The Amway Case from the Price fixing Perspective

Ask ten people who have been around MLM for a few years what the Amway case says and nine of them would know at least some of the pyramid danger signs, and that Amway was held to NOT be a pyramid, etc., etc. The case, indeed, lays out a very detailed picture of what an illegal pyramid might look like, and does conclude that Amway was and is NOT a pyramid. The purpose of this article is not to rewrite an analysis from the pyramid perspective. The case is ALSO about PRICE FIXING, and we can learn much by examining those issues.

The citation of the Amway case is 93 F.T.C. 618. A citation is a way of identifying, and finding, a case in a set books reporting legal decisions. The Amway Case is in the 93rd volume of Federal Trade Commission Decisions, and the decision begins at page 618. The official name of the case is IN THE MATTER OF AMWAY CORPORATION, INC., ET AL. The case has a sub-title which reads: FINAL ORDER, OPINION, ETC., IN REGARD TO ALLEGED VIOLATION OF THE FEDERAL TRADE COMMISSION ACT. The 120 pages of information is arranged in the following manner:

 

Page Numbers Contents
618-629 Caption, Appearances and Government Complaint
629-631 Initial Decision – Preliminary Statement
632-678 Initial Decision – Findings of Facts
678-706 Initial Decision – Discussion
706-707 Initial Decision – Conclusions
707-709 Initial Decision – Order
709-714 Opinion of the Commission – Introduction
714-733 Opinion of the Commission – The Alleged Violations
733-735 Opinion of the Commission – Procedural Issues
735-735 Opinion of the Commission – Conclusions
735-738 Opinion of the Commission – FINAL ORDER

Someone reading the Orders in this case might miss the incredible significance to MLM and Pyramid law because of the significant focus on price fixing. The Order in the Initial Decision has half of its space devoted to price fixing. The FINAL ORDER of the commission has fully two-thirds of its space devoted to price fixing. The Judge concluded that Amway fixed prices. “Respondents (Amway, De Vos, Van Andel, and the Amway Distributor’s Association) have agreed, combined and conspired with each other and Amway distributors to fix resale prices for Amway products, on sales between Amway distributors and to consumers, in violation of Section 5 of the Federal Trade Commission Act, 14 U.S.C. 45.” The Commission, in reviewing the decision of the Judge, reached the same conclusion. “We conclude that respondents have agreed and combined with each other and/or Amway distributors to fix the resale prices of Amway products, at both the wholesale and retail levels, in violation of Section 5 of the Federal Trade Commission Act.”

While no company relishes the thought of being declared a price fixer, the totality of the circumstances of this decision softened considerably the sting of such a result. First, the critical issue of an illegal pyramid was decided in Amway’s favor. Second, the price fixing issue was “old news” in that much of the evidence was of practices long since discontinued and derived from manuals and literature long since amended or totally rewritten.

One view is that both the Judge and the Commission were particularly harsh on Amway on the price fixing issue to give to the Government some semblance of a victory, since the pyramid issues in the case were without merit. In the Final Order, which has no expiration date, the Commission dictated the ACTUAL WORDS of the disclaimer Amway must put on any wholesale or retail price list, order form, promotional material, or any other document which lists resale prices for products:

“The prices stated here are suggested prices only. Distributors are not obligated to charge these prices. Each Distributor is entitled to determine independently the prices at which products may be sold to other distributors or to consumers.”

Section 5(a)(1) of the Federal Trade Commission Act is incredibly broad: It says “Unfair methods of competition in commerce, and unlawful or deceptive acts or practices in commerce, are declared unlawful.” Combining and conspiring to fix resale prices is a prohibited act, says this Judge, says this Commission, and says hundreds of cases before and after the Amway case. The price fixing lesson from this case can be looked at from three viewpoints, the MLM or Direct Selling Company, the Distributor, in his or her relationship to the Company whose products or services the distributorship sells, and the Distributor in his or her relationship to other distributors.

