In a Twisted Turn of Events, Herbalife Retains Anti-MLM Firm, Boies Schiller

Humor me for a second. Suppose prominent law firm, Dewey Cheatham & Howe, initiates a class action lawsuit against cigarette maker, Marlboro. DCH alleges that Marlboro sells cancer sticks. DCH achieves a windfall settlement from Marlboro i.e. $20,000,000! Now suppose a doctor accuses Marlboro’s competitor, Winston, of also selling cancer sticks. And when it comes time to choosing a law firm, Winston chooses……Dewey Cheatham & Howe.

Do you see the problem?

Herbalife has retained mega firm Boies, Schiller and Flexner

Before discussing Herbalife’s decision, it’s important to provide a little background. Bill Ackman, hedge fund manager and founder of Pershing Square Capital Management, dropped the proverbial hammer on Herbalife. In what has been referred to as “dizzying takedown” of Herbalife, Ackman gave a 330+ slide presentation at the Ira Sohn conference in New York, arguing that Herbalife is an illegal pyramid scheme on the verge of collapse. When choosing his tools for the Herbalife autopsy, Ackman skipped right over the scalpel and went straight for the sledge-hammer.

Herbalife’s decision to retain Boies Schiller came to light in the Wall Street Journal’s story titled “Herbalife Goes on Offensive.” Out of all of the law firms in America, it’s extremely confusing to me why Herbalife would retain Boies Schiller (assuming the report is true). Currently, it’s unclear what exactly Boies Schiller will be doing for Herbalife. Given the timing, I suspect they’re being asked to help Herbalife deal with Ackman i.e. suing Ackman. If this is the case, hell has truly frozen over.

Boies Schiller recently received a settlement from Amway, resulting in legal fees “up to $20,000,000!” I’m not making this up. In late 2006, Boies Schiller initiated a class action lawsuit against Amway. In the lawsuit, they made most of the same arguments used by Ackman in his presentation i.e. there are minimal retail sales, the products lack quality, the buyback policy is ineffective, internal consumption is bad, etc. Their anti-MLM sentiment is made obvious in the first paragraph of the lawsuit against Amway (included below, written and filed by Boies Schiller!):

This pyramid scheme [Amway] is fraudulent because it induces individuals to invest in products and marketing tools and to recruit new victims into the scheme with the false promise of enormous profits. . . Because [Amway] distributors most often do not sell products to consumers who are not also distributors, they can obtain a return on their investment in the [Amway] program only by recruiting new distributors who will then buy products and recruit more distributors who will buy products.

And this firm has been asked to protect Herbalife.

Soon, I’ll be providing a more detailed analysis of Ackman’s position against Herbalife. In summary, the MLM industry is about to change, for better or worse. There’s no doubt about it. While there have been plenty of attempts in the past by lawyers and disgruntled distributors to air the dirty laundry of companies, there has never been anything like Ackman. Not even close. He’s all over the news, seemingly rubbing the FTC’s nose in a pile of poop. He’s creating the impression that the FTC has fallen asleep at the wheel. Whether that’s true or not is a topic for another post.

How can Boies Schiller effectively represent Herbalife? And really, they’re not only being asked to protect Herbalife, they’re indirectly being asked to protect the legitimacy of the entire industry. It seems bizarre for a firm to profiteer on two sides of the same issue….especially when those sides are on polar opposites.

In this fight with Ackman, Herbalife needs to restore confidence in its business model. Retaining Boies Schiller is a huge step in the wrong direction.

See below for the class action lawsuit filed by Boies Schiller against Amway

See below for Ackman’s presentation about Herbalife

There are a lot of similarities in Ackman’s arguments and those used by Boies Schiller against Amway.

