Babener weighs in on FTC Vemma lawsuit
Well-known MLM attorney Jeffrey Babener has been in contact, with his views on the recent FTC illegal pyramid scheme lawsuit filed against Vemma.
a more detailed article is coming for our website…in the mean time, here is a succinct and informed article on Vemma…
Feel free to share it….
This one is from someone who actually has tried cases and represented major companies…
For those unfamiliar with the MLM legal landscape, Babener (right) is
the principal attorney in the law firm of Babener & Associates.
For more than 30 years, he has advised leading U.S. and foreign companies in the direct selling industry, including many members of the Direct Selling Association (including Avon, Herbalife, USANA and NuSkin).
On August 17, 2015, the FTC filed a complaint in U.S. District Court in Arizona, seeking a permanent injunction against Tempe-based Vemma International Holdings, Inc., a long-time direct selling marketer of health-related products.
The FTC was successful in obtaining a temporary restraining order, which shut the company and froze its assets.
Further proceedings for a hearing on a preliminary and permanent injunction and other relief were set to the future.
Such a scenario has been a common approach for the FTC. The most recent actions resulted in permanent injunctions against BurnLounge and Fortune Hi-Tech Marketing.
The primary accusation against Vemma is that its program focused on recruitment rather than sale of product to the ultimate user, thus rendering the program a pyramid scheme and a deceptive practice under FTC legislation.
In addition, the FTC has charged that Vemma is deceptive in its earnings representations.
FTC vs. Vemma Litigation Bullet Points:
1. (a) This case affirms the BurnLounge standard requiring emphasis on sales to ultimate users, which includes nonparticipant retail customers and personal use in reasonable amounts.
Primary motivation for distributor purchases should be destination to ultimate users and not to qualify in the plan for compensation.
(b) Contrary to some industry comment, autoship is not under attack, but rather the method of its promotion and implementation and amount, which suggests the primary motivation for purchasing is not for sales to retail customers/ultimate users or reasonable amounts for personal use, but rather to induce purchasing to qualify for commissions in the plan.
(c) A similar analysis is applicable to up-front fast-start packages.
2. The FTC alleges several accusations that Vemma is not complying with the BurnLounge standard, and, thus is a pyramid.
(a) Emphasis not on use or retail but purchasing to qualify.
(b) Distributors are told to give away product.
(c) Little evidence of retailing or emphasis on retailing or teaching or training to retail.
(d) Up-front emphasis on buying fast-start packs of $500-$600, plus sign up for $150 per month autoship to qualify for commissions, rather than service an actual need.
(e) The FTC asserts that the Vemma program emphasis was about distributor purchasing and getting recruits to do the same, rather than sale of product in reasonable amounts for the needs of retail sales and personal use by distributors.
(f) And the FTC no doubt had complaints from parents of college students, and parent lawyers, for targeting vulnerable college age students with promises of fast wealth from working “the system” of buying and recruiting. The FTC complaint focused heavily on accusing Vemma of abuse by target young individuals.
Clearly, this is a sore point for the FTC, and it has been a concern of some industry observers even prior to the FTC case. The last time this criticism was made was when Equinox and Trek Alliance were shut by the FTC for the same reasons.
In a way, this action is Equinox Redux.
3. The FTC does not condemn, nor attack the MLM model (nor personal use), but rather goes out of its way to call out Vemma practices, which it contends makes Vemma an illegitimate pyramid. (See the FTC press release and complaint for FTC’s highly perjorative characterization of the facts)
“…. an alleged pyramid scheme, Vemma Nutrition Company, that lures college students and other young adults with the prospect of getting rich without having a traditional 9-to-5 job.”
“Rather than focusing on selling products, Vemma uses false promises of high income potential to convince consumers to pay money to join their organization,” said Jessica Rich, Director of the FTC’s Bureau of Consumer Protection.”
4. Vemma is accused by the FTC of deceptive earnings claims, potentials and hypotheticals as to how distributors could earn substantial income.
Vemma published an earnings disclosure, but it was inadequate and deceptive to show the entire picture by limiting disclosure to earnings of active distributors rather than disclosing earnings of all individuals who signed up, of which the vast majority had no income.
5. Autoship: Rumors of its demise are exaggerated. In the future, autoship will continue as a form of orderly ordering … the legal key will be “tracking” how that product is consumed or sold to ultimate users.
After the Vemma case, all other cases will demand “tracking” evidence to determine what will clearly become cases that are “fact driven.”
6. As the FTC v. Vemma action unfolds, the outcome will be “fact driven” on the issue of “primary motivation” for distributor purchasing.
The FTC has made it clear that it believes that the facts show that Vemma operated a “recruitment” machine that targets college age students with promises of wealth for merely using the system to “buy and recruit” rather than “sell and use,” i.e., per BurnLounge, the product was incidental to the opportunity.
The FTC’s complaint does its best to present a factual picture that the Vemma program implementation and distributor purchasing patterns are dominated by “recruitment and qualify” motivation rather than sales to be used by “ultimate users,” whether they be outside retail customers or distributors for personal use.
7. Of course, Vemma will argue a completely different characterization of the facts. Vemma will be obliged to prove the opposite. The “facts” will determine the outcome.
If the FTC allegations on incomplete earnings disclosure are correct, the FTC has a point that merits correction.. But certainly not a shut down.
If the FTC is factually supported that distributor purchases are “dead ended” to garages and basements or given away, then there is a real pyramid problem.
However, if Vemma can demonstrate that distributor purchases actually make their way to “ultimate users”, whether retail customers or personal use in reasonable amounts, then the wholesale ordering mechanisms of fast start packages and autoship subscriptions are not really a challenge for pyramid analysis.
