Characteristics of Pyramid Schemes
How does Quixtar and their Tools Groups Compare?

There is a long standing debate about Amway (now Quixtar) and their lines-of-sponsorship being pyramid schemes. There have been numerous court cases, filed by former IBOs as high as a Crown and Double Diamond, since the 1979 FTC case. The court cases cast doubts about the legalities of Quixtar and the Line-of-sponsorship tape and seminar businesses. The legalities and case precedents can be researched on this Q&A page on pyramids. Rich DeVos, co-founder of Amway/Quixtar has even spoken openly about abuses than can cause the business to be illegal. Amway even had an internal memo called the Postma memo, which declared the tools systems to be illegal pyramid businesses.

Do you feel you were deceived? Here is the link to file a complaint with the Michigan Attorney General if you think you were conned. You can also complain to the Better Business Bureau.

As with most any MLM opportunity, the Quixtar teams have the default status of "legal and in good standing" until there is an action by an attorney general or a court. To my knowledge no Quixtar team has never been ruled an illegal business by an attorney general or a court. However, due to the sheer number of MLM businesses and the limited resources of regulators, only the most abusive schemes ever get prosecuted.

"While our office is able to tell you if we have taken any legal action, we will not comment on any specific investigation of multi-level marketing companies. Additionally, we do not provide any
advance form of approval for any company and if you want legal advice on whether a multi-level marketing opportunity is actually an illegal pyramid, you need to seek private legal counsel."

Michigan Attorney General's web site

Characteristics of Illegal Marketing Plans
- from MLMlegal.com -

In the leading decisions in this subject area, 17 abuses have been targeted as potential elements of illegal marketing plans: (See the MLMlegal.com Web site)

  1. Plans in which company products are totally or substantially consumed only by distributors.
  2. Plans which make no effort to emphasize retail sales to the ultimate nonparticipant consumer.
  3. Plans in which commissions are not based on actual retail product sales.
  4. Plans which would fail without purchases by participants.
  5. Plans in which emphasis is on recruitment rather than sale of product.
  6. Plans in which distributors purchase products in order to further the marketing plan rather than out of genuine desire and need for the product.
  7. Mandatory purchases of company product
  8. Products which have "no real world" marketplace.
  9. Mandatory purchases of peripheral or accessory products or services.
  10. Products that are sold at inflated prices.
  11. Plans which result in inventory loading distributors.
  12. Plans in which distributors are left with substantial unsold inventory upon cancellation of participation.
  13. Substantial cash investment requirements.
  14. Earnings misrepresentations or inflated earnings representations.
  15. Plans which require no meaningful participation by distributors after becoming a distributor.
  16. Plans that contain elements of a lottery rewarding participants based on chance rather than on bona fide sales efforts.
  17. Plans in which fees are paid to distributors for headhunting.

Characteristics of Illegal Pyramid Schemes
- Michigan Attorney General -

The Michigan Attorney General also has a good page describing the characteristics of illegal marketing schemes. The Michigan AG's site references most of the above 17 points. It is interesting to compare what the Michigan Attorney General describes and what many Quixtar teams’ business building training materials teach. Most AG's will not take action against unless there are complaints, so make your voice heard if you feel you were part of an illegal pyramid scheme. Here is the link to file a complaint. All text in "maroon" is from the Michigan Attorney General's page on pyramid schemes.

Definition of Illegal Pyramid Schemes
- Federal Trade Commission -

Definition from FTC vs. Equinox April 2000, is the same as FTC vs. Trek Alliance June, 2003

"Pyramid scheme" means a sales scheme, Ponzi scheme, chain marketing scheme, or other marketing plan or program in which participants pay money or valuable consideration to the company in return for which they receive:

  1. the right to sell a product or service; and
  2. the right to receive in return for recruiting other participants into the program rewards which are unrelated to sale of products or services to ultimate users.

For the purposes of this definition, "sale of products or services to ultimate users" does not include sales to other participants or recruits in the multi-level marketing program or to participants' own accounts.

The FTC definition for a pyramid focuses on the issue of retail sales. At least 50% of the rewards generated must come from those outside the compensation system, or simpler said, from sales to retail customers. The diagram above shows the money flow in the Quixtar system and how the majority of it just flows among IBOs themselves.

