UPDATE: On 8/13/98 the judge in this case ordered that the plaintiffs must first pursue their complaint through Amway's non-voluntary arbitration process. We may never know the outcome of the case, which is probably exactly what Amway had in mind when they cooked up this "agreement." The judge's order also applies to the Morrison suit, and probably the Griffith suit as well.
No. 98-17491
IN THE DISTRICT COURT OF HARRIS COUNTY, TEXAS
190th JUDICIAL DISTRICT
DONALD AND JACKIE GRIFFITH
VERNON AND BONNIE HOLQUINN,
BRENDA AND WILLIAM L.
CHRISTIAN, DONALD AND LINDA
WEAD, BYRON AND KENDRA
HALLMARK, AND TED AND
MYRENE MCDANIELS
v.
AMWAY CORPORATION, et al.
ORIGINAL ANSWER, THIRD PARTY CLAIM, AND PLAINTIFFS' CLAIMS BY JEFFREY AND CECELIA MUSGROVE
COME NOW, JEFFREY AND CECELIA MUSGROVE and file their Original Answer and Third Party Claim in the above entitled and numbered cause and in support thereof would show unto this Honorable Court as follows:
I. INTRODUCTION, GENERAL DENIAL AND OVERVIEW OF ADDITIONAL COMPLAINTS.
1. The Musgroves, Defendants in the above-entitled case generally deny the
allegations made by the Plaintiffs. Further, the Defendants Musgrove have claims of their own against certain defendants and intervene in this lawsuit as plaintiffs. For purposes of clarity, all defendants the Musgroves have claims against will be referred to as third-party defendants. The third party defendants identified in this pleading are liable in whole or in part for each and every claim asserted by the Plaintiffs in this case. The third party defendants were responsible for, created, organized, and orchestrated a plan intended to defraud not just the Plaintiffs in this case, but also the Musgroves. Finally, the Musgroves state that they have claims in their own right against the third party defendants and are cross plaintiffs. The Musgroves are Texas residents and residents of Hanis County, Texas.
IDENTIFICATION OF THIRD PARTY DEFENDANTS
2. The following individuals and or business entities are hereby identified as third party defendants:
Amway Corporation
7575 East Fulton Street East
Ada, Michigan 49355
Amway Distributors Association
7575 East Fulton Street East
Ada, Michigan 49355
JA-RI Corporation
Attn: Kim S. Mitchell, Reg. Agent
7575 E. Fulton Street East
Ada, Michigan 49355
Dennis James
601 Cypress Station Dr. #203
Houston, Tx. 77090
Rich DeVos
7575 E. Fulton Street East
Ada, Michigan 49355
Jay Van Andel
7575 E. Fulton Street East
Ada, Michigan 49355
Dick DeVos
7575 E. Fulton Street East
Ada, Michigan 49355
Steve Van Andel
7575 E. Fulton Street East
Ada, Michigan 49355
Doug DeVos
7575 E. Fulton Street East
Ada, Michigan 49355
Bob Kerkstra
7575 E. Fulton Street East
Ada, Michigan 49355
Dexter Yager, Ind. And d/b/a
Yager Enterprises and
Internet Services Corp.
12201 Steele Creek Road
Charlotte, North Carolina 28273
Jeff Yager
12201 Steele Creek Road
Charlotte, North Carolina 28273
Donald R. Wilson, Ind. And d/b/a
Wow International and
Wilson Enterprises, Inc.
6057 South 2950 East
Ogden, Utah 84403
Randy and Valorie Haugen, Ind. And d/b/a
Freedom Associates, Inc.
Freedom Tools, Inc. And
All Star Production Co.
2488 Bonneville Terrace
Ogden, Utah 84403
John Sims, Ind. And d/b/a
Sims Enterprises
1148 N. Highway 89
Kaysville, Utah 84037
Randy and Susan Walker, Ind. And d/b/a
Walker International
1450 Interstate 45 South, Suite F-13
Conroe, Tx. 77304
Mark and Martha Hughes
13315 Pantano Houston, Tx. 77065
Bill and Alyssa Bergfeld, Ind. And d/b/a
Bergfeld International, Inc.
c/o The Feed Store
S. Main
Conroe, Tx. 77304
Lisa Bergfeld
202 Old Country Club Road
Conroe, Tx. 77304
Jody Victor, Ind. And d/b/a
Jevi Corp.
740 Yager Road
Clinton, Ohio 44216
The foregoing third-party defendants have already been served in this case in their capacity of defendants. When such defendants have answered a copy will be served consistent with the Rules of Procedure.
STATEMENT ON JURISDICTION AND VENUE
Venue is proper in Harris County since one or more of the defendants resides in Harris County. All claims in this lawsuit are limited to claims arising under Texas law. No claim should be in any way considered to be a federal claim in any respect. These claims are brought against both Texas and non-Texas residents. As such. this complaint does not invoke any basis for federal jurisdiction.
FACTS RELEVANT TO ALL THIRD PARTY CLAIMS, DEFENSES, AND CLAIMS BROUGHT AGAINST THE THIRD PARTY DEFENDANTS.
INTRODUCTION:
"A market exclusion is a violation of the Robinson-Pattman Act."
Jody Victor, Member of ADA,
Chief Arbiter for ADA Disputes
Dec., 1996
"If you swim in a cess-pool long enough, you'll end up full of crap."
Don Wilson
June 2, 1997
"Selling at a discount is the kind of crap that comes from a down line that is planning to do you in."
Richard Setzer,
Emerald Club tape.
3. The Musgroves were, prior to the tortious acts described in the petition, successful distributors in an organization controlled by Dexter Yager. The primary income generated by this organization came from the sales and marketing of motivational tapes, videos and business functions ("tools"). The Yager distribution network is a distribution organization that has associated itself with Amway Corporation for the purposes of recruiting distributors. In return, the Yager entity allows Amway to use its distribution network to sell Amway products. People within the organization depending upon their success can obtain certain levels. These levels are identified by labels. These labels, for example, include direct distributor, Emerald, Diamond and other terms.
4. The highest level achieved by the Musgroves in the Yager organization was Emerald (an Amway designation) with gross income in excess of $1,000,000.00 per year. Their business was destroyed by a unilateral and arbitrary market division approved by Jody Victor as a representative of the ADA (Amway Distributors Association) and Amway. This market division was ordered by Dexter Yager and implemented by one of Dexter Yager's "generals" (a Jody Victor reference), Don Wilson on June 2, 1997.
5. Assuming the Musgroves had done nothing but maintained their respective levels achieved within the Yager organization, lifetime income expected for the family (excluding loss of inheritance) would have exceeded $2,500,000.00. Now the Musgroves have been sued by people that were formally within their organization. To the extent the Musgroves are liable, they are owed contribution and indemnity by the third party defendants. Because the Musgroves have claims in their own right, this petition also asserts claims on their behalf.
FACT STATEMENT
1. The Yager organization.
"I know one thing -- I do not want anything that doesn't have Darter Yager's approval -- that equals devastation.
… somebody will step on you. "
Richard Setter, Yager general,
Emerald Club tape
Amway is ordered to cease and desist … from allocating retail customers of distributors.
In the Matter of Anyway. Inc., Et al.
(FTC order 5/8/79).
