In 1975, the U.S. Federal Trade Commission (FTC) accused Amway of operating as a pyramid scheme. Many people might think this case had lasted a few months at most but actually it took four years until 1979.
As an introductory note, the Federal Trade Commission has the regulatory authority over direct selling businesses in the U.S, setting anti-pyramid standards and determining the business standards used by legitimate companies.
FTC’s five accusations filed in March 1975 against Amway were:
* Amway was engaged in resale price maintenance.
* Amway allocated customers among distributors and restricted the distributors’ source of supply as well as the retail outlets through which they may resell.
* Amway restricted the distributors’ advertising.
* Amway misrepresented that substantial income may be obtained from geometrical increases in the number of distributors in the chain.
* Amway misrepresented the profitability of a distributorship and the potential for recruiting new distributors and failed to disclose the substantial business expense involved and the high turnover of distributors.
After four years in 1979, it was ruled that Amway’s was a legitimate business but not a pyramid scheme.
The significance of this decision for the rest of the direct sales community was that the FTC had distinguished an illegal pyramid from a legitimate multilevel marketing program. This was despite the fact that FTC actually decided Amway had made false and misleading earnings claims when recruiting new distributors. The FTC said “Amway differed in several ways from pyramid schemes that the Commission had challenged. It did not charge an up-front ‘head hunting’ or large investment fee from new recruits, nor did it promote ‘inventory loading’ by requiring distributors to buy large volumes of nonreturnable inventory.”
This did not mean that the FTC had left Amway free of any orders to follow: Amway had to stop, retail price-fixing; misrepresenting profits, earnings or sales; allocating customers among their distributors; and had to print a specific disclaimer on its suggested retail price lists. In other words, the ruling didn’t make Amway look very good, but it provided a shield to network marketing companies, including Amway.
The famous “70% rule” has also been an industry standard or a “Golden Rule” following this case. Amway’s requirement from its distributors to sell or personally use a minimum of 70% of previously purchased product before placing a new order had been recognized by the FTC as one of the signs of not being a pyramid scheme.
This case has been considered as the most significant case in the history of direct selling by many. Jeff Babener, a well-recognized authority in legal issues, says, “Had Amway lost, MLM history after 1979 may have been nonexistent. Amway’s victory paved the way for hundreds of MLM companies that would follow. So significant was the decision that the FTC during the next 20 years focused on ‘deceptive’ practices of MLM companies such as earnings representations or medical claims rather than attacking the ‘structure’ of MLM programs.”
The FTC’s Former General Counsel Debra A. Valentine commented in a speech in 1998, that FTC’s decision in 1979 was a “landmark decision” that distinguished an illegal pyramid from a legitimate multilevel marketing program.
Hakki Ozmorali is the Principal of WDS Consultancy, a management consulting firm in Canada specialized in providing services to direct selling firms. WDS Consultancy is a proud Supplier Member of the Canada DSA. It is also the publisher of The World of Direct Selling, global industry’s leading weekly online publication since 2010. Hakki is an experienced professional with a strong background in direct sales. His work experiences in direct selling include Country and Regional Manager roles at various multinationals. You can contact Hakki here.