Scott Larsen's Rebuttal to 'The Facts About Quixtar'
Scott Larsen composed a rebuttal to a Ken McDonald letter posted on the Team Of Destiny Web site. The letter is titled "The Facts About Quixtar" and below is Scott Larsen's rebuttal reprinted with permission.
THE FACTS ABOUT QUIXTAR
About the Quixtar Plan
With Quixtar's Independent Business Ownership Plan, each IBO sets his own goals and decides how much time and effort to invest. The beauty of Quixtar's plan is that every IBO has the opportunity to reach levels equal to or greater than his sponsoring IBO. Success is as individual as each Independent Business Owner.
Quixtar's business plan follows the same established plan cited by the Michigan Attorney General as an example of a legal, legitimate tiered marketing business.
Scott's Rebuttal:
Quixtar follows the Amway plan, which is mentioned on the Michigan Attorney
General's web page as a legitimate Multi-level-Marketing plan. However
most Attorney Generals have never performed an in-depth study or analysis
of the way Quixtar is actually run, and choose to rely on the 1979 FTC
ruling stating that at the time Amway had rules which prevented it from
being an illegal pyramid. Whether those rules are adequately enforced
is the real question to be asked.
There are four key elements that make the Quixtar Plan legal and a model of integrity:
- Sales-based compensation. Compensation in the Quixtar Plan is based on sales of products and services to consumers. An IBO who sponsors/registers other IBOs earns income based on his own sales and on sales made by his downline IBOs. IBOs cannot receive income based on sales by downline IBOs without meeting specified retail selling requirements each month.
- No "headhunting fee." An IBO is never compensated
for merely sponsoring another IBO.
- No purchase requirements. There are absolutely
no minimum product purchases that an IBO must make.
- Buyback rights. If an IBO wishes to discontinue
his business, any currently marketable and unused inventory will be
bought back, upon request, by either the sponsoring IBO or Quixtar.
Scott's Rebuttal:
The Michigan Attorney General's website states that "A representative
earns commissions from retail sales he or she makes, and also from
retail sales made by other people he or she recruits." If the Michigan
Attorney General were to seriously investigate the Quixtar business,
they would find the vast majority of sales are to the participants
in the compensation scheme. The Omnitrition
and Equinox MLM's were shut down because they did not enforce
the retailing rules, requiring at least 70% sales to come from those
who did not participate in the compensation scheme. The current retailing
requirements in Quixtar's MC volume rule are not enough to satisfy
the 70% precedent. The rule is also easily bypassed with the "self
reporting" option.
In addition, the United State Federal Trade Commission does not consider purchases by IBOs and downline IBOs in a multilevel marketing business to even constitute "retail sales" as show in this definition of a "prohibited marketing scheme" taken from FTC v. Five Star Auto Club:
'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.
Products that are not sold to actual retail customers who are not participants in the Quixtar or TOD compensation plan are not "retail sales to consumers" as suggested by Quixtar. According to internal Amway documents acquired by Forbes Magazine in 1991, only 19% of the products were resold to actual retail customers. The rest were consumed by the distributors themselves. This is far short of the 70% rule and far short of the legal requirement that income be "primarily" from retail sales.
Scott's Rebuttal:
This is misleading. If there are no retail sales to customers outside
the pyramid, then the only way an IBO can make a profit is by recruiting
more downline IBOs. While there is no up front headhunter fee,
the absence of a meaningfully enforced retail sales rule results in
payments based primarily on recruiting new members to buy goods for
their own consumption. In practice, this is nothing more than a carefully
disguised headhunting fee unless the focus is on selling the products.
Scott's Rebuttal:
This is true. However, as numerous Team of Destiny leaders demonstrate,
IBOs are regularly taught to change their buying habits to remain
"brand loyal", and to generate volume.
TOD Leaders promote "buy from yourself"
In addition, IBOs are typically heavily pressured by their upline system to purchase "business support materials" ("BSMs"), a system consisting of audiocassettes, videos, books, tickets to functions and rallies, very little of which can be resold to retail customers.
"Tools
(BSM's) are optional, but so is success" Founders Diamond Chris
Brady on tape PPS31
"IBOs
must submit to the system". Emerald Don Freeze on tape PPS9
"Diamond
Tim Marks states on tape PPS-19" that the business will
not work without the "system".
Scott's Rebuttal:
Typically Quixtar inventory in large quantities is bought back at
90% of cost. Additionally, the Line of Sponsorship Business Support
Materials carry no 90% or better money back assurance. The large volumes
of tapes and promotional materials available on E-bay show just how
good their buyback policy really works.
The Michigan Attorney General, in fact, clearly delineates that the plan upon which Quixtar's is based is legal. Additionally, this plan has been cited in many Federal and State courts and agencies as the legal and viable way to operate a business with a tiered compensation plan.
Scott's Rebuttal:
The Amway plan, upon which Quixtar is based, clearly relies on the 1979
FTC case. In this case because Amway had certain rules, such as the
Retail Sales rule, the 90% buy back rule, and the 70% rule, it was not
ruled an illegal pyramid. However, that ruling was based on the FTC's
finding that at that time these rules, and particularly
the retail sales rules, were actually enforced:
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.
From In re Amway, 93 FTC 618 (1979) (record citations omitted, emphasis added).
Since 1979 there have been numerous legal cases which now dictate that a MLM must enforce its rules and that retail sales to non-participants must make up the majority of sales. It is not enough to have rules to encourage retail sales if they are not meaningfully enforced.
In Amway's suit against P&G claiming they were being defamed by P&G and being unjustly called an illegal pyramid scheme, the United States Federal District Court for the Western District of Michigan went on to summarize the evidence presented in the case that Amway actually was a pyramid scheme. The issue in that case was an individual's right to say that Amway was an illegal pyramid scheme. Thus, the court did not find the actual operations of Amway an illegal pyramid, because the issue was not before the court.
In summary Amway was in theory not a pyramid from the 1979 ruling, but only because the FTC found at that time that Amway had and enforced rules that encouraged retail sales, including the 70% rule. If Quixtar were tried today, based upon the actual percentage of sales to those participating in the compensation scheme, the model would probably be ruled an illegal pyramid. The Lines of Sponsorship would clearly be ruled illegal pyramids since their BSM products are only sold to IBOs, who also one day hope to participate in the BSM compensation program. Even the co-founder of Amway, Rich DeVos, has admitted that the BSM business operates as an illegal pyramid scheme:
"Let me talk to you about the legal side, beyond
price fixing, that deals with pyramids, that deals with the illegal
operation of a business that does not have an end consumer, where the
product is not retailed. That would include all books and tapes. The
sad news, folks, is that when those things go out that way and they
become excessive, beyond my ten or twenty percent theoretical guideline,
hopefully acceptable, to where it's a reasonable support system, but
not beyond the reasonable element, then it becomes an out and out illegal
pyramid."
Listen
to Rich
From Rich DeVos's "Directly Speaking" tape, recorded in 1983.
With Quixtar, you can feel confident that you're partnering with a credible, successful business organization.
Ken McDonald
Managing Director
Quixtar Inc.
November, 2003
