retail sales, Amway's price lists obliquely refer to 'suggested retail for sales tax' or 'retail sales tax computation base.' (Finding 113) The record does not show that Amway has ever clearly told its distributors that they are free to set their own prices on sales to other distributors or to consumers.

FN13 Holiday Magic, Inc., 84 F.T.C. 748, 1050 (1974). Amway was able to produce distributors who do use prices competitively to obtain wholesale and retail sales. (RPF 223-229) Considering the number of distributors who sell Amway products, this is not surprising. Furthermore, evidence of price competition conflicts with statements of Amway officers who say that very little price cutting occurs. (Finding 127)

FN14 An Amway market study in 1970 warned that lifting the customer protection rule could lead to 'excessive price cutting' by distributors. (CX 522-Z-215)

FN15 In 1968, an Amway employee reported that retail prices on Amway products 'are in most instances appreciably higher than comparable items in conventional retail outlets.' (CX 558-B) Customer complaints about high product prices (CX 700-J) may have changed Amway's pricing policy. In 1970, retail prices set for most Amway catalog products were set below the prices for comparable items sold in department stores but above prices charged by discount stores. (CX 522-Z- 176 to 177)

FN16 Mr. DeVos' advice to Direct Distributors on how to handle price cutting distributors exhibits a lack of formality inconsistent with the sensitive nature of the subject. He incoherently mixes warnings of price fixings with advice to terminate the distributor or to badger, threaten and otherwise 'do a sales job on the guy' because 'you gotta guard against anything that's dog eat dog.' (CX 1037-E to I)

FN17 The customer protection rule has been considered a part of the unlawful price fixing combination, supra, pp. 88-89.

FN18 In those cases, price fixing allegations in the complaints 'accompanied' the allegations of other vertical restraints, but the Court did not rely on that fact in deciding whether the per se rule should be used. The test is not whether price fixing allegations 'accompany' allegations of other vertical restraints but whether the main purpose and effect of all of the vertical restraints show a justifiable business reason, or whether they are mainly directed at fixing prices for which there is no acceptable economic basis. (Ibid.) The Commission referred to, but did not develop, this issue in the letter explaining the acceptance of a consent in Performance Sailcraft Inc., File 771 0027 [C. 2922] (Commission action dated May 2, 1978) [91 F.T.C. 869].

FN19 While the courts have split on adopting this part of the ancillary restraints doctrine (see dissenting opinion of Commission Clanton in Cola Cola, supra, at pp. 11-12), it was relied on in part of Schwinn, not reversed by Sylvania. The Court held that where Schwinn retained indicia of ownership it could, under the rule of reason, confine sales to franchised retailers for the reason, inter alia, that the restraint 'was justified by, and went no further than required by, competitive pressures.' 388 U.S. at 382. (Emphasis added).

FN20 While Amway sells a variety of products, its main business is still 'selling soap.' (RX 331, p. 4-A)

FN21 Unlike some other direct selling companies, Amway does not prohibit distributors from selling competing products. (RX 331, p. 15-B; Bortnem--W.T. Raleigh, Tr. 697-99; Cooke--Avon Lady, Tr. 735-36; Laverty-Fuller Brush, W.T. Raleigh, Tr. 838-39). And, unlike Avon, the largest direct selling company, Amway does not assign sales territories to its distributors. (Cooke--Avon, Tr. 735; Halliday, Tr. 6192-93)

FN22 Direct selling companies generally do not, however, sell their products through retail stores. (Patty, Tr. 3099-3103)

FN23 Amway also prohibits distributors from selling or displaying Amway merchandise at flea markets and similar events (Finding 86) and regulates their sales through fundraising drives. (Finding 87). The rationale for these restrictions is the same as the retail store rule and they have the same economic impact as that rule.

FN24 Sylvania's market share was 5%, 433 U.S. 46-47 n.12, almost triple Amway's 1.7% of the soap and detergents market. (RX 406, RX 407)

FN25 Amway also restricts distributors from selling non-Amway products of Amway distributors they have not sponsored. (RX 331, p. 15-B) The business reason for this restriction is to prevent a 'conflict of interest.' (Van Andel, Tr. 1896) The record does not show the market impact, if any, of this provision.

