Fired Quixtar distributors sue over clause

By Chris Knape
The Grand Rapids Press
August 13, 2007

A group of prominent Quixtar distributors is suing the direct sales giant, alleging the company is little more than a pyramid scheme with overpriced products.

The suit came after Quixtar fired 15 influential distributors last week because their business practices were "some of the worst of what our critics say about our business," spokesman Rob Zeiger said.

Quixtar also said the distributors told officials they planned to start their own multilevel marketing business.

The allegations from both sides give a glimpse into the internal struggle taking place as Alticor tries to clean up a business it now admits was facing major problems.

D.J. Poyfair, an attorney for the plaintiffs in the lawsuit, said their distribution networks make up about 40 percent of Quixtar's $1.1 billion in annual sales.

But Zeiger said the sales lines of those involved in the suit represent only 15 percent of Quixtar sales.

Sixteen distributors filed the class-action suit in U.S. District Court in California last week -- the 15 who were fired and an additional distributor -- demanding the company release them from noncompete clauses.

The suit does not ask for monetary damages.

The situation is the first major public dust-up since promises Alticor made in June to reform its business as it readopts the Amway name over the next 18 to 24 months.

Quixtar is the name the Amway direct sales operation adopted in the United States.

The suit is led by Orrin Woodward, of Grand Blanc, a co-founder of TEAM (which stands for Together Everyone Achieves More), a large group of Quixtar distributors. Others involved in the suit include leaders of groups called Legacy and Team 5K.

The suit alleges Quixtar knowingly operates as an "illegal internal-consumption recruiting pyramid" by focusing on selling overpriced products only to its own distributors, known as Independent Business Owners, or IBOs.

In doing so, the suit says, IBOs are only capable of making money by continually recruiting new IBOs who also buy products, for which "upline" IBOs receive commission-like bonuses.

The suit said only 3.4 percent of all Quixtar product sales are made to non-IBOs. Zeiger said that number was low, but he did not have a company-supplied number.

The suit further alleges Quixtar avoids government scrutiny by requiring all IBOs to comply with an alternate dispute resolution process, which was implemented in response to lawsuits and complaints by IBOs.

While the suit says Woodward and others involved were long aware of the alleged problems, they remained IBOs and continued recruiting -- or encouraging others to recruit -- hundreds of others into a system.

The suit said their "forced participation" was driven by wording in their contract with Quixtar that prevented them from competing with the company and taking other Quixtar IBOs with them for six months after resigning.

Poyfair said the group was working with company officials to resolve issues but finally found it "difficult to reconcile" the problems they encountered while encouraging thousands more people to become part of what they pitched as a good business opportunity.
Zeiger said Woodward and the others had been problems for years and refused to agree to company demands to improve business practices.

"There are things that with their departure already look improved to us today," Zeiger said.
The independently run Independent Business Owners Association International, once headed by Woodward, released a statement backing Quixtar.

In a release announcing the firings of 15 IBOs tied to the TEAM organization, Quixtar said it was unsuccessful in trying to work with TEAM leaders to "correct issues related to Team's teaching of inappropriate business-building tactics, improper positioning of the opportunity and use of unauthorized support materials."

Quixtar's termination targets an issue that has long been a sore spot with new IBOs. Some have complained they weren't given an accurate account of the "business opportunity" or even told they would become a Quixtar distributor when being recruited by other IBOs.

Some IBOs have long complained that higher-level IBOs make far more money from sales of their own expensive training seminars and CDs than they make selling Amway products.

Poyfair said he didn't know how much the plaintiffs in the suit made selling business support materials, versus what they made from Quixtar.

The suit references a 1979 Federal Trade Commission ruling that said Amway was not a pyramid scheme in part because it had rules that required sales to non-IBO customers and it offered a buyback plan for merchandise IBOs couldn't sell.

In practice, the suit alleges, Quixtar does not enforce many of the rules laid out by the FTC to avoid being labeled an illegal pyramid.
Poyfair said Alticor's allegations about his clients are simply diversionary tactics.

"All that is and ever has been is a smoke screen for the fact this company has known for some time that the products cannot be sold in an open retail market and are only being sold to IBOs to qualify for bonuses," he said.

The issues raised by Quixtar and the lawsuit are similar to those at the center of a government investigation in the United Kingdom that led Alticor's Amway unit there to suspend recruiting new IBOs and forbid all non-approved paid gatherings and business support materials.

In an unusually blunt posting on its media blog, Alticor said this about Woodward: "We terminated Orrin Woodward for philosophical reasons. We did it for legal reasons. But the main reason we did it is because the way Orrin Woodward ran his organization was a disgrace to every person who's ever tried to build a Quixtar or Amway business the right way."

The company said it has a temporary restraining order preventing Woodward from "looting the business as he seeks to take his act to a new company."

Alticor has about 5,000 employees in Michigan and 13,000 employees worldwide.

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