vemma-logoFrustrated with the FTC’s “all or nothing” interpretation of the court-ordered preliminary injunction, Vemma sought to bypass regulatory approval through a court filing.

Whereas the FTC maintained that no commissions should be paid out unless 51% of affiliate sales are to retail customers, Vemma instead wanted to adopt a pro-rata model.

This would see affiliates who failed to generate 51% retail sales volume paid pro-rata based on whatever percentage their retail volume was.

The problem as I saw it with this model was that it technically would permit Vemma to continue running a product-based pyramid scheme, based on revenue flowing into the company.

If on average say only 40% of affiliate sales revenue was retail, Vemma as a company would still be sourcing the majority of company revenue from affiliates as opposed to retail customers.

And this is pretty much the same way the FTC saw it:

The FTC objects to Vemma’s proposed compensation plan on the grounds that it still incentivizes recruitment of Affiliates over retail sales in violation of the Preliminary Injunction and the FTC Act.

Specifically, the FTC argues that the 51% Rule is an insufficient anti-pyramiding safeguard because it provides an Affiliate significant compensation even if most of the Affiliate’s sales are to downstream Affiliates, not Customers.

A broader issue is also that Vemma’s revised compensation plan potentially sees the company operate against the spirit of the preliminary injunction, which sought to eliminate recruitment revenue beating out retail.

The matter went to court on October 21st, with Judge Tuchi reserving his judgment.

That judgement was published earlier today, with Tuchi ruling in favor of the FTC.

In making his decision, Judge Tuchi acknowledged Vemma’s position

that if the economic behavior of Affiliates is rational, they will purchase products only because they want to consume them, not because they want to allow upstream Affiliates to earn bonuses.

Vemma placed emphasis on the motivation behind affiliate purchases, believing that such motivations would override the explicit terms set out in the preliminary injunction.

Problem is though their emphasis was based on the assumption that Vemma affiliates would follow logical “economic behavior”.

In assessing the foreseeability that Affiliates will continue to engage in inventory loading under the proposed compensation plan, the Court must consider that Vemma is a ten year-old company with an existing culture and history and that its thousands of
existing Affiliates developed their businesses in an environment in which they were encouraged to purchase product not for personal consumption, but rather to give away as samples to potential new Affiliates, among other things.

In this context, it is foreseeable that Affiliates will perceive that the proposed compensation structure continues to hinge bonuses on Affiliate consumption, not sales to Customers, and they will behave accordingly

Basically Tuchi is calling out Vemma for lip-service. You’ve got “thousands” of affiliates who have been participating in a product-based pyramid scheme, who likely aren’t going to change their behavior if given half a chance.

And a pro-rata commission structure that pays out commissions below 51% retail is certainly more than half a chance.

The principal defect with the proposed 51% Rule is that it does not provide any real disincentive for the majority of an Affiliate’s sales to be to downstream Affiliates.

Using the FTC’s example, if 60% of the sales of an Affiliate’s organization are to downstream Affiliates and not Customers, the Affiliate is still fully compensated for the 40% of sales made to Customers—even though they did not constitute most of the Affiliate’s sales—and, more disconcertingly, the Affiliate is also compensated almost 40% more for the sales made to other Affiliates—even though those sales may in fact be inventory loading.

The Affiliate thus earns nearly 80% of the compensation available even though most sales were made to Affiliates.

The revised compensation plan was clearly against the spirit of the terms of the preliminary injunction, and Judge Tuchi agreed.

Furthermore,

aside from the 51% Rule, the proposed compensation plan contains neither additional anti-inventory loading safeguards nor incentives to sell to Customers rather than Affiliates.

By way of comparison, the multilevel marketing company Amway was not considered a pyramid scheme under the Koscot test in part because it enforced antiinventory-loading safeguards that included requirements that at least 70% of the products bought by a distributor were sold to customers and that a distributor must sell products to at least ten different retail customers per month in order to earn a bonus; no bonus was paid if a distributor failed to meet these requirements.

There was no pro-rata weaseling in Amway, so why should there be for Vemma?

Vemma’s proposed compensation plan would give Affiliates full bonuses for meeting a lower threshold of sales to customers—51% in the Vemma plan versus 70% in the Amway plan—and Vemma Affiliates would still earn potentially significant bonuses even when the 51% threshold is not met.

Nothing like Amway’s ten customer rule is present in Vemma’s proposed compensation plan, nor does the plan include revised retail pricing or other incentives to encourage sales to Customers rather than Affiliates.

Because the 51% Rule can provide significant compensation to an Affiliate whose sales are principally to downstream Affiliates, who may well be inventory loading, and because the proposed compensation plan does not include other anti-inventory loading safeguards or otherwise incentivize sales to Customers rather than Affiliates, the proposed compensation plan does not meet the provisions of the Preliminary Injunction or go far enough to prevent pyramiding behavior that violates the FTC Act.

My own proposed solution was to abolish downline volume qualifying a Vemma affiliate for commissions (Vemma’s revised definition of PV).

Instead, require an affiliate to qualify solely based on retail volume requirements.

The FTC suggests that the Court require that any plan proposed by Vemma only provide for the payment of a bonus to an Affiliate whose organization’s sales to Customers are at least 51% of the total sales for the organization.

While Vemma requested that the Court not dictate the terms of its compensation plan, the Court notes that the FTC’s suggestion would serve to remedy the issues incumbent in the present 51% Rule.

Whether or not Vemma submit a new compensation plan with adequate retail volume provisions and incentives remains to be seen.

In the meantime, the flailing businesses of Vemma affiliates hang in the balance.

 

Footnote: Our thanks to Don@ASDUpdates for prodiving a copy of Judge Tuchi’s October 28th order.