Comparison of Quixtar lines of sponsorship
and the 17 Pyramiding Abuses

Retail Sales
* Plans in which company products are totally or substantially consumed only by distributors.
* Plans which make no effort to emphasize retail sales to the ultimate nonparticipant consumer.
* Plans in which commissions are not based on actual retail product sales.
* Plans which would fail without purchases by participants.
* Plans in which distributors purchase products in order to further the marketing
plan rather than out of genuine desire and need for the product.

"Multi-level" or "network" marketing is a form of business that uses independent representatives
to sell products or services to family, friends, and acquaintances. A representative earns commissions
from retail sales he or she makes, and also from retail sales made by other people he or she recruits."

"Commissions should only be paid on the sale of goods or
services to non participant end-user consumers." -
Michigan Attorney General

Retailing goods and services to non-participants is the least stressed item by many Quixtar teams. Just check out their training materials. Having significant sales to non-participants of the compensation scheme is one major factor separating a legitimate MLM from an illegal pyramid, as stated above by the Michigan Attorney General. Court opinions state that at least 50% of sales should be from those not involved in the compensation scheme. From the following exhibits one can see that the main reason IBOs should buy the Quixtar products is so that they can participate in the pyramided compensation scheme. Listening to their tapes, one finds a major focus is to just sell to "participants" in the compensation plan, which according to the Michigan Attorney General, the 1979 Amway FTC opinion, Amway Co-founder Rich DeVos, and other court precedents is an illegal practice. Commissions are paid on all sales, even if the majority of sales are to those in the compensation plan.

Ask the person prospecting you to see the line of sponsorship’s website to see how heavily they promote "buying from yourself". Did the person prospecting you tell you that retail sales are required to earn bonuses from those you recruit? Probably not.

Amway/Quixtar Co-founder Rich DeVos freely admits in his March 1983 Directly Speaking Tape that a "wholesaling only", or "buy from yourself" business is illegal:

"I guess if I'd been told all these years you don't have to sell the product, all you have to do is wholesale it to people, then I guess maybe I wouldn't pay any attention to pricing, either. But that's an illegal business. And those of you that preach it and foster it and talk about it are operating illegally. I don't know how often I have to tell you that. I don't know how long I have to keep insisting that you talk upon people retailing the product and gaining customers and servicing them faithfully, only to have some of you just throw it up in the air and say, "That's not our way. We don't teach that method." I got to tell you, you're running the wrong method. You see, once you'd accept the fact that you must sell the product at retail to have an honest business, then you suddenly are very concerned about the pricing of the product."

"Pyramid schemes claim to be in the business of selling products to consumers in order to look like a multi-level marketing company. However, little or no effort is made to actually market the product. Instead, money is made in typical pyramid fashion . . . from recruiting other people to market the program."
-
Michigan Attorney General

He said that if you had toilet paper in your home, or other Quixtar items such as
paper towel, etc. and people came over to the house and used these items, technically
this falls under the definition of selling."
IBO Site visitor

It is quite easy to find examples of many Quixtar groups’ over emphasis of self-consumption in their training tapes from a variety of their leaders.

Have the person prospecting you loan you some business building tapes and find out for your self.

Quixtar has the "Member/Client" rule requiring IBOs to have a least 50PV or $100 in sales in order to obtain bonuses on downline volume. The rule can be easily circumvented by "self reporting", or by using "option 4: buying for a customer through your account", or by "pay around" of the bonus by the Platinum, or by creating bogus Member accounts and buying the minimum from those accounts.

"I was told to sign someone up who does not want to be an IBO and then make my first purchases
through that account. There are a lot of IBO's doing this"
"Our Platinum taught us to make our first purchase 'option 4, buying for a customer', using IBO price, in fact she said use it for all purchases." -
IBO Site visitors

For brand new IBOs left in the dark about the rules, if your upline knows your Quixtar password they might even log in your account and report MC volume for you without your knowledge.

"I don't have any product to sell. I buy product for myself. I don't sell anything. I simply buy product
from Quixtar for my home and family. I am changing my buying habits so that when we are running
low on paper towels, toilet paper, diapers, garbage bags etc., etc., etc., then I order from Quixtar."
IBO on Web Bulletin Board MLM Know How Forum

Commissions are paid on all sales regardless even if most are self-consumed. No doubt without the sales to the IBOs themselves, the business would fail.