The entire direct selling industry has been offering fast start packages and autoship ordering for a half century. If product is making its way to a destination to be used by ultimate users, then a program is a legitimate direct selling/MLM program, and not a pyramid.
8. How will the facts play out?
Without extensive discovery, it cannot be determined at this stage. (Presumably, in its sealed filing, the FTC provided significant fact scenarios to support its position).
However, if extensive discovery is needed at this point, a temporary restraining order and preliminary injunction seem inappropriate on the pyramid issue, particularly for a company, Vemma, whose roots, including its predecessor company from which Vemma was “spun out”, New Vision, go back almost 25 years. Nevertheless, this is a reality of this matter.
Historically, the FTC has done a good job on the “fact gathering” even though it has been wrong on or misstated the state of pyramid law. (It was roundly rebuked by the U.S. Court of Appeals for the Ninth Circuit for its stated legal position that distributor “personal use” should not be considered in pyramid analysis.)
9. How long will this litigation process take? Had the FTC merely asked for injunctive relief and a preliminary injunction, Vemma would be in a stronger position to see through the litigation.
However, the fact that the court ordered an asset freeze and appointed a receiver, does not bode well for Vemma. And although a preliminary injunction hearing was set for a very short period of time after the temporary restraining order, case history suggests that most companies, including Vemma, are not prepared with factual testimony preliminary injunction hearing on short notice.
The net result is that companies often stipulate to continue the temporary restraining order for months while they gather evidence. And the remainder of the litigation may go on for months or years, all the while that a company is shut down and not in control of its assets.
Similar scheduling scenarios for companies such as BurnLounge, Fortune High Tech Marketing, Equinox, Trek Alliance, spelled a death knell to the future of those companies, all of whom became a “dead man walking”.
In the last two decades, MLM companies, which have been subject to a receiver and asset freeze at the commencement of FTC litigation, have not emerged “alive”.
If Vemma survives the process, it may be viewed by some as an outlier. Unless Vemma can immediately compile a mountain if evidence to refute the FTC fact allegations on “product movement”, it is more than an uphill battle.
10. Lessons learned for the future for MLM companies…and for which they should start “yesterday”:
(a) Track product to its final destination. Bottom line, is that companies should be able to document that product makes its way on to “ultimate users” and is used.
(b) Marketing emphasis should always be on product first, and opportunity second.
(c) Employ procedures to avoid inventory loading.
(d) Employ procedures to mandate and guarantee retailing.
(e) Do not make claims of wealth, fast wealth, easy money or sure fire systems, nor effectively invite the FTC to inquire into a program based on earnings hype and systems based on distributor “purchasing” rather than distributor “selling” and “using”.
(f) Do not boldly target demographic markets that the FTC might view as vulnerable to hype and abuse. Such groups may be young people or poor populations.
(g) Do not play fast and loose with earnings disclosures. To be transparent, always indicate the percentage of new sign ups who have no earnings, ie., what percentage of new distributors actually make any money.
In FTC vs. Vemma, who owns the facts?
BurnLounge set the standard for years to come. The decision in case after case, including FTC vs.Vemma, will be “fact driven”… is distributor behavior driven by product sales to the ultimate user or is it driven by recruitment?
In the end, he, who owns the facts, will prevail.
There’s a lot to take in there, with the language used very lawyers (apologies to regular readers used to a more relaxed style of prose).
I do agree with most of Babener’s essay, taking exception however with the notion that Vemma needs to time to demonstrate retail sales.
Companies often stipulate to continue the temporary restraining order for months while they gather evidence.
Unless Vemma can immediately compile a mountain if evidence to refute the FTC fact allegations on “product movement”, it is more than an uphill battle.
Vemma was founded in 2006, and what’s more was a continuation of another MLM opportunity.
B.K. Boreyko is no stranger to the industry having tasted Amway decades back.
Am I thus the only one who has a hard time contending that Vemma needs time to gather evidence of retail sales?
Either they have them or they don’t. And any evidence proving their existence should be ready to go at a moment’s notice.
In any other industry sales are trackable and instantly verifiable via backend reports. Why isn’t the MLM industry held to the same standard?
If Vemma don’t have evidence of retail sales taking place good to go, then they don’t have them and are a product-based pyramid scheme.
The only outcome of delays, under the guise of “we need more time”, is the fudging of figures and manipulation of available data to wormhole Vemma’s way out of their current predicament.
That might work, it might not – but it doesn’t address the fundamental issue of a lack of provable retail sales figures.
If today, right here right now, Vemma cannot answer the simple question of “how much of your $200 million in revenue for 2014 was provable attributable to retail sales?”, then this already over.
They’ve had nearly a decade to track retail sales and subsequent revenue, with the only logical reason they haven’t being that Vemma’s retail sales aren’t significant enough to report – which plays right into the FTC’s product-based pyramid scheme allegations.
To that end I’ll leave you with an update from Troy Dooly, published earlier today:
Vemma Update – The legal team has been assembled and are now in place.
In order to present a strong case the team has requested additional time to prepare a strong case.
My understanding the additional time requested is one week.
I don’t believe any extra time is warranted, a week or otherwise.
As of next Thursday, the FTC lawsuit against Vemma will have been unsealed for ten days. Vemma can’t prove the existence of significant retail sales in ten days? How long does it take to run a retail revenue report and print it out?
Oh right, turns out “wink wink, nudge nudge retail” isn’t trackable.
Let’s get this show on the road already, and if Vemma can’t prove this existence of retail sales then so be it.