The nature of the claims made herein relate to tortuous conduct, fraudulent conduct, and violations of various statutes of the State of Texas. There are no federal causes of action which are specifically sought here. The claims involve citizens of the State of Texas as well as out of state Defendants and Plaintiffs. There is no diversity of citizenship present in this lawsuit.

MELALEUCA INC., (hereinafter referred to simply as Melaleuca), is a corporation selling many and various products through a system commonly known as multi-level marketing. The system presumes that a series of supposedly independent distributors establish businesses for the purpose of promoting, selling and distributing products produced by the corporation. An individual distributor succeeds best when he is not only able to sell significant amounts of product, but more importantly, acquires other distributors to be in his "downline" or group. Each distributor recruited in this scheme then establishes his own business and in turn recruits others to do the same, who in turn continue the cycle of recruiting distributors. This downline or group return profits through sales which flow upline ultimately to the corporation. The larger one's group, the larger the volume of sales capable of being accomplished, and in turn the larger the sales profits which can be claimed a little at a time by each distributor in the upline.

The success of any system of recruiting depends upon the product and company itself. It is difficult if not impossible to entice a potential distributor to commit to a new business if the product being sold is not a good one, and if the prospects for recruitment of others is not great. Melaleuca represented to your Plaintiffs that it had good, safe products which were capable of revolutionizing its industry. Fundamentally important to the representations made by Melaleuca and its agents, VanderSloot, individually, and Larry and Connie Hagen, individually, was the claimed fact that the retention rate among customers and distributors was the highest in the multi-level marketing industry. This representation was backed up with claimed statistics wherein Defendants regularly claimed that 94.5 percent of all persons who have ever signed up to become Melaleuca distributors remained so. This percentage is an extraordinary one and a huge claim. Anyone familiar with the multi-level marketing industry knows that it is one thing to get an individual to sign up and into a multi-level marketing plan, and it is surely another to get someone motivated to actively participate, order products, recruit other distributors, and stay motivated through that process. 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.

Each of your Plaintiffs succumbed to this enticement, joined Melaleuca, and heard these representations repeated directly by numerous agents and employees of Melaleuca, Defendant, FRANK VANDERSLOOT, the President and founder of Melaleuca, and Defendants, LARRY and CONNIE HAGEN, the upline to most of your Plaintiffs who received a direct benefit as a consequence of the sales generated by Plaintiffs. Plaintiffs expended vast sums of money and extraordinary amounts of time in an effort to build the Melaleuca businesses. Each of your Plaintiffs were initially successful in this enterprise. Plaintiffs found it relatively easy to recruit other distributors who were subject to the same enticement and excitement which had captured them. However, to do so took great effort, massive amounts of time and unwavering commitment. 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 where they too could experience such a dramatic retention rate. Defendants continued on, plowing more time and effort and expense into the development of their businesses. Yet, the numbers kept dwindling.

Further, many Plaintiffs were disadvantaged by the constant changes in the bonus structure and other rules relating to how one gets paid in the company. The changes, while permitted within the rules established by Melaleuca themselves, nevertheless made the ability to make this business successful more and more difficult. At the same time that compensation plans were being changed to make it more difficult for individual distributors, the fortunes of the company, Defendants, soared.

Most of your Plaintiffs finally gave up their businesses, or attempted other businesses, recognizing that the Melaleuca business would never develop as had been represented. Plaintiffs experienced 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.

Plaintiffs, JAMES HOLTEN and his minor son, (hereinafter referred to as "Holten"), have an even more tragic tale which relates to the misrepresentations by Defendants. Holten had looked at any number of multi-level marketing schemes, but was disenchanted with all of them. He recognized serious and significant flaws in these plans as shown him by friends and others trying to get him involved in their various enterprises. However, the Melaleuca concept was different. He saw the plan and heard the representation about the retention rate. He had the retention rate repeated to him many times. He believed it. As a consequence, Holten came to believe that the Melaleuca plan might indeed be all that it was cracked up to be, and thought that his ambition and efforts would cause him to succeed beyond his wildest imaginings. He would recruit distributors, they would in turn recruit distributors, and they would all prosper.

Holten's wife Kim joined him in his efforts in the Melaleuca business. All multi-level marketing enterprises attempt to make use of a team of husbands and wives working together in a business for a common goal. Melaleuca was no different. Kim Holten was at least as if not more excited than her husband James over the prospects of the Melaleuca business. Together, they worked hard to recruit everyone they knew to become Melaleuca distributors. Among other things, they wanted to make sure their friends, for whom they cared deeply, were given the opportunity to succeed and achieve through the Melaleuca program. To this end, James and Kim Holten ignored their other businesss enterprises, believing their time was best served in planting the seeds of their Melaleuca fortune.

 

This page updated 2/18/2004