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The History of MLM Starting with Nutrilite False Claims, Non-Compete
Agreements: |
| Food fortification with vitamins and minerals is one of the most effective
methods to improve health and prevent nutritional deficiencies. It is greatly responsible
for the virtual eradication of disease such as goiter, rickets, beriberi, and pellagra in
the United States. Food fortification came in several waves in the United
States. These waves include the iodization of salt in the 1920s, fortification of
milk with vitamin D in the 1930s, enrichment of flour and bread in the 1940s, and the wide
spread addition of calcium to a variety of products beginning in the 1980s. For salt,
milk, and bread, food fortification was accomplished by establishing the health benefits
through scientific research and enlisting the support of food manufacturers. The Vitamin B complex had been found to be involved in the prevention of pellagra, and that disease was fairly common in the southeastern part of the United States back in the '30s, but since that time has essentially disappeared, and there are no frank vitamin deficiencies in the United States. But as a result of the enrichment of flour and bread and the popularity that the vitamins got there, combined with a lot of enthusiasm for these products made available the FDA classified them as special dietary foods rather than as drugs, that made them available to a lot of outlets that otherwise wouldn't have had them. The sale of vitamins mushroomed beyond belief, and the first large reason for the growth was the adaptation of house-to-house direct selling sales combined with the pyramid-type method of distribution that was feeding that direct sales technique led to the first big confrontation the FDA had with this problem. Mytinger and Casselberry was the firm involved and it sold the Nutrilite vitamin brand, now owned by Amway. The Nutrilite vitamin concept is said to have originated about during the early 1930s in the mind of Carl Rehnborg, an American businessman who lived in China from 1917 to 1927. According to Amway publications, this gave Rehnborg "ample opportunity to observe at close range the effects of inadequate diet." He also "became familiar with the nutritional literature of his day." Concluding that a balanced diet was needed for proper bodily function, he began to envision a dietary supplement which could provide people with important nutrients regardless of their eating habits. After seven years of "experimentation," Rehnborg produced food supplements which he gave to his friends to try. According to his son, Sam, who became Nutrilite's president and chief operating officer:
Carl Rehnborg's food supplement business, which thus began as the California Vitamin Corporation, changed its name to Nutrilite Products in 1939 when it moved to larger quarters. According to Federal District Court records, significant out-of-state distribution of Nutrilite supplements began in 1945 when a company operated by Californians Lee S. Mytinger and William S. Casselberry -- a former cemetery-plot salesman and a psychologist became exclusive national distributor. Rehnborg acted as "scientific advisor" in the distribution scheme and would explain to sales groups that his supplements contained a secret base of unusual therapeutic value and were the answer to man's search for health. Multilevel marketing started with Mytinger's and Casselberry's new marketing plan for the Nutrilite company. Nutrilite sold green tablets and red capsules that were made of alfalfa, watercress, parsley, vitamins, minerals and yeast. Cost: $19.50 for one month's supply of 279 vitamins. The Nutrilite marketing plan, now the model for many MLM companies, worked like this:
Gross sales soared to $500,000 a month, but the promoters also ran afoul of the law. In 1947, the FDA began a 4-year struggle to force Mytinger, Casselberry, Rehnborg, their respective companies, and some 15,000 door-to-door agents to stop making wild claims about their products. Potential customers were being given a booklet, "How to Get Well and Stay Well,"[1] which represented Nutrilite as effective against almost every case" of allergies, asthma, mental depression, irregular heartbeat, tonsillitis, and some 20 other common ailments. The booklet, which contained testimonial letters, also implied that cancer, heart trouble, tuberculosis, arthritis and many other serious illnesses would respond to Nutrilite treatment. After Mytinger and Casselberry, Inc., was asked by the government to show cause why a criminal proceeding for misbranding should not be started, the booklet was revised. A "new language" was devised which referred to all diseases as "a state of nonhealth" brought about by a "chemical imbalance." Nutrilite would cure nothing -- the patient merely gets well through its use. Most direct curative claims were removed from the booklet, but illustrative case histories were added. Although continued governmental pressure led to removal of the case histories, the booklet remained grossly misleading. After citing them and with the appearance of the new book the FDA began citing them right and left and made eleven product seizures. The FDA's plan was to make enough seizures to where they would have to either do something to correct the violation, or go to trial. Mytinger and Casselberry filed suit against the FDA for the multiple seizures, and to enjoin the FDA from making seizures claiming that Mytinger and Casselberry was proceeding in good faith and that the agency was harassing them and making these seizures to run them out of business before they could have any chance to make the necessary corrections. They were represented by a a prominent Washington lawyer lawyer named Charlie Rhyne. M&C sued the FDA