March, 2000

Fourteen Melaleuca distributors have sued their upline and the company on charges that have become all too familiar to followers of MLM lawsuits. The crux of this case rests on claims that the company and its representatives knowingly, fraudulently and persistently misrepresented their distributor retention rate.

Distributor retention is vital to the success of any MLM endeavor, because you have to be able to sponsor new people faster than the old ones quit. In the landmark FTC decision of 1979, Amway testified to a 50% retention rate, which was excellent for the direct sales industry. This means that, in any given year, 50% of the distributor force quits. Anyone wanting to succeed at sponsoring would have to sponsor two for every one they want to keep.

Melaleuca, on the other hand, represented its retention rate to be a whopping 94.5 percent, according to the plaintiffs' petition:

"For Melaleuca to have a retention rate of 94.5 percent tells the prospective distributor that the products must be very good for so many people to continue to use them, and that the ability to build and maintain a business with such a retention rate is guaranteed. This was, indeed, the message and representation by Defendants."

The petition further explains:

"Plaintiffs were able to build large and successful groups. However, after a time, Plaintiffs each saw their numbers diminishing. Distributor after distributor was being dropped from the active lists. Rather than a positive, upward trend which would be expected as a consequence of the greatest retention rate in the history of multi-level marketing, Plaintiffs saw their numbers either decline or become stagnant, despite new distributors being added all of the time. When asked, Defendants would blame the numbers problem on their own lack of effort and initiative, saying that harder work would bring Plaintiffs back into the same realm as the rest of the company. . ."

This led to the plaintiffs experiencing

"a gradual diminishment of their monthly income. Each of these Plaintiffs could not continue to participate in the business which required so much attention and so little in return. As a consequence, these Plaintiffs have disrupted careers and dashed hopes, dreams and expectations."

James Holton, along with his wife Kim, had been neglecting other businesses in order to focus on the Melaleuca distributorship. They had sponsored a great many family and friends, relying on the company's information. Then the shoe dropped. According to Holton, his upline, the Hagans, admitted at a large sponsoring meeting that

"At this meeting, the Hagens confessed, for the first time, that the 94.5 percent retention rate was not at all what had been represented. It was not 94.5 percent over time, it was not 94.5 percent per year, the Hagens said. Instead, it was more along the lines of 94.5 percent per month."

So (according to the complaint), instead of an average attrition rate of only 5.5% per year, as they had been led to believe, the Holtons discovered that the annual dropout rate was really 66% per year -- an enormous difference. Kim Holton, who had sponsored people she cared about, was thrown into a serious depression and eventually committed suicide, leaving her husband and son.

The petition outlines other distributor plaintiffs complaints of fraud and deceptiveness on Melaleuca's part. Distributors' businesses were terminated arbitrarily, and without just cause. Compensation plans were changed. Promises were never delivered. The plaintiffs, who all had invested significant time and effort and had achieved some measure of success, were left with nothing to show for their effort, while the company had profited considerably.

Sadly, this case has been tried, and a jury found in favor of the defendants.

The case was heard in District Court, in Harris County, TX. Texas has recently seen some significant changes in the tort, or personal injury, laws. Certainly there have been abuses in recent years. But if this courtroom climate is any indication, then it would seem that no consumer will be able to successfully sue any business. That's a scary thought. And who is taking credit for this tort reform? None other than Presidential hopeful George W. Bush.

Anyway, enough of politics. Read the entire text of the pleadings here.

You are Survivor #

to read about the Melaleuca Lawsuit