FTC Vs Vemma The Judgment
Judgement day has arrived for Vemma. It is the end of Vemma as it once was. Vemma was a Multi-level Marketing company. It is no longer.
After the review of the case by the judge John J. Tuchi, here are some of the key orders and findings about Vemma:
The critical question for the FTC is whether the revenues that primarily support the commissions paid to all participants are generated from purchases of goods and services that are not simply incidental to the purchase of the right to participate in a moneymaking venture.
The evidence before the Court leaves little doubt that the FTC will ultimately succeed on the merits in demonstrating that Vemma is operating a pyramid scheme. With regard to the first Koscot prong, Vemma’s bonus structure and training materials are designed to make new Affiliates buy a $600 Affiliate Pack, which makes payment for the right to sell a Vemma product if not a written requirement, a practical one. With regard to the second Koscot prong, the evidence shows that the bonuses Affiliates earn are primarily for recruitment of other Affiliates, not the sale of products.
Much of Vemma’s contention that it is not a pyramid scheme is based on its proposal to reclassify many of its Affiliates, as currently shown in its own records, to customers, which would have the effect of decreasing the amount of sales to Affiliates and increasing the amount of sales to customers. However, Defendants’ proposed reclassification of Affiliates to customers—as urged by Defendants’ expert, Dr. Carr—is not based in fact.
In practice, distributors may themselves consume some inventory as ultimate users, and thus a program that permits internal consumption is not per se a pyramid scheme. However, evidence that distributors purchase and consume product for the purpose of qualifying for recruitment incentives is evidence of a pyramid scheme.
Vemma’s purported anti-inventory-loading safeguards are neither effective nor enforced. Vemma contacts only 15 of its over 90,000 Affiliates a month to ask if at least 70% of their sales were for consumption or retail. And Vemma’s Vice President of Legal Affairs admitted in her testimony that the script for those calls does not really investigate the reason an Affiliate purchased product or check for inventory loading. Moreover, the Receiver found that, in practice, Vemma is five months behind on its inventory loading audits and has never suspended or disciplined an Affiliate who failed to make the requisite sales to ultimate users.
Vemma does not even attempt to apply a rule similar to the ten customer rule that was found to be a reliable way to control inventory loading in Amway.
In live presentations, when Vemma speakers include “results not typical” disclaimers with income representations, they often follow the disclaimer with a statement such as, “I hope you’re not typical,” to weaken the disclaimer. As a result, the net impression is still that a Vemma Affiliate is likely to earn substantial income, which is deceptive under the FTC Act.
The FTC has also provided ample evidence that Vemma provides the “means and instrumentalities” for Affiliates to deceive consumers by providing them with promotional, recruiting and training materials containing false or misleading income representations, which is a further violation of the FTC Act.
The Court finds that, even in light of the argument and evidence provided by Defendants, the FTC has met its burden to show a likelihood of success on the merits in demonstrating Vemma, Mr. Boreyko and Mr. Alkazin are making material misrepresentations and omissions, as well as furnishing Vemma Affiliates with the means and instrumentalities to make material misrepresentations and omissions, in violation of the FTC Act.
The Court will require Defendants to remove all non-compliant material from its “Back Office” websites, all other web-based and other repositories for training and promotional material, and to undertake diligent efforts to require all Affiliates to do the same. The injunctive relief will also include, as Defendants offered in their proposal to avoid appointment of a receiver, a prohibition against the use or distribution of any promotional, sales or advertisement material that has not been provided to the FTC for review and right of objection in advance.
The Court denies the FTC’s request for a preliminary injunction against Mr. Alkazin with regard to the operation of an illegal pyramid scheme.
Vemma and its agents have been preliminary restrained from doing the following:
A. Engaging in, participating in, or assisting others in engaging in or participating in, any Marketing Program that:
- Pays compensation for recruiting new members;
- Encourages or incentivizes members to purchase goods or services to maintain eligibility for bonuses, rewards, or commissions rather than for resale or personal use;
- Induces others to encourage or incentivize members to purchase goods or services to maintain eligibility for bonuses, rewards, or commissions rather than for resale or personal use;
- Pays any compensation related to the purchase or sale of goods or services unless the majority of such compensation is derived from sales to or
purchases by persons who are not members of the Marketing Program;
- Constitutes a pyramid scheme; or
- With specific reference to Corporate Defendants’ existing Marketing Program:
- sells Affiliate Packets;
- links or ties an Affiliate’s eligibility for bonuses, or the Affiliate’s accumulation of bonus qualifying points, to that Affiliate’s purchase of the Corporate Defendants’ product, such as through autodelivery or Two & Go;
B. Misrepresenting, or assisting others in misrepresenting, directly or indirectly, expressly or by implication, any material fact, including, but not limited to,
that consumers who participate in a Marketing Program will or are likely to receive substantial income;
C. Failing to disclose, clearly and conspicuously, to any prospective member in any Marketing Program to whom any earnings, profits, or sales volume claims have been made:
- The number and percentage of Marketing Program members who have made a profit through their participation in the Marketing Program;
- The beginning and ending dates when the represented earnings, profits, or sales volume were achieved; and
- The average and median amount of profit made by each Marketing Program member;
D. Furnishing materials to be used in recruiting new members in a Marketing Program that contain false or misleading representations; and
E. Publishing or disseminating any new marketing or sales materials without prior delivery to the FTC and a five (5) day period for the FTC to review the materials. If the FTC objects to any such materials, Defendants will not use such materials absent approval of the Court, which Defendants shall seek through motion.
Viewing all the evidence in light of this case law, the Court concludes that measures less drastic than some of the relief the FTC seeks are available to remedy the harms shown. The Court’s finding that some significant amount of Defendants’ product is sold to persons not pursuing the business opportunity persuades it that, while the FTC has shown that aspects of Defendants’ marketing program likely constitute unlawful activity as discussed above, not all aspects of the business are necessarily pyramidal or otherwise illegal. Thus, the Court will tailor injunctive relief to preclude components and practices of the Defendants’ marketing program that would promote pyramid activity and misleading statements, but will not prohibit all business activity. The Court also will not order a Permanent Receiver, but will instead appoint a Monitor. Finally, the Court will unfreeze corporate and individual financial accounts, although it will restrain the alienation of certain other assets to ensure their availability to satisfy monetary relief, should same be awarded after a trial on the merits.
The court has allowed Vemma to continue to function as a company and sell products, but they will no longer be able use auto-shipments and product packs to run a product-based pyramid scheme. They will have a monitor that reports to the court on their operations to make sure they comply. This judgement will have a huge effect on the other Multi-level Marketing companies in the marketplace. Many Multi-level Marketing companies are using auto-shipments and product packs just like Vemma.