Secretary of State for Business Enterprise & Regulatory Reform v Amway (UK) Ltd, Court of Appeal - Chancery Division, May 14, 2008, [2008] EWHC 1054 (Ch),[2008] BCC 713

Resolution Date:May 14, 2008
Issuing Organization:Chancery Division
Actores:Secretary of State for Business Enterprise & Regulatory Reform v Amway (UK) Ltd
 
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Neutral Citation Number: [2008] EWHC 1054 (Ch)Case No: 2651, 2652 and 2653 of 2007IN THE HIGH COURT OF JUSTICECHANCERY DIVISIONRoyal Courts of JusticeStrand, London, WC2A 2LLDate: 14/05/2008Before : Mr Justice Norris- - - - - - -- - - - - -- - - - -Between :- - - - - - - - - - - - - - - - - - - - -- - - - - - - - - - - - - - - - - - - - -Mark Cunningham QC and Andrew Westwood (instructed by The Treasury Solicitor) for the ClaimantDavid Chivers QC and Philip Gillyon (instructed by Eversheds) for the DefendantHearing dates: 26-30 November 2007 & 3-7 December 2007: - - - - - - - - - - - - - - - - - - - - -JudgmentMr Justice Norris :1. I shall not order Amway to be compulsorily wound up, but will dismiss the petition if Amway will give the voluntary undertakings handed up during the course of the hearing (with one addition).2. The business now conducted by Amway (UK) Ltd (``Amway'') has been conducted in this country for some thirty years. So far as the evidence discloses its basic business model has remained more or less the same throughout that period, though it was subject to significant revision in October 2007. The same basic business model is used in about 80 countries worldwide. Amway is involved in direct selling. It sells something over £10 million of products in the UK each year. It markets its own and third party products directly to consumers through a network of independent sellers known as Independent Business Owners (``IBOs''). The structure adopted for the direct selling network is what has come to be known as ``multilevel marketing''. Such a structure encourages existing IBOs to recruit additional sellers whose sales (and the further sales of those whom such additional sellers in turn recruit, level by level) benefit the original IBO through a bonus structure that I will need later to explain. The resulting business organisation might be expected to resemble a pyramid with (at the top) a very few people whose earnings are generated by the layers of recruiters underneath them and (at the base) a large number of direct sellers whose income is derived solely from what they manage to sell. For each IBO there will be above them a ``sponsorship chain'' (the person who recruited them, and who in turn recruited the IBO's recruiter, and so on) who will benefit from sales made by the IBO and that IBO's downline: and below them a ``downline'' (those whom the IBO has recruited, and those who in turn have been recruited by the IBO's recruits and so on) whose sales will benefit the IBO. 3. The evidence of Mr Richard Berry, the director of The Direct Selling Association and current chairman of The Federation of European Direct Selling Associations is that for most of the last twenty years the majority of direct selling companies in the UK have operated on a single level structure, but that this had now changed and the majority now operate on a multilevel basis where the rewards of some are to a greater or lesser extent determined by the sales efforts of others.4. One of the risks inherent in a multilevel marketing structure is that (because it offers participants both the opportunity to sell products and the opportunity to recruit others) it is capable of exploitation as a pyramid selling scheme. This is explained in the Department for Business Enterprise and Regulatory Reform web site in these terms:-``Trading schemes can be a legitimate opportunity for people to operate a business from home and are not illegal in the UK. Trading schemes become illegitimate and illegal if, while purporting to offer business opportunities, the sole purpose of the scheme is to make money by recruiting other participants, rather than trading in goods or services. This form of bogus scheme is sometimes referred to as ``pyramid selling''...'' 5. One of the by-products of a multilevel marketing scheme is that those towards the top of the pyramid (whose income is derived substantially from the sales efforts of several or perhaps many levels of IBOs below them) have the opportunity to create and promote motivational courses and literature directed at the lower tiers and aimed at encouraging them to recruit more members and thus to extend further the base of the pyramid. Such material is known as Business Support Material (or ``BSM''). The promotion of such BSM to the captive market represented by the lower levels of the pyramid provides the IBOs at the top with an additional and independent source of income to that derived from bonus payments arising from the sales generated by the lower levels of the organisation. Senior Amway IBOs promoted BSM through a number of vehicles, including Britt (UK) Ltd (``Britt'') and Network 21 Support Systems Ltd (``Network 21''). Britt and Network 21 are independent entities which are not owned by Amway or by any