FN26 The rights of servicemark owners in this respect are the same as owners of trademarks. Pro. Golfers Ass'n v. Bankers Life & Cas. Co., 514 F.2d 665, 668 (5th Cir. 1975)

FN27 While the ten customer rule has a reasonable basis in preventing an unlawful pyramid, the distributors' monthly reports showing such sales need not specify the prices at which the sales were made. Such a requirement could be used to monitor unlawful resale price fixing.

FN28 According to a market study conducted in 1973, only 4% of the distributors who did not renew their distributorship left because there were too many other Amway distributors in their area. (CX 521-E)

FN29 They argue that Amway has too many distributors and that Amway has 'saturated' the market for distributors.

FN30 Complaint counsel object to the 'curiosity approach' that distributors have used when attempting to interest recruits. This involves getting the prospect to attend a meeting by a statement such as 'we're in the business of helping professional people . . . start their own business,' without mentioning the name 'Amway.' (Williams, CX 1116-S-T) At the meeting the full details of the Amway Sales and Marketing Plan are then explained. This approach was used primarily in the early 1970's because of the adverse publicity about pyramid plans unconnected with Amway. (CX 519-Z-49)

Amway distributors are not required to seek new distributors only by first announcing to prospects that they want to take their leisure hours away in a sales job. One distributor said that if this approach is used and '. . . you're talking to the guy that just came home from a factory maybe after ten hours, and is perspiring and looking at you and saying, 'Lady, you are one big dingaling if you think I'm gonna go out and do some more work after that." (Blinco, CX 1041-Z-3)

FN31 Specific examples of amounts paid to Amway distributors are well qualified in the literature to show that they are maximum amounts, not average. (RX 401, p. 10)

FN32 Amway urges that recruiting be done individually rather than at mass meetings. (CX 638-H)

FN33 For example, while urging distributors to open their minds to thinking in terms of making $100,000 a year, Mr. DeVos predicted that 'there are going to be some people in the room' who were going to have that kind of income. (Finding 132) (Emphasis added.) This statement does not indicate that the average distributor can expect to make that amount. Examples cited in complaint counsel's proposed findings, when put in context, similarly show that the speakers are offering the specific amounts as goals not as representations of average incomes. (See the text surrounding the dollar amounts referred to in CPF 457, for example CX 990-Z, CX 992-H, CX 992-J.)

FN34 Before 1973 it was $100; in 1977 it was raised to $250. (Finding 134; RX 401, pp. 7-9).

FN35 And distributors were warned: 'In reality, some of your distributors will probably sell more than $200 P.V. while others may sell less; but just to make it easy to understand, we'll stick to the figure of $200 P.V. for purposes of this example.' (CX 190-G; CX 201-G)

And Amway literature advises that: 'As with retailing, depending on their own goals, initiative, and available time, and the retail sales of those they sponsor will vary.' (CX 205-G; CX 208-F)

FN36 The audience at opportunity meetings includes persons who are already distributors as well as prospective distributors. (CX 204-G) The 'drawing circles' technique is used to teach these distributors the wholesale side of the Amway Sales and Marketing Plan and to set goals for these distributors, as well as to introduce prospective distributors to the plan.

FN37 In any event, prospective Amway distributors do not believe that they will make $1000 a month. On the application form for an Amway distributor, the applicants are asked to state their expected earnings. About 90% expect to earn less than $10,000 a year. About 75% expect less than $5,000, and more than half expect less than $2,000 a year. (CX 516-U)

FN38 Compare, Snap-On-Tools Corp. v. FTC, 321 F.2d 825, 829 (7th Cir. 1963). Of 900 dealers of industrial tools, Snap-On had a turnover of from 350 to 700 in one and one-half years.

FN39 Mr. Price, Amway's trademark attorney, testified that distributors can properly advertise that they are selling Amway products. (Tr. 2900-01)