6. A qualified distributor (e.g. direct and above) in the Yager organization makes income by participating in several markets. These markets include (1) the tools market; e.g. sales of motivational tapes, videos and books; (2) the lecture and speaker market; and (3) the Amway product market. The Yager organization controls the lecture and tools markets through Yager's company, Internet with the acquiescence of Amway and the ADA (a trade association composed of Amway distributors). Organizationally, Yager distributes tools and controls markets through various distribution lines or networks. Control of market entry and participation in these markets is very tightly controlled through a system that has never been set down in writing. Nevertheless, use of both vertical and horizontal market controls, access to the leadership of the organization, and price maintenance are the hallmarks of this organization and the means used within the system to control market participation.
a. Vertical & horizontal market controls used by the Yager system:
7. Yager's ability to control and police distributors within his organization is well known to Amway and his distributors. Yager "generals" and certain selected Diamonds within the Yager organization control entry into the tools and functions market. Entry into those markets is difficult. Once entry into the markets is achieved, access and income participation is tightly controlled by the top of the organization's leadership. Diamond level distributors who are "plugged" into Yager are allowed to allocate markets both vertically and horizontally. Access to financial information regarding income distribution in the tools and functions markets is very tightly controlled and is known on a need to know basis only.
8. Access to Yager functions as an organizer and/or speaker is one of the more significant ways money is made in the Yager system. The function market is, in fact, one of the essential ways a distributor who has achieved Emerald or above earns income within the system. The organizational jargon for successfully doing this is being "plugged into" Dexter. If you speak at a function controlled by Dexter or a Yager general like Don Wilson, as a speaker you get a piece of the action for that function. That piece is often paid in cash. Participation in such functions is a critical step to succeeding in the Yager organization since "… the one major thing sold by Yager's business are major functions." (Emerald strategy meeting).
9. The Yager distribution networks relevant to the Musgroves are controlled by Don Wilson. Don Wilson's description is that "I have the local control. Dexter Yager has the long distance control." Within the Yager/Wilson line of distributorship the following mechanisms are used to control market access and income:
i) Approval of diamond/emerald events.
ii) Controlling access to certain events.
iii) Deciding who speaks at certain events.
iv) Solicitation of down-line distribution systems occurs to bypass "nonconforming" distributors to support those distributors that are "properly" plugged into the Wilson/Yager systems.
v) Access to the Yager markets is used as a carrot stick approach to control distributors.
vi) The Yager leadership does not publish information about income distribution from the "tools" and "functions" markets in order to maintain an information edge and to prevent the lower levels from finding out how much money is made in those markets.
viii) Controlling the decision on who participates and at what level in receiving income from "tools" and "functions" markets.
10. Ultimately, the Yager system is set up to control market access to his motivational product business in a manner designed to financially benefit Yager and the immediate leadership below him.
b. Resale price maintenance.
11. Each aspect of the "tools" and"functions" market pricing is controlled through a complex and unwritten system of rebates. In essence, once a distributor reaches a certain level in the Yager organization (typically direct) he receives a rebate on each tool that he sells. Typically, the higher the level the larger the rebate.
12. The Yager organization through Don Wilson and others condition a financial payment based upon receipt of a set price per tool item by the lowest level distributor who receives a rebate or "tool break." Each level receives a portion of a rebate predicated upon the price paid by a distributor. Any departure from this distribution setup is strongly discouraged on both a financial level and from a psychological level. Any lower level distributor issues or ideas about how much money is generated by the upline, how money is distributed, and whether books, videos, and tapes should be obtained at a discount are not tolerated.
c. The Yager organization compared to Amway as described in the 1979 FTC decree regarding the Amway Corporation.
13. In 1979, the FTC in a lengthy opinion examined Amway from an antitrust viewpoint. Ultimately, the FTC ordered Amway to cease certain anti-competitive practices including price fixing and market boycotts. It also found certain vertical restraints used within the Amway group to be permissible given certain assumptions about those restrictions.
14. In terms of organizational structure, contrasting the Yager organization with the Amway system as described in the 1979 FTC decree illustrates the nature of the Yager system. In that decision, one of the restrictions examined by the FTC was the Amway "cross group" selling rule. It is a vertical restriction that prohibits a distributor from dealing with anyone within the distribution network that is not either directly upline or downline from that distributor.
15. The FTC found this restriction to be a reasonable one for a number of reasons. First, it provided lines of communication and responsibility to insure that distributors are properly motivated and trained and that consumers (e.g. non-Amway purchasers) receive services. Second, the FTC found that this was a true vertical restriction that was imposed from the top down and was not induced by lower level distributors to control markets on a horizontal basis. See. e.g. U.S. v. Topco Associates, 405 U.S. 596 (1972) (selling restrictions that are horizontally agreed to or induced are illegal per se). Third, the vertical restrictions were not set up to control price. Resale price maintenance, if implicated, was incidental to the "cross group" selling rule and not its primary purpose.
16. One significant difference between the Yager system and the system described in the 1979 FTC decree is that the "cross group rule" is enforced or invoked by the Yager group only when it is convenient or useful to do so. Indeed, the Yager system history is replete with examples of when the "cross group" rule is set aside because certain distributors "plugged into Dexter" desire to force market divisions or control certain aspects of the tool or function markets to the detriment of competing distributors.
17. In this case, certain Texas groups headed by Joe Morrison were upline of the Musgrove group. The history of these legs is replete with examples of selective use or "nonuse" of the "cross group" rule to benefit certain distributors to the detriment of others.
18. As acknowledged and admitted to by Don Wilson in a December, 1996 phone conversation with Kelly Robbins, the degree of control over the Texas groups achieved by the Haugen/Sims/Walker line of sponsorship was obtained at the expense of Kelly Robbins and in violation of "Don's transfer teaching." Because this control was induced by the Haugen and/or Sims upline to exclude or bypass a horizontal competitor (Robbins), this was an illegal market division and thus distinguishable from the system described in the FTC decree of 1979. Likewise, Don Wilson's decision to transfer the Robbins/Morrison groups out of the Wilson/Yager line of sponsorship (as described herein) on June 2, 1997 was done to benefit the Haugen/Sims/Walker upline at the expense of distributors such as Robbins or Morrison. As such, the market division rules as practiced by the Yager organization operate to transfer or exclude certain distributors on both a horizontal and vertical basis without regard to the transfer rules set out in the Amway Distributor's manual. In the case of the Musgroves, they were ultimately the victims of a horizontal market division.
19. A second significant difference between the system described in the 1979 decree is that vertical restriction of access is primarily motivated as a means to keep in place the rebate system on tapes that benefits direct distributors. As such, price fixing is the primary purpose of Yager's vertical rules not simply an incidental effect.
20. Amway and the Yager organization are symbiotic organizations that sometimes have consistent goals and sometimes competing goals. Because both Yager's organization and Amway sell Amway products, Amway is willing to accommodate and tacitly support the means used by the Yager organization to control markets. Although Yager's goal to maximize tool and function income may conflict with Amway goals, any effort on the part of Amway to enforce Ethical and Conduct Rules threatens to destroy the total enterprise. As such, in certain instances, illegal and deviate practices become normative behavior in Yager's organization. This case is an example of such normative and illegal behavior. As stated in a 1982 internal legal memorandum written by Amway's lawyers "… legal evaluations have disclosed that the disproportionate (to Amway) sales, intensity and solicitation of these "tools/systems" are illegal per se, under several federal and state rules."
2. Relevant distribution networks and the June 2, 1997 decision exclude distributors from the Yager markets:
a. Overview and summary of the June 2, 1997 decision.
