Tuesday, April 4, 2000 | 11:16 a.m.
The federal government and eight states began laying out their case against Equinox International Corp. on Monday as a federal civil trial began against the Las Vegas network marketing company.
The Federal Trade Commission and eight states, including Nevada, sued Equinox nine months ago. Their quest to shut down the company they brand an illegal pyramid scheme, and to force the company and founder William Gouldd to cough up more than $50 million in assets to repay former distributors.
Equinox sells beauty and health products, as well as a line of water filtration products, through a network of independent distributors. Before the FTC initiated legal action the company had 40,000 distributors.
But in pre-trial papers and opening testimony, government officials sought to paint an entirely different picture of Equinox. The company, they claimed, is a pyramid scheme that attracted new recruits through deceptive advertising and false claims of income. Far from being a lucrative opportunity, the government claims most distributors ultimately lose money.
Most of the government's case is based on depositions provided by former Equinox distributors.
But in its own filings, Equinox blasted these charges as misleading allegations made by "malcontents." Rather than operating as a pyramid scheme, Equinox said it makes it very clear to distributors that success is based primarily on retail sales and that "there are no guarantees of success, and that successful Equinox distributors work very hard." Most government witnesses, Equinox pointed out, acknowledged that they knew they weren't guaranteed a profit.
"Because the vast majority of Equinox's products are consumed by non-Equinox distributors, Equinox is not an illegal pyramid scheme by any standard," Equinox wrote in a pre-trial brief. "If Equinox, with its overarching emphasis on retail sales and with all its anti-pyramiding safeguards and vigilant enforcement, cannot pass muster (under anti- pyramid case law), then it is difficult to fathom any multilevel marketing company in this 50-year-old, $23 billion a year industry that could."
Equinox admitted its distributors "are encouraged to sponsor others to become Equinox distributors." But it said it "does not reward its distributors for the act of recruiting." Rather, the company said, distributors make money only if their recruits make retail sales.
"It is only by recruiting sales people, many of whom may only purchase and sell a small amount of product, that a multilevel marketing company gets its products to market," Equinox claimed.
But government attorneys claim Equinox isn't honest in how it recruits people. Rather, they claim, Equinox distributors typically advertise in "help wanted" sections of newspapers, without mentioning that the opportunity offered is a multilevel marketing company.
To paint their version of an Equinox distributor's experience, government attorneys called Douglas Johnson, a former Equinox distributor from Oxnard, Calif., to the stand. In his testimony, Johnson claimed he lost more than $18,000 during his time with Equinox in 1995 and 1996 and that the experience forced him into bankruptcy.
Johnson testified he was drawn to a recruitment meeting by a "help wanted" ad and that the woman who answered the phone said she would "schedule an interview" with her boss. Instead, Johnson said, he attended a meeting with dozens of other potential recruits.
Soon after, Johnson said he purchased $6,000 in products. "I thought if I could make 50 percent (commission) on a product I believed in, I could make a living doing this," he said.
"It was never explained to me how the pay plan truly worked. I was told I shouldn't spend time trying to figure out how the pay plan worked, just that it works."
Several government witnesses claimed in depositions that they initially purchased $5,000 in products because they understood that this level of purchases would instantly qualify them for the "manager" level and entitle them to larger commissions. Since Equinox distributors receive commissions on their sales, this would result in higher commissions for the recruiter.
Equinox maintains it doesn't encourage this practice.
Despite his best efforts, Johnson said he was only able to sell $2,000 of his products in two months. Equinox policy says unsold products can be returned for a refund, but Johnson said distributors were encouraged to "flush" water filters they purchased so they could be used for a demonstration. Once opened, Equinox won't accept the product for a refund.
To "kickstart" his business, Johnson said distributors in his "upline" began urging him to attend company training seminars. Over a two-year period, Johnson claims he spent more than $3,000 on these seminars.
"I thought I was a dismal failure," he said. "I was under the illusion that most of the people in my office were successful in Equinox. (Equinox distributors) told me to focus on recruiting. Eventually, I focused just on recruiting."
Johnson said he was able to recruit six people but became choked up when he admitted his recruits included his mother and two of his sisters. His mother ended up purchasing $2,000 in products herself, she said.
"I realized if I was to be successful in Equinox, I would have to be dishonest with people," Johnson said.
He said that many costs, such as advertising, desk rentals and training seminars, were never fully explained to recruits.
"I didn't feel the folks (in his local Equinox office) were very ethical," Johnson said. "They allowed people to be misled. They would not be up front with people how the (commission) plan worked."
In its pre-trial filing, however, Equinox insisted that details of the plan are distributed to each possible recruit and that the company shouldn't be held responsible for misrepresentations made by "independent distributors."
"Each new distributor learns that he or she would be an independent contractor not an agent, employee or franchisee of the company," Equinox stated. "This repudiation of any agency relationship is among the passages that new recruits are required to read before signing an application and agreement."
This separation, Equinox said, is the reason classified ads by its employees do not contain any reference to the company.
"Equinox takes steps to ensure that the public does not get the impression that distributors have authority to speak on behalf of Equinox," the company said.
Moreover, Equinox said, Gouldd "repeatedly emphasizes (in training tapes) that there is no room in Equinox for dishonest distributors. He makes it crystal clear that retailing is the key to success in the business, especially when one is starting out and wants to earn money instantly."
Johnson admitted during cross-examination that he'd signed a form stating he had read and understood - but insisted that he'd signed a form stating he had read and understood the company's terms and conditions-- but insisted the manual made the Equinox commissions system anything but clear.
"It took me six months to understand that, and I'm a math major," Johnson said. "Reading does not equal understanding."
Testimony in the trial is expected to continue at least through April 21, and may go through the end of the month. Judge Johnnie Rawlinson isn't expected to issue a decision for at least 30 days after the trial ends.
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