LOS ANGELES–(BUSINESS WIRE)–A group including eight of the largest distributors of Quixtar Inc., a sister company of Amway Corporation, today filed a class-action lawsuit against Quixtar seeking a declaration that all distributor contracts with Quixtar, and the non-competition and non-solicitation provisions in particular, are unenforceable due to illegality and/or frustration of purpose. The plaintiffs allege that Quixtar knowingly operates as a pyramid scheme and that it prevents distributors from leaving the organization through the non-competition and non-solicitation provisions.
The plaintiffs assert in the complaint that they merely want to allow distributors to leave the Quixtar organization and, to further that effort, they also intend to seek a preliminary and permanent injunction restraining Quixtar from enforcing or attempting to enforce the non-competition and non-solicitation provisions.
“Many of the plaintiffs have had close relationships with Quixtar’s founders as well as executive management for nearly three decades and have regularly pleaded with management to address these provisions, as well as the overpriced nature of the products,” stated D.J. Poyfair, an attorney for Shughart, Thomson & Kilroy, the law firm representing the plaintiffs in the lawsuit. “The complaint clearly illustrates that Quixtar has acknowledged that distributors can not sell the company’s products retail on the open market while encouraging them to recruit new distributors.”
The lawsuit was filed in federal district court, central district of California, western division. The proposed class representatives are a group of 15 Quixtar distributors, one of whom has been an Amway and/or Quixtar distributor since 1973, and many of whom have been distributors since the 1990s.
Quixtar, an e-commerce company founded by Amway in 1999, is a unit of Alticor, Inc., which is owned by Amway’s founding DeVos and Van Andel families. It essentially is the U.S. operation of the old Amway operation, which no longer operates under that name in the U.S. Alticor also is the parent of Amway, which only operates under that name outside the U.S., as well as Access Business Group, LLC, which manufactures the products sold by both Quixtar and Amway.
“We are not seeking damages against Quixtar, or to shut Quixtar down,” stated Billy Florence of Athens, Georgia, a distributor since 1974, who noted recent regulatory inquiries into Amway in India and the U.K. “Rather, we merely seek a judicial declaration that the non-competition and non-solicitation provisions are unenforceable, so distributors who choose to do so can extricate themselves from continued forced participation in Quixtar’s illegal pyramid scheme and pursue legitimate business opportunities instead.”
In the lawsuit, the plaintiffs assert Amway viewed the Quixtar launch “as its chance to make a second, and this time good, first impression on the network marketing industry in the United States and created new products, with a fresh plan for success.” They claim, however, that Quixtar instead adopted Amway’s existing business model, which by this time had been sharply criticized in the media, in lawsuits and by distributors.
According to the lawsuit, The Federal Trade Commission (FTC) began examining Amway’s business model in the late 1970s to determine whether it was operating as an illegal pyramid scheme. The examiners concluded that because Amway’s products were capable of being sold in the retail market, it was not a pyramid scheme; however, the company had to adopt – and enforce – certain rules designed to avoid the Koscot characteristics of an illegal pyramid scheme. The company needed to comply with these rules or it would be deemed an illegal pyramid scheme. Today, plaintiffs assert that Quixtar does not enforce any of these rules.
Since its start-up, the lawsuit claims, Quixtar products have become significantly overpriced, “and are thus not sellable in the retail market.” In fact, the action asserts that it is “widely understood in Quixtar for years that (distributors) buy Quixtar products mostly to earn commissions or bonuses,” rather than to sell the products to retail purchasers. The plaintiffs allege that only 3.4% of Quixtar’s sales are sold to customers outside Quixtar’s distributor network.
“Instead of focusing on reducing prices across the board on products, Quixtar has resorted to marketing the products solely to its distributors,” the complaint asserts. In fact, “President Doug DeVos himself has stated … that ‘Quixtar is an internal consumption company,’ not a retail sales company,” the lawsuit asserts.
Further, the plaintiffs assert that since Quixtar’s products are “unmarketable to those not participating in Quixtar’s comp plan, the sole way to make money is for a (distributor) to continually recruit new distributors who are also willing to buy and self-consume, or give away, the Quixtar products. This fact alone renders Quixtar a classic recruitment pyramid scheme.”
Finally, the complaint sharply criticizes Quixtar’s non-competition and non-solicitation rules. “The Quixtar business model is brilliant if you are a member of the DeVos or Van Andel families,” it asserts. “Elevate the price of all products to gain an alarmingly high profit margin for the company. Market the company as a business opportunity, promising retail saleability, to get unsuspecting distributors to purchase products at exorbitant prices while investing their time and energies promoting the business opportunity. Offer monetary rewards to incentivize distributors to recruit new distributors who also buy the company’s products. Teach all distributors to consume the products that cannot be sold, which is all of the products. Trap the distributors, a.k.a. the consumers, from leaving the company with a non-competition clause. Penalize those who attempt exodus with heavy-handed sanctions imposed by the only judge in town, Judge Quixtar.”
“In this manner, Quixtar has created an army of (distributors) who are effectively trapped in Quixtar’s system, forced to buy and consume outrageously priced products, and recruit new victims as the only means of avoiding financial loss, because leaving Quixtar is rendered impossible by the non-competition and non-solicitation rules.”
An injunction will be filed later today to stop Quixtar from enforcing the non-competition and non-solicitation rules that entrap distributors and prevent them from exiting the pyramid scheme. The preliminary injunction hearing is expected to be held in the next two weeks in Los Angeles.
