Stewart v Gooch et al (cont'd)

25. The Stewart Organization's exclusive networks of downline distributors served as lucrative markets for the sale of Amway products and Amway-related 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 motivational seminars, rallies, conventions and functions (hereinafter collectively "functions"), which serve and have served as an integral part of the Amway business. The tools and functions businesses together comprise what may be referred to as the BSMs industry.

26. For over 40 years, Amway has enticed 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, if not acceptance, of the BSMs industry, has sanctioned the use of BSMs within and by the Amway distributorship network. Within this framework, Plaintiffs were successful in developing Stewart Associates' Amway distributorship, as well as promoting and selling tools and functions to its downline groups within its immediate line of sponsorship.

27. As might be expected, these powerful distributors at the top of Amway, 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 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 unwritten rules to govern this BSM industry since it involved non-Amway products. These 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 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 the functions. Thus, once an Amway distributor became "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.

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 their 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 Emerald 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 also favored and prescribed by Amway. 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.

33. Essential to the BSMs industry rules was making sure that Emerald 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 under-standing and acceptance of this long-standing course of dealing by all participants in the BSMs industry constituted an implied in fact contract between them.

35. The Upline Defendants for years espoused, instructed and promoted the aforesaid rules to their down-line, including Ken Stewart.

36. The Crossline Defendants for years espoused, instructed and provided the aforesaid rules to their downline.

37. Jimmy Dunn has hereto represented to Emerald and Diamond distributors that respecting the line of sponsorship is essential. Jimmy Dunn agreed to honor the line of sponsorship respecting the sale and distribution of BSMs.

38. Jimmy Dunn 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.

47. Parker Grabill has hereto represented to Emerald and Diamond distributors that respecting the line of sponsorship is essential. Parker Grabill agreed to honor the line of sponsorship respecting the sale and distribution of BSMs.

48. Parker Grabill represented and espoused to others the servicing agreement rule.