21. Prior to June 2, 1997 the relevant distribution chain from top to bottom was set up as follows:
Dexter Yager22. On June 2, 1997, Don Wilson came to a meeting in Houston, Texas and offered Texas distributors two choices. Choice one was to follow and be part of the "blue team" that consisted of Yager/Wilson/Haugen/Sims and Walker. This team would be within the Yager/Wilson system and have access to the Yager markets.Don and Nancy Wilson
Randy and Valerie Haugen
John and Barbara Sims
Kelly Robbins
Dennis James
Randy and Susan Walker
Joe Morrison
Bill and Lisa Bergfeld
Jeff Musgrove
23. Choice two was to be part of the Robbins/Morrison "green team." Any member of this team was unilaterally excluded from the Yager/Wilson system and would not have access to the markets controlled by Wilson/Yager.
24. In effect, Don Wilson announced a unilateral market division that separated certain parts of the distribution chain and segregated one part from the system "controlled locally" by Wilson and 'controlled on a long distance basis" by Yager. According to Wilson, this market allocation and division had the approval of Dexter Yager, Jody Victor (presumably as an actor for the ADA) and Amway. For Jeff Musgrove and Cecelia Musgrove, this "choice" was a Hobson's choice of either affiliating with a newly created distribution network that had just been unilaterally excluded from the Yager system of markets or affiliating with a distribution network where their immediate upline was controlled by Randy Walker.
25. For the Musgroves, this was an impossible situation. Essentially, for them the June 2, 1997 market division was the last in a series of disastrous events that culminated in the destruction of their respective businesses. Indeed, the events leading up to the June 2, 1997 meeting had involved theft, cover-up and incompetence presided over by Randy Walker and members of the "blue team." Bill and Lisa Bergfeld, upline from Jeff and Mark had stolen literally hundreds of thousands of dollars owed to Jeff and Cecelia Musgrove and the distribution networks in their downline. Jeff and Cecelia Musgrove, once they discovered that money was owed to them and their downline, sought to first find answers from their direct upline, the Bergfelds. After they met with deceit, they sought to bring the matter to the attention of first Randy Walker and then John Sims and Randy Haugen.
26. Finally, they and others brought it to the attention of Don Wilson. In part because of Bergfeld kickbacks upline and in part because of a desire of the upline to "solve" the problem by pretending it didn't exist, Jeff and Cecelia Musgrove were met with evasion, empty promises to investigate, and delay. Upline diamonds continued to ask the Bergfelds to speak at functions well after his theft of monies became known. The Musgroves found themselves in the unenviable position of being told by their upline including Walker, Sims, and Haugen to not rock the boat and essentially keep the Musgrove's downline from knowing the extent of the Bergfeld's theft. Thus, to understand the context and ramifications of the June 2, 1997 market division, it is critical for the jury to understand the facts of the Bergfeld theft and the events that flowed from that theft.
b. The "Bergfeld" situation.
27. Prior to the Bergfeld theft, the Musgroves were literally living the Amway dream. Although there is a high percentage of turnover among distributors, once a certain level is reached, turnover drops significantly. Over 75% of those who qualify as a direct distributor stay with Amway as a means of making a living for five years or longer. The Musgroves who had qualified as Emeralds, had achieved a level not achieved by over 97% of distributors that enter the Amway business. Indeed, once Emerald or above is achieved, the chances that you will not succeed as a distributor in the Yager organization is less than 5%.
28. Thus, without the Bergfeld theft and the June 2, 1997 market division, there is absolutely no reason to believe that the Musgroves would do anything other than succeed as successful Amway distributors within the Yager organization.
29. This conclusion is supported by both gross income and disposable income figures for the Musgroves. By 1993, the Musgroves had gross sales of $1,001,000.00. After costs directly related to Amway are deducted (cost of goods sold, commissions and fees, phone expense, seminar function, commissions, etc.) are deducted, actual disposable income approximated $75,000.00 annually. 1994 disposable income approximated $70,000.00.
30. At some date not specifically known, the Bergfelds began to withhold money owed to their downline. In July of 1995, the Musgroves concluded that Bill and Lisa Bergfeld were wrongly withholding money owed to Mark and Jeff and their networks. They and others raised the issue with Randy Walker in July of 1995. Walker was a distributor above the Bergfelds in the Yager organization. Walker was not surprised and expressed his awareness that Bill and Lisa Bergfeld were having "financial problems" with a comment over the phone "… Oh, did he write hot checks to you also?" Disturbed at Mr. Walker's attitude, at a Phoenix meeting in July, 1995, the Musgroves and others expressed a concern to Don Wilson that the Bergfelds were stealing money from their downline. Don Wilson recommended that the Bergfelds be confronted. That confrontation took place on August 7, 1995 and confirmed that the Bergfelds were (1) wrongfully withholding money owed to their downline; and (2) the Bergfelds were bypassing the Musgroves to sell directly to their downline. Bill Bergfeld in fact, admitted that what he had done was both "illegal and immoral." These facts were reported to Don Wilson in a phone conversation that took place on August 8, 1995.
31. Don Wilson assured the Musgroves and others that the situation would be promptly investigated and would be resolved within the Yager organization "… to everyone's satisfaction." By mid August, Don Wilson, Randy Haugen, John Sims and Randy Walker had been put on notice that (1) the Bergfelds were stealing money; and (2) that the Musgroves business was being damaged. By mid-August the Musgroves had been assured that the matter would be investigated and would be fixed.
32. On August 16, 1995 Kathy Tache, a distributor downline from the Musgroves contacted Cecelia Musgrove and demanded to know "what was wrong with the Bergfelds" and what had happened to money owed by the upline. She was told exactly what the Musgroves knew and that they had been assured by their upline (Wilson, Haugen, Sims and Walker) that the situation was going to be resolved quickly by that upline. Kathy was encouraged to contact the upline and confirm what the Musgroves had told her. Kathy contacted Valerie Haugen only to be told that there was nothing wrong with the Bergfelds and she (Valerie) didn't know what "… the problem was with the Texas Emeralds." When this conversation was reported, the Musgroves, in disbelief, called Valerie Haugen to confirm her position. Not only did she confirm her representation to Kathy Tache, but she told the Musgroves in no uncertain terms to cover-up "the Bergfeld situation" and that the best way to handle the situation was "… to leave the downline in the dark." That evening, Joe Morrison (upline from the Musgroves) along with Jeff, and others went to Randy Walker's home and demanded a solution to what was becoming an untenable situation. The meeting ended badly when the Walkers kicked everybody out of their house.
33. By September, it had become apparent that the Bergfelds had stolen thousands perhaps hundreds of thousands of dollars from their downline. It also became increasingly apparent that the upline directly responsible for money channeled through the Bergfelds was not only unwilling to do anything but was in fact, willing to sponsor, edify and bless Bill Bergfeld as a valuable part of the Yager organization. As their business continued to suffer, the Musgroves watched in disbelief when Bill Bergfeld appeared on stage at a Dexter Yager function that occurred September 15-17, 1995 at Salt Lake City. They watched while Randy Walker praised Bill Bergfeld at a men's leadership conference that took place on October 13-15, 1995. They watched with incredulity when Bill Bergfeld spoke at a Don Wilson leadership conference that took place on November 17-19, 1995.1
1The evidence will be in this case that a common refrain from the upline above the Bergfelds was that Bill Bergfeld was "too much of a high profile diamond" who is "… good at putting numbers in."
34. John Sims' response during this period was typical. First, he would refuse to discuss the situation or return phone calls. Once the Bergfeld theft was undeniable, his solution was to tell the downline to counsel with Randy Walker -- the upline diamond who had refused to address the Bergfeld situation for months. Walker, as a possible competent upline counselor to his downline was further compromised by the fact that he had purchased his diamond rather than earning it.
