Hart v Gooch et al, (cont'd)

The Amway Business and the Essential "Line of Sponsorship."

16. Amway Corporation ("Amway") is a "multi-level marketing" business, selling consumer goods and products worldwide through a vast network of independent distributorships, many of them based in Florida. Alticor is the parent company of Amway, as well as Quixtar, Alticor's internet-based, multi-level marketing business implemented more recently as an alternative to Amway. Quixtar has become the company of choice for many distributors, instead of Amway, due to the adverse publicity and "negatives" being experienced by Amway. Regardless, for whatever reason, there is a movement of distributors away from Amway to Quixtar, and on knowledge and belief, the Quixtar business is essentially the same as Amway's, only the name is different. Alticor has simply "repackaged" Amway's business concepts in the entity known as Quixtar. Today, Amway is often referred to as Quixtar and, for the purposes of this cause, the terms are interchangeable. Moreover, a distributor's respective position within the Amway network of distributors is essentially the same as within Quixtar's network. In other words, the networks are identical within those "legs" opting for Quixtar after having been Amway.
    
    
17. The Amway/Quixtar marketing program, in connection with this multi-level marketing business, is one where any purchase or sale of Amway/Quixtar products by a distributorship financially benefits not only the Amway distributorship itself and Amway, but also those Amway/Quixtar distributorships that qualify and occupy levels within the Amway/ Quixtar distributorship network between Amway/Quixtar and the selling distributorship. Those Amway/ Quixtar distributorships that occupy positions in the Amway/Quixtar network below a given distributorship in each branch of the network are referred to as that distributorship's "downline." Conversely, those distributorships that occupy positions in the network above a given distributorship in each branch are called that distributorship's "upline." These respective positions are determined by the essential and important Amway/Quixtar concept of "line of sponsorship." As such, a distributorship's initial place in the Amway/Quixtar network is immediately below the distributorship who sponsors that distributorship into the network, subject to Amway's/Quixtar's approval, and immediately above those distributorships that the given distributorship sponsors as new Amway/Quixtar distributorships. New Amway/Quixtar distributors are instructed that respect and observance of the line of sponsorship is mandatory, that they should "edify" and "support" their upline distributors, and that their upline is there to teach and support them. In order to earn significant profits as an Amway/Quixtar distributorship, one must develop a sizable downline network by recruiting and sponsoring other distributors into the Amway/Quixtar business. By so doing, the upline distributorships stand to benefit. Accordingly, recognition and respect for the line of sponsorship in a multi-level marketing business like Amway/Quixtar is crucial to its success, if not survival.
    
    
18. Defendants Richard Setzer, Hal Gooch and Bill Childers are principals of Amway and/or Quixtar distributorships located near the apex of the Amway pyramid in what may be referred to as the "Yager Group," and are part of the upline for the Harts (herein the "Upline Defendants"). Defendants Steve Woods, Tim Foley and Don Brindley are principals of Amway distributorships and related tool businesses downline to the Harts in the Yager/Setzer/Gooch/ Childers line of sponsorship (herein the "Downline Defendants").
    
    
19. Amway/Quixtar considers its distributorships as independent contractors, an aspect that is continuously stressed and touted as an advantage and incentive for every distributorship. Accordingly, each distributorship constitutes an "Independent Business" or "IB," as designated by Amway/Quixtar. If the principal of an Amway distributorship is successful in developing their independent business, that principal (distributorship) can reach various "pin levels" of achievement. The ascending "pin levels" were, until September 1999, Direct (four Direct levels: Silver, Gold, Profit Sharing and Founders), Ruby, Pearl, Emerald, Diamond, Executive Diamond, Double Diamond, Triple Diamond, Crown and Crown Ambassador, and thereafter Platinum, Ruby, Sapphire, Emerald, Diamond, Executive Diamond, Double Diamond, Triple Diamond, Crown and Crown Ambassador. Each pin level entitles the principal and/or distributor to corresponding benefits and privileges, which increase at each ascending level.
    
