FTC reply to Vemma’s preliminary injunction objections
In direct response to Vemma’s raised objections to a preliminary injunction being granted next Tuesday, the FTC filed an “omnibus reply” late Friday.
In their reply the FTC cover the reclassification of affiliates as customers, the focus of the Vemma business opportunity, pay to play concerns within the Vemma compensation plan, the failure of Vemma’s anti-pyramid compliance policies, deceptive income claims and “woefully inadequate” disclosures.
Below you’ll find each of the FTC’s responses, along with my own commentary.
Improper reclassification of affiliates as customers
Consistent with their misleading marketing materials, and in an attempt to disguise Vemma’s actual purchase patterns which are consistent with illegal pyramid activity, Defendants attempt to re-classify self-designated Affiliates as Customers.
The clearest example of this tactic comes from the declaration of Dr. E. Emre Carr.
While recognizing that participants self-designate as Affiliates or Customers on Vemma’s website, Dr. Carr decides that this classification is not “meaningful.”
He advocates defining Customers as buyers who never received a commission, never enrolled another individual, and did not purchase an affiliate pack, regardless of whether the participant self-designated as an Affiliate.
Vemma used a similar tactic in its 2013 U.S. Disclosure statement and reclassified 149,431 Affiliates as Customers, changing its Customer versus Affiliate ratio from 28% Customers and 72% Affiliates to 70% Customers and 30% Affiliates.
This tactic allows Vemma to categorize failed Affiliates as Customers and serves two purposes: 1) making it appear that Vemma’s marketing is product-oriented rather than recruitment-oriented; and 2) obscuring the natural consequences of Vemma’s pyramid scheme — large numbers of failed affiliates.
This point I thought was so important I did a separate writeup about it.
I won’t repeat my entire thoughts on the matter here, suffice to say that misleading MLM Income Disclosure Statements need to stop.
These statements need to encompass all affiliates, rather than serve as a marketing tool of manipulated data to the n’th degree.
Vemma’s overwhelming focus is on the purported business opportunity
The FTC has presented overwhelming evidence, through Vemma’s marketing materials and the words of its CEO and other representatives, that Vemma was marketing a classic pyramid scheme by training Affiliates to make bonus-qualifying purchases and to recruit others to do the same.
Faced with this evidence, Vemma’s response essentially argues that the pyramid marketing was not effective in practice. It is true that to determine whether a business is a pyramid, a court must look at how the business operates in practice.
However, Defendants ignore the fact that a major factor of how the program operates in practice is how the program is promoted—i.e., whether the program has a recruitment bias.
Defendants’ attempts to minimize the inherent recruitment focus of their own marketing materials should be disregarded.
Whether Defendants also talk about products in some materials is inconsequential.
The extensive materials quoted in the FTC’s Memorandum plainly demonstrate that the Vemma program has a recruitment bias and that the business opportunity is the major thrust of the program.
The current Temporary Restraining Order was granted on the FTC’s representations that they have a strong case, based on their collected evidence.
It is entirely the merits of said evidence that the preliminary injunction hearing next Tuesday should be argued on.
If that evidence wholly points to the focus of Vemma’s business opportunity being that of the business opportunity itself, over sales of Vemma products to retail customers, then that should see the injunction granted.
As the FTC point out they’ve submitted a mountain of evidence asserting just that – and I’ve yet to see anything from Vemma directly challenging it (the evidence itself, they’ve done plenty to reframe the issues and present their own “irrelevant evidence“).
Vemma affiliates “pay to play”
As the court in Omnitrition noted, the “payment of money” element of a pyramid scheme can be met where the participant is required to purchase inventory in order to receive the full benefits of the program.
While Vemma Affiliates can technically join without purchasing an Affiliate Pack, such a purchase is necessary for full participation in the program.
The frenzy, double-frenzy, premier club, and affiliate pack flag bonuses all require such a purchase.
Moreover, the purchase of an Affiliate Pack and personal enrollment in auto-delivery to maintain eligibility for bonuses are heavily marketed as necessary investments to become successful in the business.
The double-frenzy bonus also explicitly requires the enrollment of auto-delivery.
Unfortunately pay to play is something that frequently crops up in BehindMLM reviews.
Here in Vemma, while a $600 affiliate pack and autoship are optional, Vemma’s compensation plan is such that to maximize it, both are required.
What that translates into is the affiliate pack and autoship used as recruitment incentives, which plays right into Vemma being a product-based pyramid scheme.
To that end the FTC have included over ten examples of this in their submitted evidence.