35. Finally, in April 1996, Don Wilson, after a confrontation at a Miami function, agreed that it was probably inappropriate for someone who had stolen considerable money from his downline to be repeatedly sponsored, edified and held up as a paragon of virtue. He conceded that the failure of the Bergfelds' upline had adversely impacted several Texas organizations including the Musgrove groups. As a solution, he agreed that Bill Bergfeld would not be included in Dexter Yager's "profiles of success book"; that steps would be taken to pay back the money stolen by the Bergfelds; and Bill Bergfeld would no longer appear on stage; and that he was willing to put his solution "… in writing."2 Don Wilson also made clear in no uncertain terms that any permanent solution to conflicts between distributors would be solved within the Yager organization. It was made clear that "going to Amway or the ADA would be considered a big mistake.
2This solution was never implemented as promised. Nothing was ever reduced to writing. To date, there has never been a final accounting or audit of what Bergfeld withheld from his downline.
36. The effect of the Bergfeld situation and the subsequent upline cover-up had a devastating impact upon the Musgrove's groups. People in their group had ultimately lost trust in the Yager organization as the result of (1) theft and (2) continual edification of the Bergfelds after discovery of the theft. Inevitably, once promising distributors under the Musgroves left Amway and numbers for Jeff and Cecelia dropped significantly.
37. The Musgroves had also lost trust in their upline. Indeed, Bergfeld was only taken off the stage when the issue was forced with Don Wilson in April, 1996. Although the upline above the Bergfelds took steps to pay some of the downline money stolen by the Bergfelds, the Musgroves needed assurances that the Bergfelds situation or its ilk would not reoccur. They also needed a final accounting.
38. Nevertheless, the Musgroves were still committed to building a business that had been successful for them. Although their business had suffered their network was still intact. Indeed, by the fall of 1996, the Musgroves' goals were simple. First, they wanted to rebuild the business that had been significantly harmed by the Bergfeld situation. Second, they wanted and needed continual access to the Yager markets. Third, they needed an upline they could not only trust, but would provide the necessary protection against another Bergfeld situation and proper management and training support.
39. Given the failure of the upline to address the Bergfeld situation, it should not come as a surprise that before the Walker/Haugen/Sims/Wilson upline could provide a framework for rebuilding the business, certain questions relevant to rebuilding the Musgrove business needed to be answered:
i) Why did the upline after discovering the Bergfeld situation, refuse to investigate?
ii) Why did the upline, after learning that Bergfeld was a thief, represent to Kathy Tache and others that there was nothing wrong with the Bergfelds?
iii) Why did the upline continue to sponsor and edify the Bergfelds after discovering that they were thieves?
iv) What steps would be taken in the future to ensure that another Bergfeld situation would not occur?
v) What steps could be taken to rebuild the business?
vi) How much money did the Bergfelds steal? What sort of accounting for those amounts is going to be done?
vii) How would the Yager organization provide the necessary training and management support that was needed to rebuild the business?
40. In the summer and fall of 1996 the Musgroves and others posed these questions and were answered with either silence, evasion, or a continued insistence that you needed to work it out with Randy Walker. Randy Walker was the man who knew the Bergfelds had been stealing money before the Musgroves found out. Walker had refused to investigate when confronted with the facts. Walker had responded to the Musgroves' concerns by kicking them out of their house. Walker had obtained his diamond by purchasing part a portion of some of his legs. Walker had sponsored and edified Bill Bergfeld at his functions after Walker knew he was a thief. Despite these facts, the Musgroves and others were now being told to disregard common sense and trust Walker as their direct upline. In other words, the solution offered to them, was to place their business in the hands of a distributor who had neither credibility nor competence. If limited to that choice, the Musgroves believed that their business would fail because their upline was neither trustworthy nor capable of providing necessary management support. Although the key decisions that destroyed their business were yet to occur, the Musgroves' fears were ultimately proven to be correct.
41. In an effort to save their businesses, the Musgroves attempted to find someone upline other than Randy Walker within the Yager organization that could be trusted and provide management support. In the fall of 1996, one person they communicated with was Kelly Robbins, a diamond upline from Randy Walker but downline from Don Wilson. Unlike the Sims/Haugen/Wallrer upline, Kelly Robbins was willing to listen and try to help work towards a solution that enabled the Musgroves and others to find the necessary management support for their businesses.
42. In late November and December, the Musgroves and others made it known to Randy Walker that they were seeking a solution to their problems that might not include him as part of their immediate upline. Walker's response on December 4th, 1996 at a meeting attended by several parties was to state not only that he "was pissed" but because he was "plugged into Don and Dex" that he contemplated "destroying those businesses challenging his authority" (including the Musgroves) and "… bring them to their knees.
43. In a conversation between Don Wilson and Kelly Robbins in December, 1996, Don Wilson's knowledge of the situation confronting the Texas group in late 1996 is apparent. Don acknowledged that the Texas groups had been "stiffed for a lot of money" and that he knew that the mishandling of the Bergfeld situation had a "devastating impact."
44. Don Wilson further acknowledged Randy Walker's mismanagement. The best he could say about Walker was that he was "teachable." He acknowledged that Walker's acquisition of his diamond ship was suspect, that Walker got in over his head, that Walker had exercised bad judgment, and that Walker had sent internally inconsistent messages to his downline. In other words Walker was incapable of providing necessary training and management support needed by the Texas downline during a critical time period -- the fall of 1996.
45. Don Wilson further acknowledged that John Sims was untrustworthy. This lack of integrity was confirmed by Don Wilson's description of Sims as "manipulative", as "a man with an agenda," and as a "man seeking control … of the hierarchy inside the Yager organization." In other words, John Sims was not a person capable of providing appropriate management and training to his downline.
46. Don Wilson also clearly recognized the risk that the Texas groups were facing. In describing their plight he commented to Robbins "… a body can take only a certain number of traumas -- and then it dies.
47. Despite Don Wilson's knowledge that the point of upline access to the Yager organization, Randy Walker, was incompetent and untrustworthy, his "solution" offered to Joe Morrison and the Texas groups including the Musgrove groups was that they needed to get with Randy Walker. In short, he told the Musgroves to put their business in the hands of a man who had already threatened to destroy the Musgroves and "bring them to their knees.
48. For reasons that were apparent to all but the most obtuse, Don Wilson's solution to the Texas problems "get with Randy Walker" was untenable. Accordingly, the Texas group made a decision to contact a principal of the ADA -- Jody Victor.
49. In December 1996 a phone conversation took place between Jody Victor and Kelly Robbins, Joe Morrison, Mark Pruitt and other affected members of the Texas groups.
50. Jody was fully appraised of both the Bergfeld situation and the impossibility of continuing to have Randy Walker as the upline access entry point to the Yager markets. Jody confirmed a number of things in this conversation including the following:
i) That Don Wilson's proposed solution to get with "Randy Walker" and expect proper management support from him was untenable and unreasonable. Jody Victor's specific comment was "you can kiss my butt on main street; it is not going to happen with Randy Walker.
ii) The last thing Don Wilson should do is make an "arbitrary" decision in resolving the situation; Amway in fact had a process for dealing with such situations that would allow access to a trustworthy upline that would provide appropriate management support.
iii) That Dexter Yager was the person in control of the organization and that Don Wilson was one of his "generals." To cross Don or Dexter would be the equivalent of "being drawn and quartered.
iv) That a solution needed to be worked out within the Yager organization with Kelly Robbins or an equivalent distributor as the upline "go to guy" so that the Texas businesses could be saved and receive appropriate leadership, management and training support.
v) If a solution could not be worked out with Don Wilson, Jody Victor and the ADA were available to resolve the situation.
vi) That the "Bergfeld" situation had been handled in a disastrous manner and could have been handled at the beginning in an appropriate manner.
vii) Victor acknowledged that the Texas groups was at the end of their rope.
viii) If Walker had not acquired his diamond level legitimately, his edification as a diamond was both "illegal and immoral.
