A former Amway subsidiary has settled a class action lawsuit alleging that it perpetuated an illegal pyramid scheme against independent business owners that it recruited to sell its products.
The suit, originally filed in 2007, said that Quixtar, a "multilevel marketing businessâ€ and onetime Amway subsidiary, recruited business owners to become "distributorsâ€ for Quixtar, using false statements to lure them into buying Quixtar products and warning that they would need expensive "toolsâ€ to succeed.
The company then "distribute[d] the proceeds of product sales to new recruits based almost exclusively on participants' recruitment of new victims, rather than on the sale of products to retail users of Quixtar's products,â€ according to the suit. The suit alleged that the scheme caused the plaintiffs to suffer "millions of dollars in losses.â€
Business owners promised profit
According to the plaintiffs, the pyramid scheme was made up of several different parts. First, Quixtar induced "new recruitsâ€ to join its program by promising that they would be able to resell Quixtar products at a profit. "Independent business owners,â€ or IBO's, accounted for 95 percent of those recruited to resell the products, and the price they paid for Amway products was "so high that that any profit on retail sales [was] virtually impossible,â€ the suit said. And the plaintiffs alleged that, in classic pyramid scheme fashion, "Quixtar [required] an ever-expanding network of [IBO's] to keep Quixtar afloat.â€
Those at the bottom of Quixtar's ladder were allegedly encouraged not to spend much time attempting to resell the Quixtar products, but instead "to focus on consuming the products themselves and recruiting others to be distributors,â€ another red flag.
"Tools and functionsâ€
The second part of the pyramid scheme, the suit said, consisted of "a group of businesses that [sold] 'tools and functions' purportedly to help downline distributors sell the Quixtar products.â€ The "toolsâ€ were intended to help market the products, and the "functionsâ€ basically consisted of "motivational meetings and events,â€ the suit said. Distributors were strongly encouraged to buy a set of tapes and materials that, all told, cost nearly $435.
A starter kit distributed by Quixtar told distributors that "there will obviously be an investment involved,â€ and that "you will need 'tools' to build your business successfully.â€ Needless to say, the suit alleged that these expensive tools were of no use in helping distributors move the Quixtar products.
Under the terms of the settlement, Quixtar will pay up to $34 million to the three IBO's who brought the lawsuit, and will also provide $21 million in products.
Amway, the world's largest direct selling company and manufacturer, says on its website that it "always [tries] to do what is in the long-term best interest of our partners, in a manner which increases trust and confidence.â€ The company has been accused of operating pyramid schemes several times before; most recently, in 2008, another suit alleging that the company exaggerated potential profits on the resale of its products and pushed motivational materials on distributors was dismissed by a Missouri court.