Retailing rules

Team of Destiny â Explains Two Rules

A site visitor sent me this communication to Team of Destiny ^® IBOs from Orrin Woodward. Below is Orrin's communication and my rebuttal based upon FTC and other pyramiding precedent setting cases. [What is TOD?]

Disclaimer: As with most any MLM opportunity, Team of Destiny ^® has the default status of "legal and in good standing", which is valid until there is an action by an attorney general or a court. To my knowledge Team of Destiny ^® has never been ruled an illegal business by an attorney general or a court nor has it been investigated in depth by any Attorney General.

"While our office is able to tell you if we have taken any legal action, we will
not comment on any specific investigation of multi-level marketing companies. Additionally, we do not provide any advance form of approval for any company
and if you want legal advice on whether a multi-level marketing opportunity
is actually an illegal pyramid, you need to seek private legal counsel."
Michigan Attorney General's web site

Two Rules

There are two Quixtar® rules that seem to be causing some confusion and I felt an explanation of the two rules might help. The two rules are:

1. 50 points Member/Client

2. Minimum 70% buying

The first rule (Rule 1) ensures that the Team of Destiny® (TOD) is creating Member/Client volume on a monthly basis. This is a very important thing to do for many reasons. First, it helps us fit the Quixtar rules for a legal network marketing company by creating Members and Clients and not just creating a wholesale buying club. While there is nothing wrong with buying your own products - and you should if you are going to talk about them - we believe a healthy profitable business should have Members and Clients as well. Any time Laurie and I get a "no" it is so easy to then ask if the prospect would like to be a customer with access to our many products. With offerings like MCI, Nextel phones, Artistry®, Nutrilite®, and XS(tm) Energy Drinks they have made it easy. TOD teaches to do 150 points per month with 50 of those being Member/Client, leaving 100 points for personal consumption. Secondly, a business with a Member/Client base is more profitable for our IBO's and helps the whole team achieve their goals more quickly!

The second rule (Rule 2) protects IBOs from stocking their basement full of product to hit new pin levels. The Seventy Percent Rule ensures that no more than 30% of products bought by IBOs are retained for future buyers. The leaders of the TOD are very supportive of this rule because it protects a new IBO from spending money on products he cannot move or use. An example of this rule in action would be if a person was at 4000 points and wanted to go 7500 points. If he stretched the 3500 points and didn't have any IBOs, Members, or Clients to whom he could move the merchandise that month, he would be in violation of the Seventy Percent Rule. (4000 / 7500) = 53% which is less than 70%.

The Seventy Percent Rule does not mean that 70% of products must be moved to Members and/or Clients otherwise Rule 1 and Rule 2 would contradict. For example, if someone qualified with 50 Member/Client points they could buy 100 points of products for personal use and get a bonus. They would not be in violation of the Seventy Percent Rule because 100% of the products were bought for personal or Member/Client use and none for stock.

I hope this helps clarify these two rules of our business. I am proud to be associated with the winners on the TOD!!

God Bless,

Orrin A. Woodward

Rebuttal:

Orrin's comments are no doubt based upon Quixtar's communication to him confirming his accurate interpretation of the Quixtar rules. See letter from Quixtar to Orrin. We can assume that Team of Destiny ^® is abiding by the rules laid out by Quixtar, but is Quixtar abiding by the FTC and court precedent cases? The main point of the debate is actually Quixtar's interpretation of the rules in regard to the FTC rules and precedent cases. Let's look at the history of these rules with the regulating authorities.

Here is the FTC's description of the retail sales rules that staved off a finding that Amway was an illegal pyramid scheme in 1979. Note that the basis for the FTC's decision is that these rules were meaningfully enforced to encourage retail sales.

72. Amway, the Direct Distributor or the sponsoring distributor will buy back any unused marketable products from a distributor whose inventory is not moving or who wishes to leave the business. The buyback rule has been in existence since Amway started. Amway enforces the buyback rule.

73. To ensure that distributors do not attempt to secure the performance bonus solely on the basis of purchases, Amway requires that, to receive a performance bonus, distributors must resell at least 70% of the products they have purchased each month. The 70% rule has been in existence since the beginning of Amway. Amway enforces the 70% rule.

74. Amway's 'ten customer' rule provides that distributors may not receive a performance bonus unless they prove a sale to each of ten different retail customers during each month. The Direct Distributors have the primary responsibility for enforcing the ten customer rule in their own group. The ten customer rule was started by Amway about 1970. Prior to that, there was a 25 sales rule which required the distributor to make 25 retail sales a month without regard to the number of customers. The ten customer rule is enforced by Amway and the Direct Distributors.

75. The buyback rule, the 70% rule, and the ten customer rule encourage retail sales to consumers.

Distinguishing the Koscot pyramiding case, which was tried before Amway, the ALJ explained:

"But, by several rules, Amway requires that commissions are not paid unless the products are sold to consumers. Distributors must each sell to ten retail customers every month; the distributors must certify that 70% of the products purchased by them during the month have been resold; and inventory loading is further deterred by a rule requiring distributors to buy back the inventory of any of their sponsored distributors leaving the business."

* * *

"The Amway system is based on retail sales to consumers. (Findings 72-75, 144) Respondents have avoided the abuses of pyramid schemes by (1) not having a "headhunting" fee; (2) making product sales a precondition to receiving the performance bonus; (3) buying back excessive inventory; and (4) requiring that products be sold to consumers."

