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Amway v FTC
Opinion of the Commission
By Jeff Babener
FN1 The three soap and detergent manufacturers mentioned above spent over $500 million in advertising and sales promotion in 1975. (Compare Amway's $200 million in sales.) Procter & Gamble alone is the largest advertiser in the United States and spent over $360 million in product promotion in 1975. Amway, by contrast, spent less than $1 million for advertising in 1975. Initial Decision, p. 68, Finding 175.
FN2 Amway actually has a rule (in what is known as its 'Rules of Conduct') which states that no Amway distributor shall permit Amway products to be distributed through any retail outlet. This rule, known as the 'retail store rule,' is discussed in greater detail at pages 21 and 23, infra.
FN3 Generally speaking, the Amway Plan is a highly structed organizational outline, developed by VanAndel and DeVos to control the manner in which Amway products move through the distributor network to consumers. It is based on the 'Code of Ethics and Rules of Conduct for Amway Distributors.' The Amway Plan and the Code of Ethics and Rules of Conduct are set out in a manual, which Amway republishes every two to five years. The 1975 edition of the manual, which was current at the time of the hearings and is therefore frequently referred to herein, is called the Amway Career Manual; some earlier editions, also referred to herein, were called the Amway Sales Plan.
FN5 Apparently some Direct Distributors have lines of sponsorship which are twenty to twenty-five levels deep. But as of February 1977, approximately one half of all Amway distributors either had a Direct Distributor as their sponsor or were sponsored by a distributor who had a Direct Distributor as his sponsor. Over 70 percent of all distributors were in the first three positions; over 85 percent were in the first your positions; over 93 percent were in the first five positions; and roughly 99 percent were in the first seven positions.
FN8 When a newly qualified Direct Distributor, who is by definition a very high volume performer, breaks out of his old place, it represents a great loss to the 'old' Direct Distributor who previously funneled products to him. The old Direct Distributor is compensated by Amway for this loss by an additional monthly Performance Bonus consisting of 3 percent of the Business Volume of the new Direct Distributor.
FN11 Though worded differently at different times, the message has been the same down through the years. The 1963 Amway Sales Plan said: '[P]roducts sold between distributors are always sold at the same price, with no profit made on the immediate transaction. The profit is made later on the refund percentage.' The 1968 Career Manual stated: 'You sell Amway products to the distributor you sponsor at the same [price] at which you buy from your sponsor, and as which he buys from his sponsor.'
'[T]here is . . . a binding contractual arrangement between Amway and its distributors, and that contractual arrangement is spelled out in detail not in a single printed document, but in a group of documents. Amway has always considered itself bound by a contract consisting of the following: . . . the Career Manual. . . .'
FN13 As noted at page 5, supra, Amway does indicate in a 'Performance Bouns Schedule' the percentage of a distributor's monthly Business Volume that he is to receive as a Bonus from his sponsor. If there were an agreement between Amway and its distributors at various levels that the distributors would adhere to this Schedule in paying out Performance Bonuses to the distributors they sponsored, it arguably would be an agreement with a substantial and direct effect on wholesale prices and would be illegal per se. Cf. United States v. Socony and Vacuum Oil Co., 310 U.S. 150, 221 (1940). But there is no evidence that Amway or its distributors regard the Schedule as binding with respect to specific percentages. There is also no evidence that Amway enforces adherence to the percentages set out in the Schedule, nor even that most distributors do in fact adhere to those percentages. Findings 54 and 68 of the Initial Decision, at pp. 16, 25, indicate only that Amway enforces its rule that the Performance Bonuses it pays out to the Direct Distributors must be filtered through the distributor network, but not that the percentages Amway sets out are binding.
FN14 Maway sends to distributors retail price lists for Amway products. The 1965 price list referred to the prices thereon as 'retail'. The 1970 price list used the phrase 'retail prices (for sales tax purposes)'. The current price list states that the prices listed are 'suggested retail'.
FN15 In a 1970 copy of 'The Amway Amagram' (a newspaper-like publication sent by Amway to its distributors), an article contained statements made by VanAndel to a meeting of Direct Distributors. He told them that Amway had conducted a test, in which it had divided the country into half, with prices set at normal levels in one half and at very high levels in the other half. He continued:
'We wanted to see how much difference price would make in our marketing system. Actually, the sales volume per distriubtor in the higher price area was considerably higher than that in the other. I don't mean just 5% or 10%, I think it was over 50%. We concluded that higher price encouraged distributors to do more selling so he could make extra profit.'