of its shareholders or officers. Amway does not share in any of the risks or rewards of Britt and Network 21: nor does Amway require any of its IBOs to purchase the literature or services of either entity. It does, however, reserve the right to exercise a degree of control over what is circulated to its IBOs.6. On 9 January 2006 the Secretary of State for Trade and Industry (in exercise of the power conferred by section 447 of the Companies Act 1985 as amended) authorised Mr Peter Bott (an official in the Department) and Luke Steadman, Mark Percy and Emily Adler (Chartered Accountants and all of CRA International (UK) Ltd) to carry out enquiries into Amway, Britt and Network 21. It appeared to the Secretary of State from their report that it was expedient in the public interest that each of Amway, Britt and Network 21 should be wound up. Accordingly on 11 April 2007 the Secretary of State presented a petition for the winding up of Amway. (Petitions were also presented against Britt and Network 21 but these have been the subject of arrangements made between the presentation of the petitions and the hearing of the Amway petition and so are not before me). The grounds for presenting the petition were succinctly stated in paragraph 16 in these terms:``...It appears to the Secretary of State expedient in the public interest that Amway be wound up on the grounds that the business in which it is concerned is: 16.1 inherently objectionable; and/or16.2 an unlawful lottery contrary to section 1 of the Lotteries and Amusements Act 1976; and/or16.3 an unlawful trading scheme contrary to section 120 of Fair Trading Act 1973''.7. The grounds for inherent objectionability were expanded upon in paragraph 17 of the petition to identify the following points of objectionability:- (a) that the business is promoted to prospective IBOs on the basis that participation carries with it the prospect of substantial financial rewards and/or easy money (``dream selling''): (b) the reality is that the nature and rewards of the business are such that only a very small number of IBOs make any significant money, the substantial majority making either minimal or no financial return from their participation: (c) because of the requirement that an IBO pay a joining and renewal fee and the likelihood that an IBO would purchase BSM there was a certainty that the Amway business would cause a loss to a large number of people (to the extent that out of an IBO population which exceeded 33,000 only about 90 IBOs earned sufficient bonus to cover the costs of actively building their business). 8. As regards the case based upon an unlawful lottery it is the Secretary of State's case that the bonus payments made by Amway to IBOs are to a substantial extent dependent upon chance and are wholly unpredictable and thereby constitute an unlawful lottery. Their dependence upon chance is a result of the fact that bonus payments are influenced only to a very small degree by the IBO's own purchases from Amway (only about 16% of bonuses paid by Amway to IBOs directly relate to the IBO's own purchases) and to a very substantial extent by the product purchases of IBOs whom the recipient of the bonus has recruited (or whom such IBOs have themselves recruited). The recipients of the largest bonus payments had on average (a) earned only 3.5% of their bonus payment by themselves purchasing and selling Amway products: (b) personally recruited only 2% of those whose sales contributed to the bonus they received.9. The case relating to an unlawful trading scheme is founded upon part XI of the Fair Trading Act 1973. It proceeds on the footing that the business conducted by Amway is ``a trading scheme'' and then focuses upon the payments which it is necessary to make to become and to remain an IBO. The Secretary of State seeks to prove that a prospective or current IBO is induced to make such payments by reason of the fact that the prospect is held out of receiving payments or other benefits in respect of the introduction of other persons (that is IBOs who are recruited and whose sales of Amway product may contribute to the bonus earned by the IBO who recruited them). 10. When the petition against Amway was presented the company sought to revise its business model and for that purpose to enter into a dialogue with the Department. The proper response to that approach must be informed by the following considerations:- (a) The presentation of a public interest petition is not the commencement of ordinary adversarial litigation. Parliament has charged the Department with wide ranging responsibilities in relation to the affairs of companies including (under section 124A of the Insolvency Act 1986) their investigation and the formation of the view that it would be expedient in the public interest that companies should be wound up. Once that view is formed, the Secretary of State is empowered to present a petition. (b) When the petition is presented Parliament has entrusted the court with the task of deciding whether, having regard to all the circumstances as disclosed by the totality of the evidence before the...

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