Pokorny / Amway Settlement Explained

It’s official. The long fought Pokorny Class Action lawsuit has finally been resolved. Unlike the last Pokorny / Quixtar settlement, which was delayed by the judge (or denied, depending on who you ask), this one seems to be sticking. If you were a Quixtar IBO between January of 2003 to February of 2012, you might be eligible to take a slice of the settlement pie. The official settlement page with instructions can be found here. I’ve summarized the key ingredients of the settlement below. I’ve also included direct quotes from the settlement beneath my summary.

If you learn something here, show some google love and hit the +1 button above.

In Summary

Amway must:

1) Provide 90 refund period for registration fees;
2) On registration forms, explain that income claims provided to prospects represent gross, not net income; explain the availability of free training; explain the refund policy; explain the availability of retail prices on-line;
3) Maintain policies prohibiting tactics which require people to buy tools (Business Support Materials, or “BSM”) upon enrollment;
4) Enforce its retail sales rule. As stated in the settlement, they must use “reliable reported levels of sales to end-user consumers.”;
5) 5% price reduction from the 2007 pricing levels;
6) Increase its IBO training budget by $7M over 2007 levels. Such training must be provided for free to its IBOs;
7) Maintain and enforce quality control over BSMs. The standards must prevent BSMs from making misrepresentations about the Amway business;
8 ) $55M in economic relief with $34M going to a cash (reimbursements) fun and $21M going towards a product credit fund (free schwag);
9) With the cash fund, Amway must provide a cash payment of up to 20% of the IBO’s “verifiable net BSM expenditures.” The cash payment is capped at $2,000. In other words, if you spent $10,000 on tools between 2003 and 2012, you could be eligible for a $2,000 check.
10) Upon a showing of a Special Hardships i.e. bankruptcy attributable to Amway or a loss of at least $10,000, an individual can be eligible for more money (with a $10,000 cap).

CONSENT JUDGMENT & ECONOMIC RELIEF (abridged)

5.1.1 Quixtar shall modify its agreements with its IBOs to provide not less than a 90-day refund period for registration fees. The 90-day refund period for an IBO’s registration fees will begin from the time that Quixtar receives the registration fee from the IBO.

5.1.2 The application form that new IBOs are required to execute to register as a Quixtar IBO shall disclose the following information: (a) that income figures provided to potential IBOs represent gross, not net income; (b) the availability of certain free company provided training for IBOs in marketing and merchandising; (c) Quixtar’s refund policies for products purchased by IBOs; (d) the availability of a retail product price list schedule accessible on-line; and (e) that product purchases and purchases of BSM are optional.

5.1.3 Quixtar shall: (1) not compensate any IBO primarily for the act of recruiting or registering other IBOs; and (2) not require any IBO to purchase or maintain any specified amount of inventory of products or BSM. In addition, Quixtar shall maintain policies prohibiting acts or practices which require a person to buy BSM as a condition to becoming an IBO and prohibiting acts or practices which discourage buy backs of product on commercially reasonable terms. In addition, when making sales based bonus payments or incentives to IBOs who are below the Platinum PIN level, Quixtar will emphasize consumer sales by conditioning such bonus payments and incentives on reasonably reliable reported levels of sales to end-user consumers. (The phrase “end user consumer” means any individual who intends to use or uses Quixtar products.) Quixtar shall maintain policies prohibiting Quixtar, its IBOs, and companies that are authorized by Quixtar to provide training and support to IBOs from making statements or representations or taking actions contrary to (i) the application form referenced in Paragraph 5.1.2 above; (ii) the requirements of applicable state and federal law; or (iii) the requirements of Paragraphs 5.1.2, 5.1.3, or 5.1.6 of this Settlement Agreement. Quixtar shall not be liable for contempt of the Consent Judgment solely on the grounds that Quixtar’s policies are breached by its IBOs or others.

5.1.4 Quixtar will maintain for twenty-four months from the Effective Date or from June 30, 2011, whichever occurs first, a price reduction that averages at least 5% from January 2007 pricing levels to distributors across Quixtar-branded products (existing SKUs, excluding freight). . . .