for an injunction, and they got a district court judge Judge Goldsborough, who was very much against Food and Drug. Jdge Goldsborough issued a temporary restraining order on the FDA. There was a trial and the FDA lost. In the end the whole issue was disposed of by a consent decree dated April 6, 1951. It ordered the corporation to refrain from distributing Nutrilite accompanied by specified articles, books, pamphlets and a motion picture, or matter which implied that it would be an effective cure for approximately fifty-four specified diseases or conditions, and from making other specific representations in writing, printing or graphic matter in promoting the sale of Nutrilite. The decree set forth certain allowable claims which might be made as to the need for or usefulness of Nutrilite and stated that petitioners could submit to the Food and Drug Administration for inspection and comment, written, printed or graphic matter to be used in the future merchandising of Nutrilite. The criminal and libel proceedings were terminated on stipulation. In 1953 at least 150 Nutilite distributors started selling a competing line of vitamins for Numanna Laboratories Corp. In November 1953 Mytinger and Casselberry sued Numanna Laboratories because the former Nutrilite sales people were selling for Numanna. At the time the M&C distributor contract had a two year non-compete agreement. In the suite the distribuors and Numanna contended that the alleged contract was lacking in mutuality and not enforceable, and that the restrictive covenant was in restraint of trade and therefore void. The issue of the non-compete agreement eventually garnered the attention of the Federal Trade Commission (FTC). Mytinger and Casselberry were found by theFTC to have violated section 3 of the Clayton Act and section 5 of the Federal Trade Commission Act. The finding of Clayton Act violation grew out of Mytinger and Casselberry's method of marketing in commerce, by which they bound the distributors of their product by contract, which they enforced, not to sell or distribute the product of any competitor of Mytinger and Casselberry. The Commission found that Mytinger and Casselberry by enforcing or threatening to enforce the exclusive-dealing provision had also violated section 5 of the Federal Trade Commission Act, that a companion restrictive covenant which provided that in the event a distributor terminated his relationship with petitioners he could not for two years solicit as customers for any competitive products any former customers of petitioners' product was likewise violative of section 5, and, finally, that petitioners by misrepresenting the nature of a consent decree entered against them in the United States District Court for the Southern District of California had engaged in unfair methods of competition within the meaning of section 5. "The product petitioners market is a multi-vitamin and mineral food supplement called Nutrilite Food Supplement. It is produced by a corporation known as Nutrilite Products, Inc. Petitioners purchase this company's entire output of Nutrilite and market it by a house-to-house direct-selling system through some 80,700 distributors, of whom 1,420 purchase Nutrilite directly from petitioners. These direct purchasers or distributors in turn redistribute the product to the other distributors for direct sale to the public. Petitioners' contracts with all these distributors contain the restrictive provisions found illegal by the Commission." "In addition to the exclusive-dealing and two-year restrictive provisions the contract of petitioners with the distributors of Nutrilite provide as follows: " "I [the distributor] understand and agree that I am not an employee, servant, agent, or legal representative of Mytinger & Casselberry, Inc., and that the relationship between us is not that of joint venture or similar arrangement, but that as a Nutrilite Distributor I am in business on my own account as an independent contractor who purchases and sells Nutrilite Food Supplement." "Thus, the distributors are not employees of petitioners but are independent business enterprises." Mytinger and Casselberry appealed the decision. In a 1962 ruling the US District Court of Appelas District of Columbia Circuit upheld the FTC finding that the non-compete agreement was a restraint of trade due to Nutrilite's high market share in the door-to-door sales catagory. Rich DeVos and Jay Van Andel (high school buddies and business partners) returned from military service and became distributors for Nutrilite vitamin supplements in 1950. They were extremely successful and built a sales organization with over 2,000 distributors. At this time distributors for Mytinger and Casselberry were assinged sales territories. Walter Bass, an original Amway distributor was assinged the Saginaw Michigan territory which was 2.5 hour drive away from where he lived. Fearing that Nutrilite Products might collapse due to the FDA, they formed a new company, the American Way Association, later renamed Amway. They began marketing biodegradable detergent products and other household cleaning products and later diversified the product line to include beauty aids, toiletry, jewelry, furniture, electronic products, and many other items. Gross sales rose steadily from half a million dollars in 1959 to over a billion dollars by the early 1980s. In 2004 Amway, which declares it self the "The Center of Free Enterprise", also implemented a non-compete clause to its distributor contract to try to restrict competition from defecting distributors. In 2008 Amway/Quixtar worked to retract false distributor claims that their new bottled water product increased balance, strength, and flexibility. The more things change, the more they stay the same............
[1] U.S. Supreme Court |