51. In the spring of 1997, Don Wilson continued to insist that the only solution was that the Texas groups report to Randy Walker and be controlled by the Haugen/Sims/Walker line of sponsorship. None of the issues raised by the Bergfeld situation were addressed or answered. No feasible upline means for providing the necessary management, training and leadership required to save the Texas groups was offered.
52. In March, 1997, Joe Morrison, in a last effort to resolve the situation and save the Texas businesses approached the Amway corporation. Once that happened, Yager/Wilson retaliation became inevitable. On June 2, 1997 Don Wilson came to Houston, Texas and announced the following:
i) There would be two groups: the Robbins/Morrison/Councill team and whatever groups desired to affiliate with them and the Haugen/Sims/Walker team.
ii) The Robbins/Morrison group would be excluded from the Yager/Wilson markets .
iii) His proposed solution was "the Amway solution" and had the approval of Yager, Jody Victor, and Amway.
53. For the Musgroves, Don Wilson's arbitrary decision to divide markets defined their market access as either (1) a line of sponsorship that had been arbitrarily excluded from the Yager/Wilson markets; or (2) have market access controlled by a line of sponsorship led by a group that had allowed, tolerated and encouraged the Bergfeld situation. This was the "last trauma to the body." Without reasonable access to the Yager markets and proper management support, their ability to build a business within the Amway/Yager organizations had effectively been destroyed.
LEGAL ANALYSIS
A. No legitimate business justification existed for the June 2, 1997 decision.
54. It is clear that the Wilson, Haugen, Sims and Walker groups made a decision intended to destroy the Robbins/Morrison groups by denying them access to the Wilson/Yager system. The ramifications of the Amway approved solution announced by Don Wilson were as follows:
i) The Robbins/Morrison groups were denied any future income earned by participating in functions controlled by Yager and/or Wilson.
ii) Exclusion from the Yager/Wilson system and the offering of a choice of either being "plugged into Dex" or not, had the expected effect of causing groups and individuals down line from Robbins and Morrison to "defect" from that line of sponsorship and either quit Amway altogether or be reallocated to a distributor line that benefits Wilson and Yager.
iii) People who choose to stay with the Robbins/Morrison groups would because of the market exclusion be compelled to completely recreate the mechanism for training, motivating and retaining distributors within their groups. Since the vast majority of "tools" and seminars used prior to June 2, 1997 inherently assume that the Yager system is the appropriate method to train, motivate and retain distributors, exclusion from that system completely undercut and destroyed the mechanism that the Texas groups had previously used to build their businesses.
iv) Exclusion from the Yager/Wilson system also meant exclusion from the organization infra-structure that provides the framework for servicing downline distributors necessary to make that system work. Exclusion from
that infrastructure meant that to survive, the Robbins/Morrison groups would have to create an infrastructure that is the equivalent of the Wilson/Yager system.
v) Even if the excluded groups recovered, the boycott of the Robbins/Morrison groups from the Yager/Wilson system clearly put those groups back several years.
55. Given the repeated message that a failure to be plugged in Dexter Yager was equal to "devastation" in Setter's words, equal to being "drawn and quartered" in Jody Victor's words and as Don Wilson put it on June 2, 1997 "a much bigger deal than anything else" it was clear to the Musgrove family that association with the Robbins/Morrison groups would not save their businesses.
56. The market division pronounced by Don Wilson was motivated by a number of anti-competitive and tortious motives. The initial cause of the decision obviously was because Joe Morrison and Kelly Robbins had approached Amway and the ADA to resolve events arising out of the Bergfeld situation. Thus, first and foremost, the market exclusion on June 2, 1997 was direct retaliation against distributors who had sought to avail themselves of a system of redress (the ADA and Amway) that was offered as an incentive to get into the Amway business. Don Wilson, apparently with the approval of Amway and the ADA by announcing a final solution obviously circumvented the process of redress as set out in the Amway distribution manual.
57. Second, it was clear that Yager, Wilson, Sims, Haugen, and Walker all had benefitted from the Bergfeld fraud. They had in fact, all took their cut from income generated by the Bergfelds and their downline. Further, even after the Bergfeld fraud was known Yager, Wilson, Sims, Haugen and Walker continued to praise, edify and sponsor the Bergfelds. At best, this was cover up of fraud. At worst, it was collusion and participation in the fraud. Thus, it was in the Wilson, Sims, Haugen and Walker's best interests to deflect any inquiry into the handling of the Bergfeld matter. Indeed, to date, although some money stolen by the Bergfelds has been returned, no final accounting has been done. No one is sure how much was stolen. Questions about the matter have never been answered. Don Wilson's solution of June 2, 1997 allowed Wilson and his cabal to indefinitely postpone a final accounting. Because the Robbins/Morrison groups were no longer part of the Yager system, any questions they might have could be ignored.
58. Third, the June 2, 1997 market allocation created an opportunity for the Wilson/Sims/Haugen/Walker chain to circumvent the Amway "cross group sales" rule that prohibits sales transactions outside of a sponsoring line. Since it was likely that any group not already affiliated with the Robbins/Morrison groups would choose to stay with the group that was plugged in to "Dex", the June 2, 1997 decision was a thinly disguised ploy to horizontally coerce a market allocation to benefit the Wilson/Sims/Haugen/Walker distribution chain to the detriment of distributors associated with Morrison/Robbins.
59. Thus, the market boycott and horizontal allocation of June 2, 1997 was motivated by retaliation, to cover up fraud and theft inquiries, and to circumvent the "cross group sales" rules. As no legitimate business justification existed for the market division, the Musgroves were given the choice of being excluded from the Yager/Wilson markets or have their money flow and management support controlled by an upline that had covered up fraud, actively harmed their business and threatened to destroy their business. Their ability to build their business had been foreclosed.
B. Antitrust and tortious interference claims:
60. Given these facts, it is plain that the Musgroves have a variety of claims under Texas law that allow them to recover against Walker/Wilson, Haugen/Sims/Yager, the ADA, Victor and Amway.
61. First and foremost, the Yager system is a system of resale price maintenance. Unlike the "cross group sales" rule sanctioned in the 1979 FTC order regarding "cross group sales" the Yager system is not a vertical restraint "incidental" to price controls. The upline system of tool rebates on tapes, videos and books cannot function without the vertical system set up by Yager and (in his words) controlled by Wilson.
62. Second, the market division of June 2, 1997 was both a horizontal market boycott and a tying of one market to another. Both are per se illegal under the Texas Antitrust laws.
63. In other words, the only way that a distributor could maintain access to the Wilson/Yager function markets is if they subjected themselves to being under the direct control of the tools markets operated by the Haugen/Sims/Walker line of distributorship. As such, Wilson conditioned participation in a market controlled by Yager upon participation in a separate market controlled by Haugen, et al. This is essentially tying one market to another and using market power to promote a calculated result (market allocation) for highly suspect motives. Such an act under the Texas antitrust laws is illegal per se. See e.g. U.S. v. Topco, 405 U.S. 516 (1977) (horizontal market allocation is per se unlawful). "… concerted refusals by traders to deal with other traders, have long been held to be in the forbidden category." Klors v. Broadway -- Hales Stores, 359 U.S. 207, 212 (1959). See Also Jefferson Parrish Hospital District v. Hyde, 466 U.S.2, 21-25 (1984) (using market power to coerce participation in a second market is an illegal tying arrangement).