5.1.5 Quixtar will increase its annual IBO training budget for product, product merchandising, business skills . . . by an average of $7 million or more over 2007 levels for twenty-four months from the Effective Date . . . such training to be provided free to IBOs.

5.1.6 Quixtar will maintain and enforce quality control over BSMs that are: (1) sold or distributed by Quixtar IBOs or by companies authorized by Quixtar to provide training and support to IBOs and (2) sold or distributed in a manner suggesting sponsorship, affiliation or approval by Quixtar. Quality control shall include standards that are designed to prevent BSMs from making factual assertions regarding the Quixtar business that contain either material misrepresentations or omissions that render a statement materially misleading. Quality control shall provide that BSMs comply with the standards and policies contained in Paragraphs 5.1.2, 5.1.3, and 5.1.6 of this Settlement Agreement. . . .

. . .

5.2 Economic Relief Quixtar shall provide a total of $55 Million in direct economic relief (in addition to the economic value to the Settlement Class of the injunctive relief described in Subsections 5.1.1-5.1.6 above). The $55 Million in direct economic relief shall constitute a common fund composed of: (1) a $34 Million Cash Fund; and (2) a $21 Million Product Credit Fund.

5.2.1 $34 Million Cash Fund: within ten (10) business days after entry by the Court of the Preliminary Approval Order, Quixtar shall deposit the sum of thirty-four million dollars ($34,000,000.00) (the “Cash Fund”) into an interest-bearing escrow account for an anticipated distribution to Settlement Class Members and to pay administrative costs, costs of class notice, and attorneys’ fees and expenses pursuant to this Settlement Agreement and the Court’s orders. . . .

5.2.2 $21 Million Product Credit Fund: Quixtar shall provide $21 Million in free product for benefit of the Settlement Class (“Product Credit”). . . .

6. ALLOCATION OF CASH FUND AND PRODUCT CREDIT

6.1 Cash Fund. The $34 Million Cash Fund shall be distributed as follows:

6.1.1 Cash Payments. Subject to other terms herein, Settlement Class Members who are former IBOs as of the date of this Settlement Agreement, including the named Plaintiffs, with the exceptions set forth below, who have at least $100 in Verifiable Net BSM Expenditures are entitled to a cash payment of up to 20% of their Verifiable Net BSM Expenditures, up to a maximum recovery of $2,000 per claimant, or an appropriately pro-rated amount under Paragraph 6.1.4. To obtain this cash refund, Settlement Class Members must submit to the Claims Administrator the approved Claim Form together with documentation of their Verifiable Net BSM Expenditures within a 90-day refund period as specified in the approved form of Notice. The Claims Administrator may accept receipts, credit card records, or other proof of purchase as documentation.

6.1.2 Special Hardships. Settlement Class Members who are former IBOs as of the date of this Settlement Agreement, including the named Plaintiffs, who either (i) can show that their recruitment into and operations of their Quixtar business caused them to file for personal bankruptcy or (ii) can show a loss of at least $ 10,000 from operating their Quixtar business, may apply for a special hardship award not to exceed 20% of their loss. A Special Master, who shall be appointed by the Court with input from Plaintiffs’ Counsel and Quixtar at the time of final approval of the Settlement Agreement, shall determine whether each claimant for a special hardship award has made this showing. The Special Master shall then prepare a schedule of recommended special hardship awards, if any, to each claimant and submit the schedule to the Court for final approval of the awards. The special hardship awards shall be governed by the following:

a. No individual shall receive a special hardship award greater than $ 10,000.

. . .

Full Settlement Below

Quixtar / Pokorny Settlement Agreement

Amway Settles Multiple Disputes

The weather is cooler, the leaves are falling, the holidays are drawing near….peace is in the air. In the span of a few days, Amway has made two HUGE announcements about the settlements of pending lawsuits between itself and multiple parties. First, they announced the settlement between themselves and MonaVie, which was anticipated to be an epic battle between the MLM giants. Click Amway v. MonaVie to read the original complaint. In the lawsuit, Amway alleged MonaVie was using unfair marketing practices while raiding Amway’s downline.