    
20. Prior to 1995, once an Amway distributor obtained the "Gold Direct" level (the lowest pin level), the distributor could begin purchasing directly from Amway instead of through the distributor's upline. Hence, "Direct" referred to a distributor's right or advantage to purchase directly. In 1995, Amway initiated a new program called "Direct Fulfillment." Under this program, if a distributor's next upline "Direct" (now referred to as Platinum) would approve by "signing off," the distributor, however new, could order direct from Amway. The objective of "Direct Fulfillment" was to speed up the distribution process. A pin level Amway/Quixtar distributor does not share in the profits generated by the sale of Amway/Quixtar products from other "pin level" distributors in his/her downline, but does obtain monetary and other bonuses directly from Amway/Quixtar because of the increased volume generated by these "pin level" distributors in that distributorship's downline network.
    
    

    The Hart Organization's Line of Sponsorship:

21. Brig and Lita Hart and/or Hart Enterprises directly and personally sponsored approximately 60 Amway distributors, and through tireless efforts over many years, built a massive downline organization numbering approximately 200,000 Amway distributors (the Hart Network). Included in the Hart Network are/were approximately 80 other Diamond (or higher) distributors, 240 Emerald distributors, and thousands of Direct/Platinum distributors.
    
    
22. Hart Enterprises' line of sponsorship within the Yager Group included, in part, the following principals and, on knowledge and belief, the following respective highest pin levels for each:

    Click Here to see Line Of Sponsorship Table

    Development of the Amway-Related Tool and Function Business Known as the Business Support Materials ("BSMs") Industry.

23. The Hart Network of downline distributors served as a lucrative market for the sale of Amway-related instructional and motivational materials (audio and video tapes, books, electronic literature, etc.), known as "Business Support Materials" or "BSMs," or more commonly referred to as simply "tools"; and for instructional and motivational seminars, rallies, conventions and functions (hereinafter collectively "functions"). The tools and functions businesses together comprise what may be referred to as the BSMs industry.
    
    
24. For over 40 years, Amway has attracted prospective distributors into the Amway business with the "Amway Dream" of owning and operating an independent business, buying and selling Amway products, and thereafter becoming financially independent. As part of the "Amway Dream," Amway requires distributors to "train" and "motivate" the downline distributors in their line of sponsorship. Powerful distributors at the top of the Amway pyramid long ago developed the BSMs industry to accommodate Amway's requirement for training and motivation. Amway, by its acquiescence to, if not acceptance of, the BSMs industry, has sanctioned the use of BSMs within and by the Amway distributorship network. Within this framework, the Harts were extremely successful in building their own distributor network and selling tools and promoting functions within that network through U-Can-II.
    
    
25. Mirroring the Amway business, the attainment of a certain success level within the business entitled the distributor to participate in the profits of the tool and function business. Specifically, once a distributor attained the Gold Direct pin level in Amway, the distributor's next upline Diamond would introduce him/her to the tool and function business and benefits would thereafter be received by the new Direct distributor. Because the tool and function business was not part of Amway, it was customary for the distributor to operate his/her tool and function business through one or more different corporations, separate from the operating entity for the distributor's Amway business. It was indeed rare, if ever, that a distributor would run his/her tool and/or function business through his/her Amway IB. In fact, new qualifying distributors were advised by their upline not to do so. As such, the Amway business and the tool and function business operated in tandem, but separately.
    
    
26. Amway does not view the tool and function business to be a part of the Amway business.
    

    The Promulgation of Rules Governing the BSMs Industry.

27. As might be expected, these powerful distributors at the top of Amway networks, having developed the BSMs industry, sought to control it. First, they secured control over the manufacture, sale and dissemination of the tools. Although Amway purportedly requires "content approval" of the tools, these items are/were non-Amway products. Second, they secured control of sponsoring and promoting major functions at which these very successful, high-profile distributors provided their own testimonials of success within Amway, all of which were calculated to motivate the distributors attending, fostering a sense of admiration and celebrity status for these powerful few. A "major function," as herein referenced, refers to the large, high-profile rallies or conventions normally held in large cities sponsored by a Diamond distributor. Pursuant to the course of dealing and business practices between the parties for years, only Diamonds were allowed to sponsor major functions. These major functions, typically attended by thousands of Amway distributors, became bigger and more elaborate the higher the Diamond distributor was within the Amway pyramid or the larger the Diamond's downline network. It was/is customary for the larger major functions to include well-known celebrities and/or entertainers. The cost for an Amway distributor to attend these functions amounted to hundreds of dollars, if not more. Thus, these major functions generated huge profits for the Diamond sponsor and served to enhance the Diamond's "success profile" within Amway. Typically, each Diamond distributor would sponsor three major functions a year, and then a fourth where that Diamond would tie into a major function with his/her upline Diamonds. Further, video and audiotapes used as "tools" were made at these major functions, and reproduced and sold to hype the functions, as well as the Amway business. Third, these powerful distributors promulgated their own rules to govern this BSM industry since it involved non-Amway products. These rules (hereinafter at times referred to simply as the "BSMs rules"), were explained and then implemented in a course of dealing over years.
    
