Lawsuit Anniversary: August 9, 2007

    Kevin Thompson is an MLM attorney, proud husband, father of four and a founding member of Thompson Burton PLLC. Named as one of the top 25 most influential people in direct sales, Kevin Thompson has extensive experience to help entrepreneurs launch their businesses on secure legal footing. Recently featured on Bloomberg TV and several national publications, Thompson is a thought-leader in the industry.

    If you received the post via email, there was an error. The letter referenced below was sent in February of 2006, not 2016. I blame the error on a lack of coffee.

    August 9, 2007: a day that will live in network marketing infamy. Today marks the 10 year anniversary of the beginnings of a wild ride, the day when Orrin Woodward’s organization filed a lawsuit against Amway alleging them to be a pyramid scheme.

    The purpose of this article is not to besmirch Amway or poke at an old scab. But the truth is…this stuff actually happened. As the saying goes, “There is nothing new in the world except the history you do not know.” So here’s a history lesson.

    People always ask me “How did you get into this profession?” The story always starts with me accepting a job as Chief Counsel in 2006 at Signature Manager Team a/k/a Team. Team was a third-party tool company owned primarily by Orrin Woodward and Chris Brady. “Tool companies” are basically third-party companies that sell training and support materials for Quixtar / Amway distributors. Team was one of the larger tool companies in the Amway organization, and it partnered with several crossline leaders throughout Amway, i.e. Randy Haugen, Billy Florence, Don Held, etc.

    The Letter

    In February of 2006, Orrin Woodward sent a letter to Amway’s acting president, Doug DeVos. In the letter, he all but begged Amway to provide products that were, in a nutshell, cheaper. Orrin highlighted the importance of the “First Circle” people (brand new people) earning a few hundred dollars in the first month via retail sales. Orrin’s argument: Amway’s value proposition led to reduced profitability for newer people, which led to higher attrition, which led to a heightened need to focus on recruitment. The ingredients to the cake were off and Orrin was trying to politically steer Amway into a different direction.

    Amway’s Challenges

    Amway’s challenges at the time were significant. First, the field’s frustration was starting to bubble up to Amway’s management, creating a contentious environment. Second, the government in the UK filed an action against Amway in 2006, alleging them to be a pyramid scheme and seeking to shut them down permanently. Third, Amway was sued domestically in early 2007 in a very serious class action case filed by a very serious firm, Boies Schiller. Amway would go on to pay a considerable sum to settle the class action claims ($50m+ in 2009).

    Amway was in a tough spot. In my opinion, Amway’s view was that the majority of the blame rested with the field. They surmised that if they could better control the message, they could minimize their exposure in multiple markets. Orrin’s argument was that the problem ran deeper than the message. Armed with a poor business model, the field was forced to focus on a recruitment-heavy message and augment the Amway compensation via profit from tool sales.

    Maybe both sides were right. Maybe both sides were wrong. In Amway’s defense, they did respond to some of the field’s frustration and were trying to develop some cheaper product lines. Perhaps it was too little too late? 10 years later, it’s not important to pin-point where it all disintegrated. In my opinion, the tension was accelerated with the advent of the internet and competitive shopping alternatives. When the field began to struggle to grow networks and move product, after being acclimated to a certain lifestyle, a battle was inevitable.

    August 9, 2007

    On August 9, a meeting was conducted between Woodward’s organization and Amway management. Woodward recounts a few of the details of the meeting on his site here. The tensions leading up to that meeting were thick, providing a backdrop where both sides were prepared but nonetheless fearful of conflict. I was present at the meeting, along with a few of Orrin’s partners and lieutenants.

    According to Amway, they fired Orrin. According to Orrin, he resigned. Since both parties have settled the dispute, I’m not going to re-open the wound. Bottom line: We submitted a proposal to Amway, Amway chewed on it for a few hours, and Amway came back with termination papers.

    Litigation

    Woodward had the outlook of “peace through strength.” He was prepared for litigation, but he wanted to negotiate a peaceful exit. When Amway issued the termination papers, it became clear that a peaceful exit was impossible.

    Prior to the meeting, Woodward retained DJ Poyfair, currently partner at Reese, Poyfair and Richards. With counsel, the class action lawsuit was prepared as a last resort. Why the need for a class action case? If Woodward had simply submitted himself to Amway’s arbitration process, and if he was ultimately successfully, it would have provided zero protection for his downline. Amway could have picked them off, one by one. There needed to be a determination that was applicable for the entire organization, or so the theory went.

    The lawsuit alleged Amway to be operating as an illegal pyramid scheme. The lawsuit can be viewed here. As an illegal enterprise, Amway’s contract would have been declared completely unenforceable. It was an aggressive strategy. The lawsuit was juicy, referencing confidential materials only possessed by top leaders within Amway. And the lawsuit sought ZERO compensation — the relief sought was that the contract simply be invalidated, which would have allowed Woodward’s people to exit without having to look over their shoulder. Obviously, Amway vigorously denied the allegations and fought to defend themselves. There was never a determination on the merits of those allegations, and Amway argued for their innocence throughout the process.