Over Emphasis of Recruitment
* Plans in which emphasis is on recruitment rather than sale of product.

"Be skeptical of plans that claim you will make money through continued growth of your
"downline" -- the commissions on sales made by new distributors you recruit -- rather
than through your own sales of products."

"Avoid any program that focuses more on recruitment of new people rather than the sale of a
product or service to an end-user consumer. If the opportunity for income is primarily derived
by recruiting more participants or salespersons rather than by selling a product, the plan
probably is illegal. Several courts interpret greater pressure on members to sponsor
new recruits than to market company merchandise as evidence of an illegal pyramid."
-
Michigan Attorney General

"Pyramid promoters are masters of group psychology. Recruitment meetings create
a frenzied, enthusiastic atmosphere where group pressure and promises of a
large sum of money play upon people's greed and fear of missing a good deal. "
-
Michigan Attorney General

"I was approached by a Quixtar group. I was told it is ALL ABOUT RECRUITING new IBO's."
"These guys that came over talked nothing of the actually selling of the products,
it was all about recruitment."
IBO Prospects

Purchase of Peripheral Products
* Plans in which distributors purchase products in order to further the
marketing plan rather than out of genuine desire and need for the product.
* Mandatory purchases of company product
* Products which have "no real world" marketplace.
* Mandatory purchases of peripheral or accessory products or services.

Quixtar actually consists of two different schemes. The first being the Quixtar products business. The second is the Business Support Materials pyramid run privately by the Diamond IBOs. Either of these could be considered illegal marketing schemes when retailing of products, or the system to people outside those expecting to participate in the compensation scheme is not at least 50% of sales. (as judged by the recent court precedents) The purchase of these materials and Quixtar products are of course completely optional, but those "wanting to succeed" should purchase them.

The various Quixtar lines of sponsorship sell Business Support Materials (BSMs) consisting of audiocassettes, seminars, and open meetings to train their IBOs. The BSM scheme promotes the Quixtar "Product Pyramid". The BSMs have no other market outside of the Quixtar IBO market. The content of their audio cassettes also support the wide spread teaching that the business sells mostly to its participants and very little to non-participants.

"Promoters also openly discourage thoughtful consideration and questioning of the scheme."
-
Michigan Attorney General

Product Pricing
* Products which are sold at inflated prices.

"Make sure the product or service offered by the company is something you would buy without the income opportunity and the product or service is competitively priced. Illegal pyramid schemes often sell products at prices well above retail or sell products that are difficult to value, such as health and beauty aids, new inventions or "miracle" cures."
-
Michigan Attorney General

Some claim the Quixtar Double-X vitamin is cheaper than the Centrum brand on a cost-per-use basis. Double-X costs $48.15 for 31 tablets or $1.55 each. The multi-vitamin Centrum costs 6.3 cents at Wal-Mart. The Quixtar Double-X vitamins are 24 times more expensive than the Centrum. About $22 per box, or $0.72 per tablet goes to the pyramided bonus pool. Quixtar also sells a Multi-vitamin "Nutrilite" similar to Centrum, which cost 15 cents each. This is still over twice the price of Centrum. Almost all of the price difference goes to fund the pyramided bonus pool.

"Beware when the products or services are simply vehicles for recruitment. The products may be gimmicks and/or overpriced, but even high quality products may serve as a cover for recruitment activities."
-
Michigan Attorney General

The high cost of the Quixtar products is a common objection to the business. Diamond IBOs typically make tapes for handling objections. They say that one could treat the product price premiums as an investment that will be paid off, after they show the plan and recruit some other people.

Despite IBOs showing business models with 100 or 150 points ($250 - $500 in actual sales), the majority of IBOs have very low sales. Quixtar reports to their Q12 qualifiers and above that the average IBO had just 38.5 points in sales. Data obtain from site visitors shows even much lower sales per IBO. The first group of 94 IBOs had just 26 points per IBO. A second group of 198 IBOs had an average PV of just 7 points in sales per IBO. A third group of 164 IBOs had an average sales of just 2.5 points. The actual sales per IBO is far from what most groups teach in their plan showings.