FN17 During this speech DeVos also said in regard to price cutting: 'I can't do much about it. And I don't think you can do much about it.' He added: '[Y]ou don't stand a legal chance of doing anything about it . . .. I can't take any action on it without endangering everybody in a federal restraint of trade activity.' But these statements, essentially recognizing the dangerous legal problems that can arise from resale price maintenance and recommending caution in efforts at coercion, do not offset the clear meaning and effect of the other statements quoted above.
FN18 Respondents rely heavily on Knutson v. Daily Review, Inc., 548 F.2d 795 (9th Cir. 1976), cert. denied, 433 U.S. 910 (1977), for the proposition that where an explicit agreement is abandoned and is succeeded by strong recommendations of resale price maintenance, those recommendations do not constitute a 'combination' in the absence of evidence of special coercion. But Knutson is not applicable here because Amway has gone far beyond 'recommending': it has induced other distributors to assist in its program of detecting and deterring price cutting, and it has attempted to extract agreement and acquiesence from its distributors. See Initial Decision, pp. 39, 41 and 44, Findings 115, 117.
FN19 This literally is true, as the first provision of the Code reads: 'I will make the 'Golden Rule' my basic principal of doing business. I will always endavor to 'do unto others as I would have them do unto me."
FN20 The portions of the Final Order relating to rules (Order Paragraphs I.4, I.7, and I.8) are aimed solely at preventing their use in connection with the maintenance of retail prices; the Order does not otherwise disturb their operation.
FN23 See Initial Decision, pp. 41 and 46, Findings 117, 119, 121, and p. 90. Also. Amway advises its distributors, in the Career Manual, that when a distributor violates one of the Rules of Conduct his Direct Distributor 'may take such corrective action as he deems necessary, even terminating the violator's distributorship.'
FN25 Where a finding of resale price maintenance has been made, we routinely include in the order a provision prohibiting the use of suggested prices for some time after entry of the order. But in this case there are highly unusual circumstances which make the use of suggested resale prices not anti-competitive. Specifically, Amway has an unusual distribution system which relies on the sales efforts of hundreds of thousands of distributors, many of whom distribute Amway products part-time and are inexperienced in business matters generally. It is not unreasonable under these circumstances to give distributors some guidance in setting prices on the 150 products they try to sell.
FN26 'What impression is made by a given practice is a question of fact for the Commission to determine . . ..' Benrus Watch Co. v. FTC, 352, F.2d 313, 318 (8th Cir. 1965), cert. denied, 384 U.S. 939 (1966); accord Niresk Industries, Inc. v. FTC, 278 F.2d 337, 342 (7th Cir.), cert. denied, 364 U.S. 883 (1960); Kalwajtys v. FTC, 237 F.2d 654, 656 (7th Cir. 1956), cert. denied, 352 U.S. 1025 (1957).
FN27 We note that this figure is not 'retail sales', but Business Volume, that is, the retail value of the products purchased for resale to consumers and sponsored distributors, and for distributor home consumption, which was stated before, constitutes a large portion of all sales of Amway products. See Initial Decision, pp. 55 a56, Finding 137.
FN28 In a speech given to Direct Distributors in 1974, DeVos stated that the reason for using a figure as large as $200 is to raise distributors' 'vision' of their own potential. See Initial Decision, p. 55, Finding 136. But this does not change the fact that the $200 figure overstates the true average Business Volume amount; and a statement need not be intended to deceive in order to have the capacity to deceive.
FN29 It should be noted, though, that Amway has not advertised specific earnings of named individuals. In fact, the 1975 Amway Career Manual states: 'Don't quote dollar incomes on specific individuals even though you may want to use their stories about the homes in which they live, the cars they drive, or the airplanes they fly.'
FN30 We note here that complaint counsel have attacked earnings claims made to potential distributors and to persons who already were Amway distributors. We restrict our finding of a violation to those earnings misrepresentations made to potential distributors. We believe that experienced distributors can be expected to be aware of the opportunities, or lack of opportunities, open to them under the Amway Plan. Statements of the kind discussed in the Initial Decision, at p. 49, Finding 132, when made to persons who already are distributors, can be considered 'inspirational' in nature.
FN31 We note that all of the vertical restrictions challenged have been found to be reasonable, except as they were ancillary to Amway's illegal resale price maintenance plan. We also note that these findings were based on our view that the product markets in which Amway competes are indeed concentrated, and that Amway's presence has had some procompetitive consequences.
93 F.T.C. 618
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