 |
| English: Honda- Amway（AVCL）Hồ Chí Minh (Photo credit: Wikipedia) |
In the successful 1975 FTC prosecution of "Koscot Interplanetary" and earlier prosecution of "Dare to be Great", FTC specified the four specific problems they have with the pyramid scheme:
- a) Large membership fees (Dare to be Great can cost up to $2000 or more in 1970's!)
- b) Front-end loading (buying a huge "starter kit") and inventory loading (buying so much inventory just so your upline can get the commission)
- c) Programs in which distributors were misled as to the amount of commission they might reasonably earn (misleading income claims), and
- d) Programs in which commissions were not based on the sale of product to the ultimate consumers. (no true retail customer means it's a money circulation game)
SEC had also previously joined in the prosecution of "Dare to be Great" in 1973, as it considered a pyramid scheme similar to a ponzi scheme... you put in money, and you expect to get more out of it with rather minimal effort, via the rule known as the "Howey Test".
In fact, many states as well as the US Postal Service have also joined in the prosecution of misleading direct sales, esp. those sent through the mail. Some argued that this patchwork of regulations, different from state to state, created such a hostile atmosphere for direct sales that it would have perished...
An infamous player of this era is called Cambridge Plan International, founded by Jack and Eileen Feather. Some of their most infamous products are "Mark Eden Bust Developer" (diet supplement to make women's boobs bigger), "Astro-Trimmer" (diet supplement that shrinks your tummy fat), and their namesake, the "Cambridge Diet", powdered drinks, soup, and such, only 350 calories, developed by Cambridge professor! Cambridge eventually went bust when it tried to shift from mail order model (prosecuted multiple times for mail fraud) to direct sales, then the direct sales went bubble and burst. It started with 25 reps in 1981, to 150000 reps in 1982... and declared Chapter 11 bankruptcy in 1983.
Direct sales basically would not have survived had Amway not survived the FTC lawsuit, and it did not survive unscaped. The ruling, 1979 FTC vs. Amway, resulting in a consent decree where the company agreed to several fundamental changes, that became known as the "Amway Safeguard Rules". (Incidentally, Amway also agreed to tone down income claims, and agree not to restrict the power of affiliates to set prices, i.e. price-fixing).
So what are the Amway safeguard rules? It's quite simple... 3 simple steps.
Amway Safeguard Rules, i.e. "Amway Rules" have 3 rules
1) "Ten Retail Sales Rule" -- if you don't make ten sales to ten separate people, you are NOT qualified to earn any downline commissions.
2) "70% rule" -- You have to sell 70% of what you previously ordered before you are allowed to re-order.
3) "Buyback policy" -- Amway will buyback any inventory you want to return within 6 months, at 90% or higher of the price you paid.
Amway have also adopted the compensation plan where there is NO bonus for recruiting additional IBOs. Only sales (by you, or your downlines) will be compensated through commissions.
These rules are designed specifically to counter the problems specified by the FTC in the Koscot case. Rule 1, along with compensation plan, addressed problem d), while rules 2) and 3) addressed problem a) and b).
The logic is basically that with buyback availability in place, inventory loading / pre-loading cannot happen, or even if it happens, the victim will not lose much. And retail sales rule with no incentive to recruit made Amway not fit the last factor of the Koscot test.
With all of its objections satisfied, FTC reluctantly agreed that Amway does not fit the definition of pyramid scheme as per the Koscot test, and the 3 rules adopted makes it unlikely that Amway can become a pyramid scheme, at least a Koscot-type pyramid scheme where product only flowed internally, not to retail.
Critics of the decision claimed that FTC had basically legalized a specific subset of pyramid scheme as "legal", while direct sales industry lauded the decision as creating some uniform legal framework out of the chaos without stifling direct sales industry.
How can the Amway Safeguard Rules Be Side-stepped
Amway rules are actually quite easy to side-step
The "ten retail sales rule" is almost NEVER audited. Basically Amway asks the IBO to sign a paper certifying him- or her-self as having met the requirements, and that's enough. This was later enhanced in the "Webster vs. Omnitrition" case (which is an article / definition in itself) However, it is clear that the retail rule had never been fully enforced by any mainstream MLM company. Instead, most companies simply reclassify their lowest rank of distributors as "customers" (Herbalife comes to mind).
The "70% rule" can be easily bypassed by increasing the amount of "self-consumption" (i.e. consumed by the IBO him/herself) to an amount beyond what is 'reasonable'.
The "buyback policy" can be bypassed by sending the upline and the rest of the sales team to guilt-trip / shame-attack the IBO to force him or her to recant the buyback attempt. And the upline is easily motivated to do so because her commission will be subject to "clawback" if the buyback was executed. Furthermore, company has plausible deniability (what they do is not my business!)
Merely claiming to be following Amway Safeguard Rules does NOT automatically make a business legitimate. That was the ruling in Webster vs. Omnitrition. Upon hearing that ruling (and their failure to obtain a declaratory judgment) Omnitrition settled out of court.
Amway Safeguard Rules vs Product-Based Pyramid Scheme
As scams evolve in sophistication, so did the pyramid scheme, and by weakening both factors within the Koscot test, as well as exploit the loop-holes within the Amway Safeguard Rules, a new breed of pyramid scheme is born: the product-based pyramid scheme.
In a product-based pyramid scheme, there is little if any real retail sales to non-participants. Most products are consumed by the affiliates themselves. Their excuse is they need to do that to qualify for the compensation plan of their specific level. And in turn, they tell their recruits / downlines to do the same, i.e. "lead by example". Ten Retail Customer Rules are ignored, and 70% rule are sidestepped with self-consumption. The buyback rule simply doesn't apply.
The net result is inventory loading, albeit, slightly shifted responsibility. Rather than upline convincing their downline to load up on inventory to enrich themselves, it's now upline convicing themselves they need to load up inventory to keep themselves qualified... and convince their downlines to do the same. Overall, a lot of inventory got moved, but little if any retail happened. Yet the company did indeed sell products and paid the reps based on the "sales", not on recruitment... Except each rep's monthly order is automatic... known as "autoship", so essentially, each rep's commission is based on recruiting additional reps on autoship.
Amway Safeguard Rule's Future
The safeguard rules do seem sound, but due to their severe lack of enforcement since the end of Clinton presidency, they have been rendered effectively useless.
However, with closing of FHTM in 2013, there is some indication that the Obama administration may again encourage the FTC to go after the violators.