64. Third, by forcing an illusory choice upon the Musgroves, the Yager/Wilson organization directly interfered and destroyed any prospective business opportunities. Because the decisions made by Wilson, Yager et al, have no legitimate business justification, the acts are actionable as interference with and destruction of prospective business relationships.
C. The Yager organization and Amway are liable for a failure to provide essential services necessary to the Musgroves to succeed.
65. Although the Musgroves were independent distributors, they were also distributors operating within two hierarchal organizations (1) Amway and (2) the Yager organization. A necessary condition to business success was that the Musgroves would receive the services necessary to enable them to build their business. Indeed, the entire premise behind the Yager and Amway organizations is that "we will provide the organizational apparatus necessary to enable you to build your business." The following are essential services to succeeding as a distributor within the Yager system:
i) you must have an upline that can be trusted;
ii) you must have an upline that provides appropriate training;
iii) you must have an upline that provides management skills;
iv) you must have an upline that is accountable with regard to financial matters;
V) if the upline is incapable of providing necessary management, training and trust a system must be in place that provides alternative and appropriate leadership before your business is destroyed.
66. Most, if not all, of these concepts are implicit in both the Amway Business Reference Manual and/or taught as necessary management skills with the Yager/Wilson organization. The Musgroves were entitled to assume that (1) no one in their upline would engage in any deceptive or unlawful trade practice; (2) that their upline would operate their distributorships in a financially responsible, solvent and business like manner; and (3) that their upline would properly train the down line or if"… the upline is unable to train his or her distributors, he or she (the upline) was required to make arrangements to ensure management support."
67. The Musgroves were entitled to receive appropriate business support, management, training and leadership from Yager's organization and Amway. The solution offered to them on June 2, 1997 provided none of those essential services and in fact, offered them an upline that had failed to properly handle the Bergfeld's situation, had refused to properly account for lost money, had refused to redress management and business concerns, and had threatened to destroy their business. This was a denial of essential services.
D. Claims against the ADA and Amway.
68. The ADA knew that the Texas groups were at risk no later than December, 1996 when Jody Victor was contacted. Amway was put on notice no later than March of 1997 by Joe Morrison. The only reasonable interpretation of Don Wilson's comments of June 2, 1997 are that what he did had the approval of both Amway and the ADA. The implication that Don Wilson's "solution" had Amway's blessing has to our knowledge never been repudiated. This is but one of several facts that creates a basis for holding Amway and the ADA liable.
69. This conclusion is based on a number of legal and factual points. Amway controls and supervises, and has the ability to control and supervise, its distributors directly and indirectly through several means, including, but not limited to, the following:
a. Amway's Sales and Marketing Plan, and the terms of its contracts with individual distributors, including Distributor Defendants,
b. Amway's Code of Ethics, Rules of Conduct, and other various rules, prohibitions, regulations, and requirements promulgated by Amway.
c. The Amway Distributors Association, the ADA Board, and ADAC and similar organizations controlled and/or influenced by Amway.
d. Amway literature and publications, such as the Business Reference Manual, which detail the rules and standards of conduct required by Amway distributors and explain that violations of these rules and standards can result in termination of the distributorship. For example, the following rules are included in the Business Reference Manual:
Rule 10: Do not engage in any deception or unlawful trade practices.
Rule 11. Do not operate or engage in illegal or unlawful business enterprises or be convicted of an illegal or unlawful activity.
e. Tapes, speeches, rallies, seminars, functions, conferences, and meetings at which Amway representatives, distributors, potential distributors, and/or other Amway-related individuals gather.
f. Control of trademarks, service marks, and trade names.
g. Other forms of exercising control and authority, including but not limited to providing education, information, and/or training, and taking disciplinary action, such as censure, admonishment, reprimand, penalties, suspension or removal of certain rights and/or privileges, including termination of distributorship, agency, employment, and/or any other relationship with Amway.
70. Amway also exercises control and authority over its distributors by establishing detailed requirements about what Amway distributors can and cannot say to customers and potential distributors in connection with the presentation of the Amway Sales and Marketing Plan.
71. Amway exercises control and supervision over its distributors by requiring material produced and distributed to develop the sales and distribution of Amway products and the solicitation of new Amway distributors to be pre-approved by Amway corporate headquarters.
72. Through distributorship agreements, agencies, organizations and entities such controlling fact."
79. The evidence also establishes the second element of ratification, i.e., action by Amway or the ADA which evidences an intent to approve or adopt Don Wilson's unauthorized acts.
THIRD PARTY CLAIMS
80. The third party defendants, listed above, are jointly, severally and collectively liable for the plaintiffs' claims brought in this lawsuit. All of the plaintiffs who originally brought this lawsuit who were down-line from the Musgroves or within the Musgrove group were (as were the Musgroves) adversely harmed and damaged by (1) the third party defendants participation in, involvement in, cover-up of and benefit from the Bergfeld thievery; (2) maintenance of the a re-sale price maintenance scheme on the part of the third-party defendants; (3) failure to provide essential services as owed by the Yager organization, its upper hierarchy, Amway, and the Amway distributors organization. (4) An illegal market division.
81. To the extent that the Plaintiffs relied to their detriment upon representations made by the Musgroves, the defendants ultimately responsible for damages flowing from those representations are the third party defendants who created, maintained and perpetuated acts complained about by the plaintiffs.
82. As the ultimate manufacturers, distributors and marketers of Yager products and markets, the third party defendants owe common law indemnity to the Musgroves for any claim that the Musgroves are found liable for in this suit.
83. The Musgroves plead further that any representations passed on by the Musgroves, if any, to the Plaintiffs in this case were made with the belief that said representations were true and without any knowledge of the third-party defendants intent to deceive. Thus, to the extent the Musgroves are found to be liable for any of the plaintiffs claims, they are only "pass through" defendants in that the culpable defendants are the third-party defendants. To the extent that the Musgroves are found to be liable on any of the claims brought by the Plaintiffs in this case, the third-party defendants owe them contribution and/or indemnity.
CROSS-PLAINTIFF CLAIMS AGAINST THE THIRD PARTY DEFENDANTS
84. The facts give rise to a number of claims that the Musgroves have against the third-party defendants which are independent of any indemnity and contribution claims that the third party defendants owe to the Musgroves. Prior to this filing, the Musgroves sent a notice letter to the defendants. The filing of this suit against the Musgroves and the filing of a declaratory judgment action in federal court means that any notice letter requirements for the following claims have been satisfied.
VIOLATIONS OF THE TEXAS FREE ENTERPRISE ACT
85. At all material times, Yager, Internet, the Wilsons, the Higgins, the Sims and Walkers maintained a monopoly over the sales, marketing and distribution of business support materials within the Yager distribution networks. This monopoly is maintained through a system of market controls and price maintenance described in detail in the factual allegations in this petition. This monopoly is further maintained and sanctioned by Amway, the ADA and the third party defendants through a price fixing scheme that exists in every distribution network that functions within the Amway system. Among other things, the Yager network has agreed with other networks within Amway to maintain prices on all business support materials. This monopoly is further maintained by tying essential distributor support services such as training, education and advancement within the Yager system to acceptance of the Yager market controls. These acts and the facts described in detail in this petition give rise to per se illegal violations of the Texas Free Enterprise Act including, attempt to monopolize, maintenance of an illegal monopoly, price fixing, resale price maintenance, group boycotts and illegal market division. With respect to the Musgroves, these acts include but are not limited to a market boycott or division implemented on June 2,1997 by Don Wilson, Randy Haugen, John Simms, Randy Walker and Dexter Yager. This boycott, among other acts, destroyed the business that had been built by the Musgroves and create liability on the part of these and all other third party defendants jointly, severally, and concurrently under the Texas Free Enterprise Act. Tex. Bus. & Comm. Code, SECTIONS 15.01-15.40.