Here are some thoughts:

(1) Orrin's as well as Quixtar's explanations of the seventy percent rule is contrary to the plain language of ALJ's comments. It specifically says that seventy percent of the products must be sold. Nowhere does it suggest that this can be satisfied by your own purchases or those of your downline. As shown above, the FTC approved these rules with the express understanding that the purpose of the seventy percent rule was to prevent the scheme's participants from "securing performance bonuses solely on the basis of purchases." The Omnitrition and Equinox courts have gone on to explain that this rule does not allow purchases by your downline to count as "retail sales." Seventy percent of the products must make their way into the hands of retail customers. Period.

(2) The FTC rule is that the focus of the income opportunity must be "primarily" on the sale of the products to retail customers. "Primarily" has been interpreted by courts to mean "most" of the products ultimately have to be sold to non-IBOs for the scheme to be legal (i.e., more than 50%). Thus, the real rule that Quixtar IBOs must comply with in the U.S. is this one, from FTC v. Five Star Auto:

'Prohibited marketing scheme' means a pyramid sales scheme, Ponzi scheme, chain marketing scheme, or other marketing plan or program in which a person participates under a condition that he or she make a payment, directly or indirectly, to receive the right, license or opportunity to derive income as a participant primarily from: (1) the recruitment of additional recruits by the participant, program promoter or others; or (2) non-retail sales made to or by such recruits.

'Retail Sales' means sales of products, services, or Business Ventures by Defendants, their successors, assigns, agents, servants, employees, and those persons in active concert or participation with them to third-party end users. Retail Sales do not include sales made by participants in a prohibited marketing scheme or multi-level marketing program to other participants or recruits in that scheme or program or to such a participants' own accounts.

Take notice here. From Five Star Auto, the FTC opinion clearly does not accept Quixtar's or Orrin Woodward's positions. An IBO cannot satisfy the FTC retail sales rules by counting sales to his downline IBOs or for his own consumption as "retail sales."

(3) BSMs are also part of this analysis. BSMs are also products in the Team of Destiny ^® MLM business. Thus, seventy percent of the products and BSMs must be resold.

(4) 150 p.v. in personal consumption with only 50 p.v. in retail sales with a whole slew of BSMs might satisfy Quixtar's requirements but is well short of the legal requirements. In fact, they appear to be promoting 33% and something less than 25% retail sales when factoring in BSMs.

(5) Here is an interesting technicality whereby the Quixtar rules have not kept up with the changes in the business. In "standard fulfillment" lines of sponsorship each IBO picks up their products from their sponsor and pay their sponsor for their products. In this situation it was easy to see that much of an IBOs purchases were resold downline at wholesale, as is Quixtar's interpretation of the rule. However with direct fulfillment lines of sponsorship, like TOD, there are no longer wholesale sales between IBOs. A literal interpretation of the rule from the 2002 Quixtar compendium, would imply that all IBOs without 70% cash retail sales would now be in violation of the 70% rule!

4.18. Seventy Percent Rule: An IBO must sell at least 70% of the total amount of products purchased during a given month in order to receive the Performance Bonus or recognition due on all the products purchased; if the IBO fails to sell at least 70%, then such IBO may be paid that percentage of Performance Bonus measured by the amount of products actually sold, rather than the amount of products purchased, and recognized accordingly.

It would be quite easy to show that the majority of Team of Destiny ^® IBOs would fail for a literal interpretation of the 70% rule since the "products purchased" are delivered to their home in most cases just for their personal consumption. It would be interesting to know what mechanism or procedure Quixtar and Team of Destiny ^® use to actually verify compliance with the 70% rule. I would speculate the rule can only be monitored in the worst offending cases. There will still be no doubt people "buying" the lower pins in the Quixtar business via inventory loading.

(6) Also interesting to note is Team of Destiny's ^® contractual buy-back policy published in the "Team of Destiny ^® powered by Quixtar BSMAA", which specifically excludes mandatory repurchase of BSM's not purchase for personal use. (see TOD BSMAA ) the wording is quite different from Team of Destiny ^® lawyer's assertion that BSM's have an unconditional money back guarantee.

" 8. Refund policies -- Business Support Materials are not covered under Quixtar's Satisfaction Guarantee or its Buy-Back Rule. However, the IBO Rules of Conduct and this Agreement require an IBO selling Business Support Materials to, upon request, buy back any Business Support Materials purchased for the buyer's personal use, on commercially reasonable terms, and for a period of 180 days from the date of purchase. Items shall be returned to the selling IBO, or other designated party, with proof of purchase. Business Support Materials purchased for stock or inventory, or for any reason other than the buyer's personal use, are not subject to this policy but shall be governed by whatever refund policy is agreed to with the selling IBO. For seminars, rallies, and other meetings, the selling IBO shall buy back any tickets purchased for the buyer's personal use for a period of 30 days following the event on a satisfaction guaranteed basis. Such buy-back applies only to that portion of the ticket cost related to admission to the meeting or function, and shall not include the cost of travel, meals, or hotel accommodations."

No doubt Team of Destiny ^® is complying with Quixtar's interpretation of the 70% rule and Quixtar's model of the BSM buy back rule.

The real issue is whether Quixtar's interpretation of the 70% rule is consistent with FTC Five Star Auto case and the Omnitrition precedents.

Quixtar via the Direct Selling Association are lobbying for the bill HR1220, which would legalize product based pyramid schemes, and nullify the precedents of the 70% rule. It is apparent since they are trying to change the law that their interpretation of the 70% rule is dubious at best.

By the way, Chris Brady has donated to the campaign of a North Carolina Representative who is co-sponsoring HR1220.

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