Inventory Loading
* Plans which result in inventory loading distributors.
* Plans in which distributors are left with substantial unsold inventory upon cancellation of participation.
* Substantial cash investment requirements.

"Sometimes, new "distributors" are persuaded to purchase
inventory or overpriced products/services when they sign up."

"Be cautious about participating in any program that asks distributors to purchase expensive inventory. There are horror stories of people with a basement or garage full of merchandise that no one will buy."
-
Michigan Attorney General

Besides the approximately $50 registration for Quixtar, there is no up front investment. Quixtar also has a 100% money back guarantee. I've heard that Quixtar will also pay the shipping costs. The cost to sign up with Quixtar as an IBO is only about $50. Some group’s recommended registration includes:

1) Line of sponsorship Website Registration $24.00
2) Literature $12.67
3) Quixtar Registration $45.75
4) Product Package (SKU: 10-1387) $150.
The total is about $232

The refund policy via the BSMAA contract is not as generous as Quixtar's product refund plan. Interesting to note is that the Business Support Materials Arbitration agreement specifically excludes tools that were purchase for inventory (non-personal use).

" 8. Refund policies -- ...... Business Support Materials purchased for stock or inventory, or for any reason other than the buyer's personal use, are not subject to this policy but shall be governed by whatever refund policy is agreed to with the selling IBO. For seminars, rallies, and other meetings, the selling IBO shall buy back any tickets purchased for the buyer's personal use for a period of 30 days...... "

Unlike the Quixtar product refund policy, the BSMAA (tools contract) specifically states many conditions and specifically excludes BSMs purchased for non personal use.

"Just wanted to let you know, I gave my upline two letters (one to Nick and the other to the person's name that appears on my receipts Mike Barrett) requesting my intent to leave Quixtar and requesting a full refund. He responded by telling me that I could not get a refund on tools as it is specified in the BSMAA contract. I responded that according to #8 that tapes, books, opens and seminars are refundable. I'm currently awaiting a response."

"My ex-upline and I agreed to a 50% refund for the tapes for personal use but unfortunately the BSMAA agreement rules out any money given back for tools I bought to give out to people."

-
IBO site visitors

As part of their systems, many teams encourage IBOs to stock up on tools.

Some Quixtar groups sell various "tool trunks". The compact, medium, and large trunks sell for $508, $998, and $1500 respectively. These trunks contain multiple tapes, CD and prospecting materials.

The Quixtar products can also be inventory loaded, but Quixtar supposedly has rules to addresses this issue.

Income Misrepresentations
* Earnings misrepresentations or inflated earnings representations.

"Be cautious about specific income or earnings claims. Many programs boast about the
incredibly high earnings of a few top performers ("thousands per week" or a "six figure
income"). The reality is that most of the people recruited into the organization are
not making anywhere near those amounts and most actually lose money."
-
Michigan Attorney General

On many tapes the Diamonds are said to be making millions from Quixtar. According to 2001 Quixtar data, the average IBO at this level grossed $150,000 from Quixtar, not the millions implied from their tapes. Diamonds might however make that when the profits from the tapes and seminars scheme are included.

"Be cautious about specific income or earnings claims. Many programs boast about the
incredibly high earnings of a few top performers ("thousands per week" or a "six figure
income"). The reality is that most of the people recruited into the organization are not
making anywhere near those amounts and most actually lose money."

"Beware when presented with "testimonies" from other distributors.
These "success" stories rarely reflect reality"
-
Michigan Attorney General

"I wanted to respond to a post I saw with regards to Quixtar. I have a friend living in Michigan who is completely sold on this business... He seems to think he will be a millionaire in 5 years. "

"I was introduced to Quixtar over the weekend.. My friend that has been in the company for three months guarantees he will be a millionaire in less than five years. Telling the five people he had at the meeting that they could join him if they started today." - Site Visitors

 

The image above shows the additional sources of income IBOs can eventually have from the very lucrative BSM's pyramid business selling tapes, books, seminars, and obtaining speaker's fees. Participation in the profits from the tools business is based upon one's success in building a Quixtar organization, and convincing downline IBOs to consume these items. These items have no customers outside of IBOs or prospects and have no real word use outside of the group. The BSM profit sharing plan creates an economic incentive and a conflict of interest for IBOs to recommend the use of BSMs to their downline IBOs for the sheer sake of generating commissions without regard for the economic consequence to their downline IBO's personal profitability. This creates an inherently fraudulent scheme.

