In March 1975, the U.S. Federal Trade Commission accused Amway of operating as an illegal pyramid scheme, violating the Federal Trade Commission (FTC) Act. Contrary to what many people might think, the case against this major direct seller was not resolved in a few months but took four years until 1979.
FTC’s five accusations that were filed against Amway in 1975 were quite severe:
* Amway was engaged in resale price maintenance.
* Amway allocated customers among distributors and restricted distributors’ source of supply as well as 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 the company had been conducting a legitimate business but not a pyramid, and Amway prevailed.
The significance of this decision for the rest of the direct sales community was that the FTC was making clear distinctions in its ruling between an illegal pyramid and a legitimate multilevel marketing program. 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 price-fixing at retail level; 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 an essential shield to network marketing companies, including Amway itself.
The famous “70% rule” has also been an industry standard or a “Golden Rule” following this case. Amway was requiring from its distributors to sell or personally use a minimum of 70% of any previously purchased products before placing a new order. And this was 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 whom we sadly lost in 2020, said, “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.”
FTC’s this decision has since been considered as a “landmark decision” that distinguished an illegal pyramid from a legitimate multilevel marketing program.
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Written by Hakki Ozmorali, Founder of WDS Consultancy, a management consulting and online publishing firm in Canada. WDS Consultancy is the publisher of The World of Direct Selling. You can contact Hakki here.
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