In issuing a preliminary injunction against Equinox International Corp., a federal judge branded the big Las Vegas multilevel marketing company "a pyramid scheme" and said the Federal Trade Commission was likely to prevail in its lawsuit against the company.
"Because Equinox satisfies the test of a pyramid scheme and its policies do not effectively promote retail sales while preventing inventory loading, the Equinox program will likely be found an unfair or deceptive trade practice in violation of the FTC Act," Judge Johnnie Rawlinson wrote in her order. "Mr. (William) Gouldd (founder of Equniox) will also likely to be found subject to liability for the aforementioned actions."
Rawlinson issued the preliminary injunction against the company last month. The injunction required major changes in Equinox's business practices, including advertising, recruiting and sales policies. Rawlinson also ordered the suspension of Gouldd's salary, estimated at $200,000 per year.
The injunction will remain in effect until the case goes to trial next April. The FTC and six states, including Nevada, are seeking dissolution of the company, repayment of funds to sales representatives and civil penalties for alleged violations of the FTC Act.
The company's operations are now back in the hands of company executives, but court-appointed receiver Robb Evans must approve all expenses exceeding $50,000, as well as all advertising by the company. The assets of the company, as well as those of Gouldd, remain frozen by the court.
In the month he was in charge of Equinox, Evans incurred expenses of nearly $160,000 in conducting his investigation, according to Evans' court report.
In her order, Rawlinson painted an unsavory picture of the multilevel marketing company, one that closely mirrored the FTC's accusations. Equinox had protested the order's language, calling it too strong, and it denied the allegations of wrongdoing raised by the order.
Rawlinson found that Equinox recruits were often attracted by classified ads touting a job opportunity, a move that was usually encouraged by the company. Callers to the number provided were set up with a "job interview," at which time they were pitched the Equinox sales system.
Typically, these recruits were told that they could earn anywhere from $600 to $25,000 per month by joining Equinox. However, Rawlinson noted that recruits were not told that they could only reach these income levels if they met a difficult-to-attain quota.
Although lower levels were available, new recruits were typically pressured into joining at the manager level, the order stated. The manager level required an initial purchase of $5,000, and continuing sales of $1,000 per month in order to qualify for bonuses. According to Rawlinson, company officials would tell recruits that they would provide evidence that the recruit had been given a job paying $3,000 to $4,000 a month in order to qualify for a $5,000 loan.
This is now prevented under Rawlinson's injunction, which bars initial orders above $1,000.
Recruits were also saddled with heavy expenses. Rawlinson found that recruits were pressured to lease "desk space" from the company at a rate of $300 to $800 per month. They were also strongly encouraged to attend seminars conducted by Gouldd, at rates from $300 to $2,500 per seminar. Many of the rules and regulations outlining this information were inserted into the contract after the representative had signed, Rawlinson said.
These costs often caused most distributors to take losses. Equinox raised this point in its manual, but the FTC convinced Rawlinson that distributors were told not to read this manual, but merely to use it as a reference source.
Equinox responded that its seminars were purely voluntary. It asserted that the seminars showed recruits "how to develop confidence and assertiveness skills useful in all aspects of life and human interaction." It also denied that it encouraged misleading advertising by its distributors.
Rawlinson's order bars Equinox from using ads that present distributorships as job opportunities. It also requires the company to fully disclose all expenses, and to inform recruits how many distributors in a geographic area are eligible to receive bonuses.
Equinox had attempted to block this, saying that a requirement to provide average expenses was "unduly onerous, and would involve guesswork and speculation."
Once within the company, distributors were required to adhere to the "70 percent rule." Equinox said it designed this rule to prevent its distributors from buying up inventory without the intent to sell it merely to make quota, a practice called "inventory loading." Under the 70 percent rule, a distributor could not place a new order for items without first selling at least 70 percent of their last order. Unused and unopened merchandise could be refunded at 90 percent of the purchase price.
But far from being a protection, Rawlinson argued that Equinox used the 70 percent rule as a means to avoid giving out refunds.
The judge believed that most new orders were not verified to ensure that the 70 percent rule was met. In some cases, she found, receipts were even falsified.
When distributors later requested refunds, they would be denied because they had already placed new orders; and therefore, it was assumed the old merchandise had already been sold. Distributors could only request refunds by making a long-distance call, and were often kept on hold for extended periods of time, Rawlinson said.
Equinox made $7.5 million in refunds in 1998, but didn't disclose in court documents how many refunds were denied.
"Distributors that want to resign are saddled with a majority fo the inventory because Equinox refuses to allow the return of product that was certified as sold under the 70 percent rule," Rawlinson ruled. "The 70 percent rule becomes a sword for Equinox to deny refunds, instead of a shield to protect distributors from inventory loading."
In her order, Rawlinson ordered Equinox to dump these restrictions, and provide 100 percent refunds to resigning distributors. She also ordered the company to establish a toll-free number for the processing of these refunds.
Equinox responded that it always enforced the 70 percent rule, and denied that its representatives were ever authorized to engage in misleading behavior. The company also denied wrongdoing by Gouldd. However, Rawlinson ruled that the company had done little to prevent distributors from making the misleading statements.