    We compiled over 1,000 affidavits from distributors throughout Amway, all stating that the retail sales rule was never enforced. In the end, the class action effort died a quick death as the case was kicked out of Federal Court and sent to arbitration. Amway of course fired back and sued lots of people. The internet, in the early stages of social media, was lit on fire with news provided by both sides.

    Woodward, in an effort to give his group a home and hunker down during litigation, decided to work with MonaVie instead of starting his own company. He would eventually start his own company a couple of years later.

    Two Sides

    I’m only able to recount the facts as I observed them (and only the facts that are not privileged). If I appear biased, it’s because I am. Playing the devil’s advocate, Amway had a powerful legal team and strong arguments in their favor. They vigorously argued about product integrity, product quality, the scope of their retail sales, problems with tool companies, etc. It seems simple to assume that Amway should have simply allowed Woodward to walk out the front door. But Woodward was not the average horse in the stable. He commanded a large piece of Amway’s North American business. Amway viewed it as a fight for their very survival. In Amway’s experience, organizations generally dissolved when they sued a leader. It was one of the areas where they miscalculated.

    It was a street fight. And in a street fight, it’s never pretty. We landed punches, Amway landed punches, and both sides claimed to be fighting for “the greater good.” There has never been larger litigation in the industry between company and distributors than the Woodward / Amway dispute.

    Lessons Learned, 10 Years Later

    The lessons learned are too numerous to be published in a post. This post is like a rock skipping on water, merely skimming the surface. There’s a lot of depth with each of the points mentioned above (and the countless points not mentioned). Woodward appears to be doing better than ever, operating his own network marketing company Life Leadership. Amway is fine, too.

    The main point, for both owners and distributors to understand, is that a network marketing business is a community driven entity. While owners are certainly responsible for the network marketing enterprise, it’s all only made possible by the long-suffering efforts of a passionate, volunteer community. When owners begin to view themselves as superior to the field, instead of as equal partners, the engine begins to corrode. The same principle applies to outside professionals, i.e., lawyers. Without players, there is no team. The same principle applies to people in the field. They’re no better than the owners. It happens frequently where people in the field “know best.” In reality, they might not have the slightest idea of the complexity of running a global business. This is why it’s important for field leaders to exercise massive amounts of patience with companies, instead of jumping ship at the first sign of distress.

    The owners and field are in a symbiotic relationship, neither can survive without the other.

    With the Woodward / Amway dispute, it brewed for a long time before erupting. But not all disputes are as large or as complicated. In my opinion, most can and should be avoided.

    It was an incredible experience for me, navigating the treacherous waters as an in-house attorney, mastering all of the finer legal points facing the industry from both the company and distributor sides. I would use that experience as a foundation to start my own practice in 2009. We now have 20 lawyers at Thompson Burton (and growing), and it all started, for the most part, on August 9, 2007.

    To the people at Team, Happy Independence Day.

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      Kevin Thompson is an MLM attorney, proud husband, father of four and a founding member of Thompson Burton PLLC. Named as one of the top 25 most influential people in direct sales, Kevin Thompson has extensive experience to help entrepreneurs launch their businesses on secure legal footing. Recently featured on Bloomberg TV and several national publications, Thompson is a thought-leader in the industry.

      • Chris Brady

        Kevin:

        Wow! 10 years!

        Great job succinctly summarizing a super complex event. I believe you’ve captured it correctly.

        We certainly have all learned a lot in the process, and on many levels, are better for it. I am delighted to see how you’ve built on your experience and are using it to help others coming along the entrepreneurial journey. May you steer them clear of these types of tumultuous learning experiences that, as you say, can and should often be avoided (though not always).

        All the best, and blessings to you and yours!

        Chris Brady

        • Kevin Thompson

          Thanks! A lot has happened in 10 years for both of us. You have a few more gray hairs, a son that’s married and a semi-pro superstar soccer stud!

      • David Steadson

        “Maybe both sides were right. Maybe both sides were wrong.”

        I don’t think there’s any “maybe” about it! Both sides I think had a certain arrogance born of success that did not engender a polite negotiation. Amway I think definitely came out of it a much better and stronger company, eventually taking far more responsibility for field training and behavior than they had for many decades.

        I wonder lately though if they’ve started to forget some of the lessons of “first circle” again, not to mention the importance of agility in the modern market place.

      • https://uploads.disquscdn.com/images/217e498cac03809da9deec451ccba01752d4bb8c50476cd412b15072f658296e.jpg Great story. I believe in my heart “Kevin Thompson” is a good guy. N*

        [AEq]

      • Richard Bliss Brooke

        I wonder how Orrin’s choice of moving directly to Monavie and then his own company Life’s business model map on to his complaints about Amway. Did Monavie have a powerful first circle opportunity? And what about Life? How does it’s business model compare? And what has Amway done differently this last ten years? Do they have customers yet? Direct to the company customers so they can be tracked?
        Until Network Marketing companies offer products that actually are priced and valued such that customers will buy them over and over and more customers are attracted than sales reps….we still have in essence a pyramid scheme. And until sales leaders quit preferring pyramid schemes our profession will be under siege.