    
28. These BSMs rules and course of dealing provided that only those distributors attaining an Amway pin level of Gold Direct or above were allowed to participate and primarily benefit from their downline network respecting the tool business, and only Emeralds or above received profits from functions. Thus, once an Amway distributor became a Direct, his/her entitlement to participate in the lucrative BSMs business reached fruition. Moreover, as the pin level thereafter increased, so did the prospective benefits from this business. Thus, the rules and course of dealing, along with a distributor's development of his/her downline, gave rise to business expectancies.
    
    
29. In respect to the "tools," these high-placed powerful distributors promulgated rules and implemented a course of dealing over more than 30 years which required distributor/ participants to purchase tools from their immediate upline distributor of the same, or higher, Amway pin level than themselves. Thus, for example, an Emerald distributor would buy his/her tools from the next upline Emerald or Diamond distributor, passing those lower-level distributors in between; a Diamond distributor would buy from the next upline Diamond, etc. The distributor acquiring the tools would then sell them to his/her immediate downline distributors who, in turn, would sell them to his/her downline. These same powerful distributors would also set the prices for the tools, such that a Diamond distributor would pay less for the tools than an Emerald, and so forth on down the line, such that each participant received a "break," excepting the bottom-rung distributors, who were the primary ultimate consumers for the tools. The prices for the tools were supposed to be universal or the same for each distributor pin level. If a pin level distributor in the line of sponsorship was passed over (e.g., an Emerald passed over for a lower Diamond to buy from a higher Diamond), the Emerald would be fairly compensated. In more recent years, volume has become a differentiating criteria for compensating one equal level distributor over another (i.e., one Diamond over another Diamond), for tools. However, there was supposed to be uniformity and fairness in this practice. Accordingly, the rules for the tools were intended to be reasonably consistent with those for Amway products, which require recognition of and adherence to the line of sponsorship, but with certain privileges for Direct pin level and above distributors. This course of dealing respecting the tool business, on knowledge and belief, began in the 1970s or before.
    
    
30. The rules and/or course of dealing pertaining to functions also date back to the 1970s, if not earlier. Again, only Diamond distributors were allowed to sponsor major functions. All the while, the lower-level distributors were encouraged to support and attend these events. The rules and/or course of dealing governing major functions provided that such functions consist or be limited to the Amway distributors in the sponsoring Diamond's line of sponsorship. This meant there would be no "cross-lining," a concept of paramount importance within the Amway culture. As such, strict adherence to the lines of sponsorship was recognized within these rules and the course of dealings for BSMs. Accordingly, an Amway distributor wishing to attend a major function was expected and required to attend the function sponsored by his/her immediate upline Diamond. Diamond (or above) and Emerald distributors received a "cut" from the gate at these major functions for each person attending the function from their downline network. Such distributors had an incentive, separate and apart from Amway's requirement to train and motivate, to "build the gate." A Diamond (or above) and Emerald distributor's downline network had intrinsic value to that distributor as a participant within the BSMs industry. A Diamond distributor (or above), having the right to organize and run their own major function, had the opportunity to garner significant profits from these major functions. Moreover, Diamonds (or above) received compensation from a function sponsor for appearing on stage and/or speaking. It was customary for Diamonds to speak at major functions, providing their personal testimony of achieving success within Amway.
    