86. As the result of the action taken by the defendants, the Musgroves suffered as ADAC, and through publications such as the Business Reference Manual, Amway was and is in a position of authority, control and supervision over its distributors.
73. Amway, in its failure to properly control and supervise its Distributors enabled the Yager/Wilson line to destroy the Texas defendants.
74. Given Don Wilson's position on the ADA and his representations June 2, 1997, Amway cloaked the Don Wilson with actual and apparent authority to represent Amway at that meeting.
75. Given the notice given to Amway and the ADA, these organizations are clearly liable.
76. Although Don Wilson acted on behalf of Yager and himself, he also acted as a speaker for Amway and as a member of the executive council of the ADA. Agency law dictates that Amway be found liable. Regardless of Amway's business form, Mr. Wilson acted as an agent for the company on June 2nd. Mr. Wilson identified himself as acting for Amway. He is unquestionably a vice-principal. The actual authority as well at a minimum his agency relationship was established because Amway ratified his acts.
77. The conclusion that Don Wilson acted for the ADA and Amway is in part based upon theory of ratification. Ratification occurs when two elements are present: (a) the principle learns of or should know the material facts of the act; and (b) fails to repudiate those acts as unauthorized by the principle.
78. At a minimum full knowledge of the facts will be imputed to Amway or the ADA because it is clear that the firm had "knowledge or information of facts sufficient to put (it) upon inquiry which if reasonably pursued would lead to the discovery of the damage to their business in the amount of past lost and future business revenue. The damages resulted from the above violations of the Texas Free Enterprise Act and resulted in injury to the Musgrove business in amounts in excess of the jurisdiction of the court. At all material times the third party defendants were involved in a contract, conspiracy, and/or combination to restrain trade that directly and proximately resulted in damages that are capable of reasonable ascertainment and are not speculative or conjuncture.
87. Under Section 15.21(a)(l) of the Texas Business and Commerce Code, the Musgroves are entitled to recover any and all reasonable and necessary attorney' fees for prosecuting this action. Further, because the above conduct was flagrant and/or willful the Musgroves are entitled to mandatory treble damages as set out in Texas Business and Commerce Code, Section 15.21(a)(l).
VIII.
TORTIOUS INTERFERENCE WITH CONTRACTUAL RELATIONS PROSPECTIVE BUSINESS RELATIONS AND CONTRACT.
88. The third party defendants, jointly, severally and concurrently destroyed the distributor businesses built by the Musgroves in the manner more specifically described in the factual portion of this Petition. At all material times, the third party defendants had knowledge of the business relationships that were maintained by the Musgroves in developing building and maintaining their business. At all material times, the third party defendants knew that but for their acts, the Musgroves in all likely possibility would have continued to build their businesses and continue to prosper as distributors within the Amway and Yager organizations. In depriving the Musgroves of essential distributor services, in sanctioning the Bergfeld fraud and by acting to destroy the Musgrove business the third party defendants, interfered with prospective contractual relations in such a manner as to give rise to claims for interference with prospective contractual relationships as defined under Texas law.
89. At all material times the tortious interference with prospective business relationships was committed with legal malice and/or was accompanied by fraud, and/or other acts sufficient to allow an award of exemplary damages. As such, the Musgroves are entitled to recover, in addition to all actual damages, exemplary damages up to the amount allowed by law.
DECEPTIVE TRADE PRACTICES ACT
90. Prior to the filing of this petition, the Musgroves sent a notice letter for purposes of seeking settlement of their claims. That notice letter satisfies any requirements for specific notice under the Deceptive Trade Practices Act. Further, all non-Texas residents filed a declaratory judgment act suit in federal court against the Musgroves. That act, coupled with the necessity of answering this suit has created a situation where the Musgroves have satisfied any notice requirements imposed by the Texas Business and Commerce Code that codifies the Texas Deceptive Trade Practices Act.
91. At all material times, the Musgroves were consumers as defined in Tex. Bus. & Comm. Code. Am., Section 17.50. In connection with these claims, the third party defendants collectively, jointly and/or severally used or employed a deceptive, false, or misleading act or practice as enumerated in Tex. Bus. & Comm. Code. Ann. Section 17.50(a). More specifically, the third party defendants represented, warranted and otherwise promised essential services necessary to a successful distributorship within the Amway and Yager organizations. These essential services include but are not limited to appropriate training, appropriate controls over the distribution of money owed as the result of selling Yager business products, methods for requiring accountability on the part of up-line distributors from the Musgroves with respect to distribution of money earned, providing appropriate business models at business functions, enforcing the Amway Code of Ethics, rules and regulations as articulated in this petition against distributors who act illegally, fraudulently or to illegally restrain competition. In failing to provide these essential services after representing that such services would be provided, the third party defendants represented that certain services would be provided to the Musgroves that were never provided. These actions give rise to violations of sections 5, 7 , 12, 20, and 23 of Section 17.46(b) of the Tex. Bus. & Comm. Code.
92. Further, the third party defendants acted unconscionably in so far as they took advantage of the Musgroves' lack of knowledge, ability, experience or capacity of the Musgroves to a grossly unfair degree. As such the facts as set out in this petition state a claim for unconscionability as defined in section 17.45(5).
93. These acts caused or produced and/or proximately caused damage to the Musgroves of a pecuniary nature, including the destruction of their business. Further these acts specifically harmed the credit reputations of the Musgroves. These acts proximately caused mental anguish and other intangible losses flowing from the deceptive acts. For these losses the Musgroves are entitled to actual damages.
94. The Musgroves are entitled to recover exemplary damages in that one or more of the deceptive acts were committed knowingly and/or with necessary intent sufficient to allow an award of exemplary damages. Further the Musgroves are entitled to recover any and all necessary and reasonable attorney fees.
BREACH OF FIDUCIARY, QUASI CONTRACTUAL AND DUTIES ARISING UNDER PROMISSORY ESTOPPEL
95. The primary organization the Musgroves belonged to was the Yager organization, a distributor network that also happens to be an organization that distributes Amway products. Nevertheless, the Yager group's association with the Amway group is used to induce new Yager distributors into the Yager organization. Association with Amway allows the Yager group when it recruits to represent (1) Yager's group is associated with a major corporation; (2) Amway has in place an organization that allows independent distributors a full and fair opportunity to develop their business as they like. Amway provides market literature designed to support these representations. Amway puts it this way "… whatever your goals, you control how quickly or how slowly you build your business. After all it's your independent Amway business." (Italics in original). "… our (Amway's) intent it to preserve the ongoing integrity of the sales and marketing plan … (Direct distributor manual). An inherent part of what Amway's claims are that Amway provides a fair, impartial and objective means of resolving distributor disputes consistent with a published code of ethics that prohibits unlawful and deceptive trade practices. Once the Musgroves agreed to be distributors in the Yager organization with the promise they would be allowed to develop their businesses, they were entitled to assume and did assume that any dispute between distributors be resolved by Amway in a fair, objective and just manner consistent with the Amway code of ethics and the expressed intent of Amway to preserve the integrity of its system. The reliance upon these representations was reasonable and done in good faith. At ail material times, the Musgroves relied upon the promises made
by members of the Yager organization and Amway to their detriment.
