The FTC stated Amway was not an illegal pyramid scheme since the Amway system is based on retail sales to consumers. Amway has avoided the abuses of pyramid schemes by:
- not requiring an entry ("headhunting") fee;
- making product sales a precondition to receiving the performance bonus;
- requiring the buying back of excessive inventory; and
- requiring that products be sold to retail consumers.
The administrative law judge also found that "Amway is not in business to sell distributorships and is not a pyramid distribution scheme."
In the opinion section of the ruling, Commissioner Robert Pitofsky stated:Two other Amway rules serve to prevent inventory loading and encourage the sale of Amway products to consumers. The "70 percent rule" provides that " distributor must sell at wholesale and/or retail at least 70% of the total amount of products he bought during a given month in order to receive the Performance Bonus due on all products bought…." This rule prevents the accumulation of inventory at any level. The "10 customer" rule states that "n order to obtain the right to earn Performance Bonuses on the volume of products sold by him to his sponsored distributors during a given month, a sponsoring distributor must make not less than one sale at retail to each of ten different customers that month and produce proof of such sales to his sponsor and Direct Distributor." This rule makes retail selling an essential part of being a distributor. The ALJ found that the buyback rule, the 70-percent rule, and the ten-customer rule are enforced, and that they serve to prevent inventory loading and encourage retailing. —— 93 F.T.C. 618: Opinion, page 716
The administrative law judge found, and the FTC opinion agreed, that Amway engaged in:
- resale price maintenance, through explicit agreements on wholesale prices and through practices "designed to insure adherence" to its suggested retail prices even though former explicit agreements on retail prices had been discontinued; and
- misleading sales and earning claims.
In the Final Order, issued on May 8, 1979, Amway and its representatives were ordered to:
- cease allocating customers among their distributors;
- cease retail price fixing;
- print a specific disclaimer on any suggested retail price list; and
- cease misrepresenting profits, earnings, or sales; and stop implying other than average results, unless the average results or the percentage of distributors actually reaching those figures is also conspicuously disclosed.
Read more about this topic: In Re Amway Corp.
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