There have been new developments in the class action litigation of Webster v. Omnitrition International Inc.. et al Nos. 94-16477 and 94-16478, in which the plaintiffs claimed violations of federal securities laws, anti-pyramid law, other anti-fraud provisions, RICO, and state law. In an earlier decision, the United States District Court for the Northern District of California had granted summary judgment in favor of all defendants. Plaintiffs appealed, and the United States Court of Appea1s for the Ninth Circuit has now reversed the grant of summary judgment in significant part (Webster v. Omnitrition International Inc., et al, 96 Daily Journal D.A.R. 2427). The Ninth Circuit's decision questioned the efficacy of certain safeguards apparently utilized by Omnitrition which are similar or identical to those used by legitimate direct selling/multilevel companies to distinguish themselves from fraudulent pyramid schemes. Using the test established by the Federal Trade Commission (FTC) in In re Koscot Interplanetary, Inc., 86 F.T.C. 1106, 1181 (1975), the Court found that there was a question as to whether the defendants had engaged in recruitment with rewards unrelated to product sales. Further, the Court held that at least some of Omnitrition's compensation was "facially unrelated to the sale of the product to ultimate users because it is paid based on the suggested retail price of the amount ordered from Omnitrition, rather than being based on actual sales to consumers." (Emphasis in original). The Court also asserted, "On its face, Omnitrition's program appears to be a pyramid scheme." The Court rejected Omnitrition's rebuttal (which had relied heavily on In re Amway Corp., 93 F.T.C. 618 (1979)) of the original pyramid allegations. Specifically, the Court noted that "Omnitrition argues that its formal adoption of policies similar to Amway's was sufficient to support summary judgment. We disagree." The Court continued, "...there must be evidence that the program's [Amway like] safeguards are enforced and actually serve to deter inventory loading and encourage retail sales. . . . The key to any anti-pyramiding rule in a program like Omnitrition's, where the basic structure serves to reward recruitment more than retailing, is that the rule must serve to tie recruitment bonuses to actual retail sales in some way." The Court found that Omnitrition's focus appeared to be promoting the program rather than selling the products, and it appears to challenge the efficacy in fact and/or principle of the three protections cited by Omnitrition as anti-pyramid guarantees - the repurchase of saleable, unsold inventory from departing salespeople, the requirement that every participant sell at wholesale or retail at least 70% of the products bought in a given month in order to receive a bonus for that month, and the rule requiring monthly retail sales to at least ten different consumers. The Court found that there was little or no evidence of Omnitrition's enforcement of those safeguards. The Court stated that Amway showed, through a trial on the facts, that its protections were effective and enforced. It noted that Omnitrition's buyback rule was weaker than Amway's (the Omnitrition buyback as described by the Court does not comport with the requirements of the DSA Code of Ethics) and the Court found that there was no evidence of enforcement of the buyback and the 70% rules. Amidst its observation that Omnitrition produced no evidence of enforcement of its 70% rule, the court implicitly challenged the internal consumption of product by direct sellers. The Court stated that "[p]laintiffs have produced evidence that the 70% rule can be satisfied by a distributor's personal uses of the products. If Koscot is to have any teeth, such a sale cannot satisfy the requirement that sales be to 'ultimate users' of a product." The Court also found that including "non-retail" sales of product by a supervisor to downline distributors as part of the 70% rule compliance makes it less likely that the rule will effectively tie royalty overrides to sales to ultimate users. Regarding Omnitrition's ten-customer rule, the Court found that "Even assuming that Omnitrition's enforcement measures are effective, it is not clear that these measures serve to tie the amount of 'Royalty Overrides' to retail sales…That some amount of product was sold by each supervisor to only ten customers each month does not insure that overrides are being paid as a result of actual retail sales." The Court noted in a footnote that, "The same 1ogical criticism could be made of Amway' s ten customer rule, It is crucial, however, to keep in mind that Amway's rule was found to be effective as matter of fact." The case may now be heard on the merits by the District Court; however, additional appeals of the Circuit Court's reversal are possible. The Lawyers Council will be discussing the case at length at its next meeting on March 28 and i