In a 1983 audio taped speech entitled "Directly Speaking," Amway co-founder Rich DeVos stated:

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.

. . . when your tape volume becomes so great in relationship to your regular business, if it is not used as a support for the Amway business, - will oftentimes be an illegal business - in fact, it could be called a pyramid - because, - does not get sold to the consumer. Which means that all the tape business does is take money out of the organization, and because the final person can't retail it, it never brings money into the organization. Now, I'm not arguing the value of it - we accept the fact that motivation is vital to this business. Good, honest motivation is important to the business. But, it must be motivation that builds the business - not become a business in itself. And some of you have made it a business in itself . . . And I am imploring all of you to do two things. Number one, clean up your act. And number two, if you know people who are continuing to do things improperly after all of this, then I want you to write us a note and just tell us who's doing it.
Directly Speaking, January 1983, Rich DeVos, Amway Cassette Series VA-2160.

In January 1983 the infamous internal Amway "Postma" memo it stated:

The Tool business (motivation) is illegal. If I understand the MLM system, there are certain parameters that confirm its legality. Unlike the Koscot method of marketing, the MLM system moves a product to an ultimate consumer outside of the business structure; i.e., a customer. Although the Amway business is legal (no question), the tool business is not (my conclusion).

      1. It is a pyramid. It sells only to those who involved in its structure.
      2. It may violate tax laws. It is hard to determine whether or not proper sales taxes are paid (especially in the state of Washington).
      3. A real danger of inventory loading without the protection of a buy back rule exists. This has already occurred (Mackey). It will happen again.
      4. It could be construed as an employer/employee relationship.
      5. It is not a free enterprise opportunity. A downline Direct is not to compete with an upline Diamond

Another Internal Amway Memo from 1982 states:

The following, important statement from Hogan & Hartson's 28 page legal evaluation of the legal risks inherent in selling and distributing non-consumable "products" through a multi-level system, has helped us greatly in getting the attention of the "systems" entrepreneurs:

"Because of the extensive and extremely adverse publicity associated with Glenn Turner's "Dare to be Great" operation -- an operation based primarily on the sale of motivational tapes -- it must be recognized that any multi-level sales plan which unduly emphasizes sales of motivational literature or tapes is likely to attract the attention of enforcement authorities!!!"

References for "Dare to be Great" motivational supplies pyramid cases [Kentucky] [Virginia] [SEC

At recruitment meetings you might hear phrases like "this is a ground floor opportunity which will
change your life", "opportunities don't go away, they go to other people", and "if you act now
and work hard for three to five years, you can retire and live off of the residual income."
-
Michigan Attorney General

"Another warning sign is a confusing compensation plan."- - Michigan Attorney General

Distributor Participation
* Plans which require no meaningful participation by distributors after becoming a distributor.
* Plans which contain elements of a lottery rewarding participants based
on chance rather than on bona fide sales efforts.

Many groups employs a strategy called "stacking". Prospects are told they need needn't do anything. Someone will build a line for them.

"He told me to buy into a position and I wouldn't have to do anything, just be in line.
He never said I should try to sell any products. Just buy and get others interested."
"I never knew who sponsored me, nor who I sponsored, this is a common occurrence."
- Site Visitors

Depending upon how one is stacked and who is stacked under you there is an element of chance of having successful people stacked under you. There are many disadvantages to stacking that the new IBO should know about. Before you sponsor all your friends in a tap-root line, read this page about stacking.

Headhunting Fees
* Plans in which fees are paid to distributors for headhunting.

Neither Quixtar or their teams pay any direct fees for headhunting.

"Some companies call themselves multi-level marketing when they are really operating pyramid schemes that violate Michigan's Pyramid Promotion Act." - Michigan Attorney General

Here is the link to file a complaint with the Michigan Attorney General if you think you were conned. Addresses for the complaint are at the below.. You can also complain to the better business bureau. You will need the information below for the attorney general.

Quixtar Corporation
5101 Spaulding Plaza
Grand Rapids, MI 49355
616-787-7800

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