96. In truth, Amway is arbitrary and capricious in supporting its distributors. The Amway corporation has in fact, committed itself to supporting the Yager organization and its hierarchy to the detriment of distributors that are induced to enter the Yager organization. This subjective bias on the part of Amway favoring the Yager distributorship is motivated by money, greed and avarice. The Yager organization makes Amway a lot of money. As such, Amway is willing to disregard integrity, truth, objectivity, honesty and all other ethical concepts embodied in the Amway code of ethics to protect Yager's organization. The facts that prove Amway's bias, include but are not limited to the following:
EXPECTED AMWAY BEHAVIOR AMWAY'S ACTUAL BEHAVIOR
IF IT OBJECTIVELY BEHAVIOR WITH RESPECT
SUPPORTS ITS "INDEPENDENT" TO THE YAGER ORGANIZA-
DISTRIBUTORS IN A MANNER TION AND/OR THE
CONSISTENT WITH THE AMWAY MUSGROVES.
CODE OF ETHICS.
Amway would have conducted No such investigation was
a full, fair and complete investi- ever done. Amway
gation of the Bergfelds' financial sanctioned and approved
records, and the records of all Wilson and Yager's
individuals who financially "solution" without any
benefitted from the Bergfeld objection.
fraud and/or covered it up and/or
continued to edify the Bergfelds
after the fraud was discovered.
Amway would have acted only after
this investigation was reasonably
complete.
Statements from all relevant parties Not done
including the Yagers, Wilsons, Simms,
Haugens, Walkers and Bergfelds
would have been taken.
Without knowing all the facts, Amway has now affirma-
Amway would have separated tively contended that Yager
its conducted from the Yager and others in his
organization by not taking organization did nothing
a position with respect to wrong.
whether or not members in
Yager's organization acted
tortiously.
Because Amway is a corporation Not done. Amway has
"separate and apart from its never filed contribution
independent" Distributors, Amway or indemnity claims against
would be expected to file a claim Yager in suits where both
for contribution and indemnity Yager and Amway have been
against Yager and his group for sued by a Yager distributor.
torts, if any, committed against
the Musgroves.
Amway would have provided its Not done.
Distributors equal and fair access
to its dispute resolution process."
This would have included the Musgroves.
Amway would not, given the 1979 Amway has long tolerated
FTC decree tolerate a distributor this aspect of the Yager
Organization where over 50% of the business.
income of that organization is made
by selling business materials to only
people induced into entering the
organization.
Amway, given the FTC' decree and Amway, not only tolerates
statements in that decree would not the system, it also denies
tolerate the resale price maintenance that it exists.
system practiced within the Yager
organization.
Amway would reject and prohibit Amway has full knowledge
the practice of Yager distributors of this practice and ignores it.
refusing to help downline distributors
unless business materials are
consistently purchased by the
downline.
Amway would understand and Amway has full knowledge
prohibit Yager's organization of this practice by Yager's
from representing that tapes, group and accepts it.
books, and function participation
are necessary to success because
such representations imply that
business materials are non-optional.
Amway would require prior legal Amway imposes this require-
approval for all business materials ment on some distributors.
prior to publication to ensure It does not impose it on
integrity of marketing plan. Yager's group.
Amway would require that all No such financial
distributors induced into the disclosure is required.
Yager organization be provided
complete financial information
about how distributors in the Yager
organization make income from
functions, tapes and books.
Amway would specifically Amway specifically
prohibit Yager violations of accepts any violations
the so called cross-group of this rule accepted at
selling rule. Yager direction.
Amway would have in place No such mechanism exists
an effective compliance mechanism with respect to the Yager
for use against aberrant distributor organization.
organizations such as Yager's.
97. What these and many other facts show is that Amway will always come down on Yager's side of any intra-distributor dispute. This practice is completely contrary to the practice of Amway as represented to distributors induced into the Yager organization because of its association with Amway. The decision on the part of Amway to ratify the Yager/Wilson market division is proof of Amway's unwillingness to act independently of the Yager organization. Amway's decision to join legally with the Yager organization as parties maintaining legally inseparable interests confirms Amway's lack of objectivity. In supporting Yager's solution, Amway breached fiduciary duties owed to all of its distributors, including the Musgroves. Further, because the Musgroves justifiably and detrimentally relied upon the Amway inducements used to recruit distributors the third party defendants are liable for all actual damages caused under the doctrine of promissory estoppel.
FRAUD
98. Pleading further, the Musgroves plead that the above acts constitute common law fraud and statutory fraud as codified into Texas law. The third party defendants, jointly, collectively and severally through acts of commission or omission perpetuated the Bergfeld fraud, benefitted from it and covered it up. The third party defendants were motivated by cluded financial gain. They acted with the intent necessary to trigger and justify an award of punitive damages under Texas law.
99. As persons and/or business entities, all third-party defendants that were part of the Yager organization that were upline of the Musgroves owed a duty to reveal any and all information regarding the Bergfelds. In failing to disclose such information, these third party defendants injured the Musgroves such that they are liable under the common law cause of action of fraud and the equitable cause of action of constructive fraud.
100. To the extend that third party defendants were aware of the Bergfeld fraud, benefitted from it and failed to disclose its nature to the Musgroves, they are liable jointly and severally for actual fraud under Tex. Bus. Comm. Code Arm. §27.01 and liable for exemplary damages.
BUSINESS OPPORTUNITY CLAIMS
101. At the time the Musgroves were recruited to join the Yager organization it was represented to them that an initial consideration consisted of money spent on an Amway kit and a series of installment payments for business materials. They were specifically told that their upline would not help them to develop their businesses unless they agreed to future installment
payments for business materials. The total amount of this initial consideration exceeded $500.00. It was represented to them that they were likely to earn a profit in excess of the initial consideration and that the Yager organization and/or Amway would provide necessary sales and marketing support. As such, the Musgroves were presented a business opportunity as defined by Art. 5069-16.05(2).
102. As such, the third party defendants were required to disclose within ten days of the Musgroves' signature to the Amway distributor agreement each and every lawsuit against the third party defendants involving allegations of fraud or unfair, unlawful or deceptive practices. None of this information was provided. Additional information required to be disclosed under the Act was not disclosed. Failure on the part of Amway or members of the Yager organization to comply with the act constitutes an additional cause of action under the DTPA, allowing the Musgroves to recover actual damages, reasonable and necessary attorney's fees and exemplary damages.
DAMAGES
103. Under the above specified claims, the Musgroves are entitled to actual damages arising out of the destruction of on-going and previously successful business. More specifically, the Musgroves are entitled to past lost income, future lost income, reasonable and necessary attorney's fees, pre and post judgment interest and exemplary damages not to exceed $75,000,000.00.
WHEREFORE, PREMISES CONSIDERED, JEFFREY AND CECELIA MUSGROVE
pray that the Plaintiffs take nothing from their suit, and that the Musgroves be awarded all relief prayed for herein, and for such other relief to which they may be justly entitled.
Respectfully submitted,
Frank W. Mitchell
SBOT #14209500
Jonathan Axlerad
SBOT #00796146
Maloney, Martin & Mitchell, LLP
3700 Two Houston Center
909 Fannin
Houston, Tx. 77010
(713) 759-1600
FAX (713) 759-6930
Attorneys for Jeffrey and Cecelia Musgrove
CERTIFICATE OF SERVICE
I certify that a true and exact copy of the foregoing document was sent to all counsel of record, on this 22 day of June, 1998.
Jonathan Axelrad