A company has an absolute right to SET prices. SETTING prices is not FIXING prices. Combinations or conspiracies are needed to FIX prices and one cannot combine or conspire with one self. No matter how many employees of ABC Company sit around the conference table deciding what to charge for the new widget, it is not a conspiracy. However, no independent contractor distributor of the company should ever be at such a meeting. All of the company’s employees are part of one legal entity, the corporation, for purposes of deciding whether “two or more persons” conspired to do anything. Have a distributor, or a competitor, or a supplier, or a visitor on a plant tour for that matter attend, and the requirement of “two or more persons” has been met. This, of course, is not automatically an illegal conspiracy, by why even take the chance. The classic example is two or more COMPETITORS agreeing to fix prices, usually to damage a third competitor or just to line their pockets at the expense of the consuming public. The variation on the classic theme, also prohibited by law, is retail price maintenance. It usually involves one manufacturer, with or without the knowing cooperation of one or more of its distributors. It can also involve just two or more distributors.

A company can unilaterally publish SUGGESTED retail prices. A company CANNOT do anything to require that its independent sales force sell at the prices suggested by the company. Amway’s practices in the early Sixties were deemed to be illegal acts intended to maintain the retail price of its products.

It is on the issue of retail price maintenance that the Amway case becomes very specific. The Judge writes: “The Rules of Conduct of the Amway Sales Plan published in 1963 required that distributors sell Amway products to consumers at the specified resale price. It also provided that no unauthorized discount be given on sales to other distributors, and fixed the resale charge for freight. The record does not show when Amway stopped using this sales manual or whether distributors were ever clearly notified that it does not express Amway’s policy. Such resale price maintenance is per se unlawful.”

Amway argued that the quoted manual and the actual practice had been discontinued since at least 1972. Remember, the trial took place in 1978. The Judge listened but was not persuaded. He said “While much of the evidence of price fixing agreements is relatively old, it raises a presumption of continuity which respondents (Amway) have not rebutted.” The Judge’s view that there exists an affirmative duty to tell distributors they may set their own prices was further emphasized is this footnote, “The record does not show that Amway has ever clearly told its distributors that they are free to set their own prices on sales to other distributors or to consumers.”

Clearly today’s companies must have the right words in their literature. But beyond that, regulators and prosecutors, as they did with Amway, will examine the company’s overall attitude toward the issue. Fertile ground are transcripts of company officer’s speeches. Amway’s Co-Founder, Rich De Vos, in 1971 in Dallas Texas, was recorded speaking to Amway Direct Distributors: “If you have a distributor who is selling Amway products at wholesale to a customer, our action has got to be first of all to get a complaint on it and find out who the distributor is that’s doing it. Our next move has got to be to work on his removal, but that isn’t an easy problem, because if this person wishes to sell to anybody on the street at whatever price he wants to, you’re getting into some touchy areas on price fixing. Now the only thing you can point out is that sooner or later the distributor is going to go broke – because you can’t go on selling the product at what you paid for it and survive in the business.” In the same speech, De Vos said that price fixing is a serious matter that the federal people and the FTC watch like a hawk. Still he persisted in his advice to pressure the price cutting distributor into compliance. “You do a sales job on the guy and pointing out that if he’s going to continue that he’s going to destroy his own business, he’s gonna work at a no-profit situation, he’ll ultimately not be able to recruit distributors, because they can’t make any money and what he’s doing is destroying himself, and therefore in most cases where you have it happen it disappears quite rapidly.”

The laws in the area of retail price maintenance are as strict today as they were in 1979 when the Final Order was issued in the Amway case. Enforcement is not limited to the FTC or the Federal arena. The States have become much more active, and Judges need little more than inappropriate quotes to support their rulings.

The lesson from the Amway case should be clear to any company selling through independent distributors: Do not directly or indirectly attempt to control or maintain the retail prices of your products. For added legal protection, remind your distributors in your literature that they have the final say in determining retail prices.

The lesson for the distributor is to resist any attempt by the company to control retail prices, and take affirmative action to get the practice stopped, both for your own protection, and the continued viability of the company. Asking the company’s officers and/or counsel to read the Amway case would be a good first step.

An added lesson for the distributor is to avoid any temptation to combine or conspire with other distributors to maintain or control retail prices. A leader cannot tell his or her downline, “We sell at full retail in our line”, for all the same reasons the company is prohibited from maintaining retail prices.

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