    
31. The rules and long-standing course of dealing for both the tool and major function business further provided that, for instance, if an upline Diamond sold tools to the downline of another Diamond and/or had another Diamond's downline distributors attend its upline function, that Diamond would enter into a "servicing agreement" with the other Diamond to compensate that Diamond reasonably and fairly for the participation of that Diamond's downline distributors. Absent the consent of the downline Diamond and a servicing agreement, the upline Diamond would refrain from soliciting or involving the other Diamond's network. This provision for consent and servicing agreements (hereinafter the "servicing agreement rule") was intended to be consistent with Amway's practices. The intent of such was to negate an upline Diamond from abusing or failing to honor the essential line of sponsorship by "going around" or "boycotting" a downline Diamond or Emerald distributor to profit unfairly. The rules and course of dealing for the tool and function business were intended from the beginning to recognize and honor the essential line of sponsorship, just as in the Amway business. Otherwise, abuses lead to impairment and disintegration of the integrity of the network of distributors.
    
    
32. Essential to the BSMs industry rules, as in the Amway business, was the necessity for recognizing and respecting the lines of sponsorship. This meant, and the rules provided, that a distributor was not to solicit the business of another distributor unless he/she had sponsored that distributor in joining the Amway network.
    
    
33. Essential to the BSMs industry rules was making sure that Direct pin level distributors and above benefited through bonuses or other fair compensation for business transacted by that distributor's downline.
    
    
34. These rules governing the tool and function business became known and understood by participants within the Amway network by instruction from the top down, and were confirmed in a course of dealing over years. The general understanding and acceptance of this long-standing course of dealing by all participants in the BSMs industry constituted an implied-in-fact or implied-in-law contract between them.
    

    Defendants' Recognition of the BSMs Rules and Course of Dealing:

35. The Upline Defendants for years espoused, instructed and promoted the aforesaid BSMs rules to their downline, including the Harts.
    
    
36. The Downline Defendants for years espoused, instructed and provided the aforesaid BSMs rules to their downline.
    
    
37. Richard Setzer has hereto represented to Emerald and Diamond distributors that respecting the line of sponsorship is essential. Richard Setzer agreed to honor the line of sponsorship respecting the sale and distribution of BSMs.
    
    
38. Richard Setzer represented and espoused to others the servicing agreement rule.
    
39. Hal Gooch has hereto represented to Emerald and Diamond distributors that respecting the line of sponsorship is essential. Hal Gooch agreed to honor the line of sponsorship respecting the sale and distribution of BSMs.
    
    
40. Hal Gooch represented and espoused to others the servicing agreement rule.
    
    
41. Bill Childers has hereto represented to Emerald and Diamond distributors that respecting the line of sponsorship is essential. Bill Childers agreed to honor the line of sponsorship respecting the sale and distribution of BSMs.
    
    
42. Bill Childers represented and espoused to others the servicing agreement rule.
    
    
43. Tim Foley has hereto represented to Emerald and Diamond distributors that respecting the line of sponsorship is essential. Tim Foley agreed to honor the line of sponsorship respecting the sale and distribution of BSMs.
    
    
44. Tim Foley represented and espoused to others the servicing agreement rule.
    
    
45. Steve Woods has hereto represented to Emerald and Diamond distributors that respecting the line of sponsorship is essential. Steve Woods agreed to honor the line of sponsorship respecting the sale and distribution of BSMs.
    
    
46. Steve Woods represented and espoused to others the servicing agreement rule.
    

    The Promotion of the BSMs Industry.

47. The powerful distributors at the top of Amway, including but not limited to the Upline Defendants herein, also regularly represented or caused to be represented to the Harts and others that their success as Amway distributors and, in fact, the success of the entire Amway distributorship organization, was contingent upon the purchase of the tools distributed by the Upline Defendants and attendance at the major functions sponsored and/or supported by them, and that without such tools and attendance at such functions, the Harts would be unable to build and maintain successful Amway distributorships. The Upline Defendants further represented or caused to be represented to the Harts that they should purchase only those tools produced and distributed by the Defendants.
    
    
48. The BSMs industry has grown so large and powerful that it has become an industry in itself, separate and distinct, yet inextricably connected with Amway. The income a Diamond Amway distributor can potentially derive from the BSMs industry is vastly superior to that income that can be derived from the sale of Amway products alone. Consequently, high-profile BSMs distributors at the top of the Amway pyramid, including the Upline Defendants and co-conspirators, have profited immensely from this BSMs industry.
    
    
49. On information and belief, the substantial part of the income of each Upline and Downline Defendant herein comes from the BSMs business.