Vemma failed to show its purported anti-pyramid safeguard policies are effective
(Vemma) bears the burden of establishing that their Amway safeguard policies are effective.
The FTC has already pointed out the fallacies in Defendants’ purported anti-pyramid safeguard policies.
In addition, Defendants have provided no evidence that Vemma enforces the 70% rule, which requires that distributors sell at least 70% of their products purchases each month.
While Vemma speaks to 15 Affiliates each month to seek certification that Affiliates have met the 70% rule, the scripted call generically asks whether the Affiliate is “consuming or retailing at least 70% of the products [he or she] purchased for the month,” without inquiring as to the motivation of the purchases.
Vemma’s own filings indicate that Affiliates are not sanctioned for violating the rule.
Instead, in the event that an Affiliate cannot make the certification, Vemma simply “remind[s] them that . . . they can place their monthly autoship on hold.”
There is clearly no evidence that this superficial certification requirement “actually serves to deter inventory loading”—indeed, “the crucial evidence of [its] actual effectiveness . . . is missing.” (Omnitrition)
Further, Defendants’ argument that a 10 customer rule is inapplicable to Vemma’s business model is ill-conceived.
It does make sense to require a minimum number of customers or customer purchases per Affiliate—otherwise, there is no mechanism under the compensation plan to encourage or incentivize retail sales.
What’s the point of having anti-pyramid compliance if it’s a joke?
If you’re going to run with pseudo-compliance, might as well have no compliance at all.
Vemma’s deceptive income claims are indisputable
The FTC has submitted multiple marketing materials made by the Defendants themselves that feature misleading income claims.
The FTC is not required to show that every reasonable consumer would have been, or in fact was, misled. Nor is the FTC required to show that consumers subjectively relied on the deceptive representations or omissions.
While Vemma asserts that its earnings claims were sales pitch puffery, they are clearly not.
Here, the misleading claims were not vague or merely suggestive pronouncements, but rather specific references to actual (or purportedly actual) income amounts earned by individuals or groups of participants.
Vemma has made multiple specific earnings claims that are clearly designed to induce consumers to participate in its purported business opportunity.
I suspect the factual nature of the evidence presented against Vemma, is precisely why they’re trying to change the narrative.
When confronted with thousands of pages of evidence it’s hard to argue you weren’t what product-based pyramid schemes do.
Vemma’s purported disclosures are woefully inadequate
(Vemma) asserts that their disclosures cure the deception of the false earnings claims. However, nothing could be further from the truth.
Numerous courts have held that the “net impression” formed by a reasonable consumer based upon deceptive initial claims is not remedied by later truthful disclaimers.
It is also well settled that “[d]isclaimers or qualifications in any particular
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Meanwhile over at Vemma…
Vemma is toast, IMHO, of course.
The “weakest” of FTC’s counterpoint was the role of disclaimers, and how “prominent” they are and are they sufficient for the average consumer. That is up to interpretation.
On all the other points, Vemma was grasping at straws, and FTC know it.
Vemma apparently plan to go down as the martyr by invoking the praying image, may be trying to rally the religious right, except that segment doesn’t intersect with Vemma’s profile.
vemma has used ‘slyness’ in reorganizing its affiliates as ‘affiliates’ and ‘customers’, in order to show more sales were going to the ‘ultimate user’.
what vemma has conveniently ignored, is that there are TWO ‘pay to play’ elements in its scheme. the affiliate pack and the autoship.
vemma has renamed all those affiliates who did not purchase the affiliate pack as customers.
IF vemma had excluded all those who neither purchased an affiliate pack nor were on autoship, that would have been an accepted reclassification of affiliates [who signed affiliate agreements], as customers. this would then represent the affiliate class who joined up only to enjoy the ‘discounts’.
as vemma and YPR were heavily recruiting on college campuses, many students may have opted out of buying the affiliate packs, and chosen the autoship route to earn commissions. i suppose they could purchase the affiliate pack at a later date , to avail of extra commissions?
and as for boreyko’s ‘Prayer Call’ college students will be off swigging pepsi or red bull, rather than hang around their dorms ‘Praying’.
ted nuyten who purchased 300$ worth vemma products every month for ‘self consumption’, will have to pray in triplicate, to accrue the ‘bonuses’ vemma expects from ‘Prayer’ 🙂
From KevThom:
Arguing that “law enforcement doesn’t understand the law” rarely works unless we’re talking about major abuse of authority… which is obviously Vemma’s narrative, i.e. “oh no! we’re being picked on by big and evil guv’mint!”