High Court dismisses claims against Amway

Amway UK cleared at the High Court of 'dream selling', operating an unlawful lottery and being an unlawful trading scheme

Times Online, UK/May 14, 2008

The British subsidiary of one of the world's largest multi-level marketing groups has defeated a Government attempt to close it down after claims that it was operating unlawfully.

Amway (UK) was cleared at the High Court of "dream selling", of operating an unlawful lottery and of being an unlawful trading scheme.

However, the company had to give several legal undertakings including not to recruit further sales agents until it had publishing details of their average earnings and to scrap its annual charge to register as a distributor.

The company, part of a worldwide group with three million sales agents and an annual turnover of $6.5billion (£3.3billion), had been the subject of a Government investigation last year.

John Hutton, the Business Secretary, attempted to force the closure of the company after investigators allegedly found that just six per cent of sales agents were earning 95 per cent of the bonus income.

But Mr Justice Norris dismissed the petition to wind up the company after hearing that it had modified its business model to address the Government's concerns and had given a series of undertakings about its future conduct.

Amway, established in this country for 30 years, sells over £10 million of products in the UK annually, including cosmetics, jewellery, water filters, dietary supplements and cleaning products, through a multi-level network of more than 30,000 independent business owners (IBOs).

The judge said one of the risks of such a set-up was that it might be exploited as a pyramid selling scheme, making money by recruiting others rather than trading in good or services. One of the main objections to Amway was that, in the past, people were being "sold a dream "which had very little prospect of becoming reality.

Very few IBOs made any profit, and many made a loss through having to pay a £28 registration and an annual £18 renewal fee, the court heard.

But Mr Justice Norris said: "Amway is openly selling a proposition to prospective IBOs, not providing careers advice.

"In inviting people to make a modest financial but significant personal commitment, it has a legal duty not to misstate the facts on which the decision to commit will be made," said Mr Justice Norris. "By a fine margin, it has complied with that duty."

The High Court heard that between 2001 and 2006 the number of British agents not earning any bonus income at all varied between 69 per cent and 78 per cent. In 2004/5 only 74 agents out of 25,342 earned more than £10,000 in bonuses.

Mark Cunningham, QC, on behalf of the Government, had told the court that Amway's promise that agents could make "substantial financial rewards" amounted to "selling a dream".

He said that the company operated a "pernicious" scheme which encourages agents to recruit family, friends and colleagues to the group so that they themselves can move up to that "very narrow group that makes any money".

He said that the Amway scheme involved targeting the "gullible "deluded" and "vulnerable" to joint he scheme and accused it of "dream selling".

However, Mr Justice Norris accepted that the company's "radical" new business model - adopted after the Government threatened legal action - would guard against misrepresentation or misunderstanding as to how the operation worked.

It would also give greater prominence to the retail nature of the business - eliminating the attraction of recruiting consumers - and would not require any initial financial commitment from those who did join.

An Amway (UK) spokesman said: "We will work tirelessly to make certain we do not find ourselves in this position again. We are proud of the more than 100 UK-based Amway employees and more than 10,000 distributors there who have stood by us during this difficult time."

Steve Van Andel, Amway chairman, and Doug DeVos, president, yesterday wrote to agents worldwide saying the High Court judgment validated "the significant reforms we have made to out business model in that market".

The message continued: "This is not a pop-the-champagne victory. This is a reminder that the marketplace and regulators hold us to the highest standards. We have an obligation to meet those standards - and we intend to do so.

"Even though he dismissed all three claims against us, the judge also had harsh words for Amway. He was not pleased with the way some IBO organizations had misrepresented the opportunity in the UK, and held us responsible for failing to enforce our rules."

Amway has become one of the world's most successful multi-level marketing groups since being founded in America in 1959. Co-founder Rich DeVos is 288th on the Forbes magazine list of the richest people in the world with an estimated fortune of $3.7 billion.

However, the High Court heard that in Britain the company had faced "serious and sustained financial difficulties" in recent years. Between October 2000 and December 2005 it made an annual average losses of £2.9million. The firm was dependent on the support of its European parent company which in turn derived most of its income from its shareholder in Amway Korea, the court was told.

In recent years, Amway has expanded rapidly in Asia and the Far East, especially in China, Japan and Thailand. The region now accounts for an estimated 80 per cent of its business.

In 1979 the Federal Trade Commission in America cleared Away of being an illegal pyramid scheme, although it found that the company made misleading earnings claims to recruit new distributors.

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