Amway agrees to pay $56 million, settle case alleging it operates a ‘pyramid scheme’
ADA TOWNSHIP — Amway this morning announced a deal to pay $34 million in cash and provide $22 million worth of products to settle a 2007 class-action suit alleging the company and some of its top-level distributors operate an illegal pyramid scheme.
The proposed settlement filed Wednesday would cover former Amway/Quixtar distributors, whom the company calls independent business owners, between 2003 and the day the settlement is approved.
The suit alleged the company used unfair and illegal business practices that mislead distributors about their ability to make money and how much it would cost to be part of the business.
The case was filed in California in 2007 by former distributors for Quixtar, the name multilevel marketing giant Amway used for its U.S.-based operation at the time.
The settlement does not constitute an admission of guilt, but settlement language says the company “stipulates that certain reforms in its business instituted after the filing of this action have been motivated” by the case.
The deal was announced via a brief press release and an e-mail to Amway employees Wednesday morning.
“The suit contains strong and disagreeable allegations and language that we categorically reject,” the letter from Chairman Steve Van Andel and President Doug DeVos read. “They are sensationalist claims that remain unproven and that we expect will be dismissed by the court.
“Nevertheless, the company and its IBO leaders take responsibility for all past issues, and we take responsibility for fixing them. We regret that the experiences of some IBOs fell short of the high standards that have allowed us to help many people, from all walks of life, start successful businesses for more than 50 years.”
The proposed settlement, which still must be approved by San Francisco U.S. District Court Judge Samuel Conti, provides:
• Up to $20 million to pay plaintiffs’ attorneys from the $34 million cash fund.
• Up to $5 million from the cash fund to refund registration fees paid by people who did not continue with Quixtar/Amway after their first year.
• Up to $15,000 in payments to some distributors who lost more than $2,500 with Quixtar/Amway.
• Up to $100 worth of Amway products, with shipping costs for those products coming from the cash settlement pool, to former distributors.
The process to apply for the cash and products — or, to opt out of the settlement — will be established if the settlement is approved. A final decision isn’t expected until sometime in early 2011.
In their letter to employees, DeVos and Van Andel said Amway has addressed many of the concerns raised by those who filed the case and others who have criticized the business as being heavily weighted toward finding new recruits and sales of “tools” or “business support materials” such as motivational tapes, books and seminars.
The settlement places the total economic value of the agreement, including the changes to its business model, at $100 million. The settlement also includes a clause that neither side disparage the other.
Among actions the company says it has taken for the independent business owners:
• Tripling investment in IBO education programs.
• Expanding a money-back guarantee to include all products and training materials purchased by IBOs in their first 90 days.
• More than doubling the number of professional trainers teaching best business practices across the country.
• Consumer advertising, improved websites and other efforts to support the business opportunity, enhance IBO success rates and protect consumers from misrepresentation.
• Revised pricing strategies to enhance its competitive position.
“This settlement is our way of attempting to close this chapter,” said Rob Zeiger, Amway spokesman.
“We think the issues presented by that case are old problems. We’re viewing this as a chance to go forward in the U.S. business with a clean slate without litigation like this hanging over our heads anymore.”
The final settlement included an amended complaint that virtually eliminated the phrase “pyramid scheme” from the case.
Amway has long been sensitive about allegations that it operated a pyramid scheme. A 1979 Federal Trade Commission ruling found the company did not operate a pyramid scheme.
The amended complaint, which is expected to be dismissed without the ability for the plaintiff’s to raise the charges again, continues to accuse the company of an “illegal scheme” and racketeering, among other charges.
A letter from Amway President Doug DeVos and Chairman Steve Van Andel to Amway employees:
To The Amway Community,
Today we are announcing settlement terms in a class action lawsuit filed several years ago by three former Quixtar independent business owners (IBOs).
The suit focused on allegations that in past years, our North American business did not always train and support IBOs well enough, and as a result, best business practices were not always followed when promoting the business.
The suit contains strong and disagreeable allegations and language that we categorically reject. They are sensationalist claims that remain unproven and that we expect will be dismissed by the court.
Nevertheless, the company and its IBO leaders take responsibility for all past issues, and we take responsibility for fixing them. We regret that the experiences of some IBOs fell short of the high standards that have allowed us to help many people, from all walks of life, start successful businesses for more than 50 years.
We have not only addressed the issues raised in this case, we have also gone further than settlements and safeguards. In the past few years, we have invested more than $300 million in additional business initiatives to help our IBOs succeed – including many investments that began before this case was filed. We have fundamentally transformed our North American business to offer our IBOs the best possible opportunity to succeed. Some of these efforts include:
• Tripling our company’s investment in IBO education programs;
• Expanding our 100% money-back guarantee to include all products and training materials purchased by IBOs in their first 90 days;
• More than doubling the number of professional trainers we employ to teach best business practices across the country;
• Consumer advertising, improved websites and other efforts to support our business opportunity, enhance IBO success rates and protect consumers from misrepresentation; and
• Revised pricing strategies to enhance our competitive position.
This means that IBOs can launch their businesses with minimal, refundable start-up costs, receive excellent business and sales training, and be safeguarded by a robust satisfaction guarantee and return policy.
Still, we agreed to settle and to compensate the claimants in both money and equivalent product value, as we are confident that we have taken the necessary steps to address these past issues. We want to focus on helping IBOs build healthy businesses for the future, not a long court fight over allegations from the past.
Our founders had a simple philosophy: we start every day determined to make the business better than it was the day before. And in keeping that promise, we can confidently and proudly focus all our attention on offering an excellent business opportunity that is open to all.
Steve Van Andel ?Chairman
Doug DeVos? President