In the same announcement, Amway announced a settlement with Orrin Woodward and TEAM. The Amway / Woodward / Team litigation has been insanely intense since August of 2007. I was there for the start and I’m certain there’s much relief on both sides as a result of the settlement. The Amway / Woodward litigation produced a cutting edge court opinion about the limits of First Amendment protection for anonymous bloggers that disparage a company. Click here for the opinion.

Second, Amway announced today of its settlement of the Pokorny class action lawsuit. News of this settlement is not really surprising given Amway’s loss over its arbitration provision back in April of 2010. This was a very contentious case and Amway’s exposure was substantial. Due to the size of this settlement, I anticipate more lawsuits like Pokorny will be filed against other MLMs that rely heavily on tool companies. It’s ok to work with tool companies; however, when the tail starts wagging the dog, it can lead to HUGE, Pokorny-like problems.

The past few years have been busy for Amway as they’ve made some efforts to clean up their house. They’ve lowered prices, implemented quality control standards for the tool companies, invested more in IBO training and….settled their lawsuits.

The real losers as a result of these settlements…..THE LAWYERS.

What do you think about this news of the settlements?

Amway loses appeal in class action case

Be careful….last time I posted a pleading it was a hoax ;) It appears that Amway is going to be required to litigate the California class action case in Federal District Court. This is significant because it means the facts obtained during discovery will be made publicly available.

This is a big case with large consequences for the entire network marketing industry. The case hinges on the definition of “retail sales” and relies on the premise that a company is required to rack up customer sales from nonparticipants. As you already know, I’m a big proponent in having hard rules that require customer sales. It’s what’s best for the industry.

Additionally, this case is about tool companies and their place in the network marketing industry. There’s a host of companies in the industry that allow its distributors to produce and sell tools to their distributors. With some of these companies, the participants receive the opportunity to share in the tool profits once certain performance milestones are achieved. This largely leads to a sales force where the lower level participants expend tremendous effort to move tools with the hopes of someday profiting from their efforts. Since the majority of the participants never reach the milestones (we have high attrition in this industry), it essentially amounts to a large, unpaid sales force. This issue will be litigated if the case proceeds.

The attorneys for the plaintiffs have a tough job ahead of them. Amway is literally undefeated in these types of cases and has escaped numerous near death experiences. The plaintiffs’ attorneys will need to certify the class, which I’m not sure has been done yet. Since they’ve sued multiple tool companies, Amway can argue that a lot of the class members had different experiences with Amway via their different associations amongst the tool companies. This might lend itself as a good argument against class certification.

If Amway litigates this case and loses, there would be an immediate impact on the entire industry. They’ll need to assume that the law in California requires external sales and demonstrate that those sales are present. My prediction: this case never sees a courtroom and the plaintiffs’ lawyers just won the lottery. But does it end here? If Amway settles, I can almost guarantee that some of the other larger network marketing companies will be sued with similar allegations. The Pokorny attorneys might target other companies. Who knows.

The crux of the Pokorny lawsuit can be gleaned from the two paragraphs below (taken from the Opinion below):

“Further, once a new recruit becomes an IBO, the recruit is instructed to purchase Quixtar products only for the new recruit’s personal use and to focus on recruiting and registering new IBOs, rather than to market and resell products to retail customers.

Second, Plaintiffs contend that Quixtar and its senior IBOs fraudulently induce junior IBOs to purchase BSM by telling them the BSM are necessary to the success of an IBO business and will help them realize tremendous wealth. But the main purpose of the BSM is actually to teach junior IBOs how to recruit and register new IBOs, not to assist IBOs in conducting their own successful Quixtar business. Although this business model leads to great profits for Quixtar and its most senior IBOs, Plaintiffs allege it results in significant losses to junior IBOs”

Stay tuned on this one. It’s heating up.

Pokorny et al vs. Amway, re. arbitration