vemma-logoAs part of ongoing litigation by the FTC against Vemma, both parties have filed a joint Proposed Case Management Plan.

Filed on December 7th, the plan lays out the FTC’s case against Vemma and projected timeframes (disagreements included) from both parties.

As per the proposal, the FTC’s case against Vemma accuses them of

(1) engaging in an illegal pyramid scheme;

(2) falsely representing that members of the Vemma program (“Affiliates”) were likely to earn substantial income;

(3) representing that consumers who became Affiliates had the ability to earn substantial income, while failing to disclose, or disclose adequately, that Vemma’s structure ensured that most Affiliates would not earn substantial income; and

(4) providing the means and instrumentalities for the commission of deceptive acts and practices by furnishing Affiliates with promotional materials to be used in recruiting new participants that contained false and misleading representations.

Vemma contends that

for more than a decade, Vemma has sold high quality products to many thousands of loyal customers.

Although this Court initially concluded, based on the limited evidence available at the preliminary injunction stage, that the FTC was likely to succeed on its claim that Vemma was a pyramid scheme, a more fulsome review of the sales data and other evidence will show that Vemma was not operating as a pyramid scheme.

Statements like this suggest that Vemma hope affiliates being end consumers will equate them to retail customers:

The rewards paid by Vemma to Affiliates were primarily from the sale of products to ultimate users of the products – both Customers and Affiliates who were purchasing the products primarily for retail sale and/or personal consumption.

The data and evidence will show that commissions paid by Vemma came primarily from the sale of products to ultimate users, not from recruiting.

Interesting considering Vemma already tried that argument, resulting in a preliminary injunction against them and retail (non-affiliate) volume requirement for commission qualification.

I guess they’re hoping the concept of a “product-based pyramid scheme” is ignored, in favor of asserting genuine product purchases by affiliates override the requirement they do so in order to qualify for commissions.

Good luck with that.

Interestingly enough Vemma International Holdings, despite coming under the Vemma umbrella, claims it

is not a “common enterprise” with Vemma. Thus, it is not jointly and severally liable with Vemma.

Moreover, the conduct involving companies located in Asia, Australia, Europe, New Zealand and South Africa (none of whom are parties in this action) which is the subject of the FTC’s complaint, did not have a “direct, substantial, and reasonably foreseeable domestic effect.”

What with US-based affiliates likely having profited heavily on recruitment activities in the above named markets, again best of lucking proving Vemma International Holdings had nothing to do with Vemma.

Ditto Vemma’s international business activities having no inter-connectivity with their domestic US business operations.

BK Boreyko’s statement echoes that of Vemma itself, with an added “out of context” twist:

Much of the “evidence” relied upon by the FTC in the preliminary proceedings was taken out of context and/or omitted related disclosures and disclaimers.

After 29 successful years in the direct sales industry, there is no basis for a permanent injunction or other relief as requested by the FTC against Mr. Boreyko.

As to the case itself, with regard to “elements of proof”, here’s how the FTC outline what they need to prove in court:

(The FTC) must show that Defendants promoted a program that includes a compensation plan based primarily on providing payments to participants for the recruitment of new participants, not on the retail sale of products or services, thereby resulting in a substantial percentage of participants losing money.

The Ninth Circuit has applied what is known as the “Koscot test” to pyramid analysis. Under this test, pyramid schemes are “characterized by the payment by participants of money to the company in return for which they receive

(1) the right to sell a product and

(2) the right to receive in return for recruiting other participants into the program rewards which are unrelated to the sale of product to ultimate users.”

Could be interesting how the court rules on the whole affiliates, retail customers and end users issue.

Does mandatory autoship (either required or in effective practice) negate claims that affiliates are end-users?

And with mandatory autoship (again, either required or in effective practice), how does one determine the true motivation behind affiliate autoship purchases?

Vemma contend that

In assessing whether a company is actually rewarding distributors primarily for recruiting rather than for the sale of product to ultimate users, the mere fact that sales are made to a distributor does not mean that rewards based on such sales are rewards for recruiting.

True, but when combined with a lack of retail sales… surely it does?

Rather, the Court must consider whether sales to such distributors constitute sales to “ultimate users”.

At the cost of ignoring the lack of retail sales issue and mandatory autoship? I don’t like the sound of that.

This is the grey-area crap too many MLM companies try to operate in and needs to be stamped out.

Hiding behind waffle about “ultimate users” serves only to perpetuate the affiliate autoship mess the MLM industry is currently rife with.

With regard to “deceptive income claims”, the FTC write they

must show: (1) there is a representation, omission, or practice; (2) that is likely to mislead consumers acting reasonably under the circumstances; and (3) the representation, omission, or practice is material.”

Evidently Vemma hope to counter this with a “those deceptive claims are totally out of context!” defense:

When determining whether statements amount only to puffery, the court must analyze the context in which the statements were made.

Puffery or not, a deceptive claim is a deceptive claim – irrespective of the context within which it was made.

For “means and instrumentalities” the FTC ‘must show that Defendants placed “into the hands of another” a means for violating the FTC Act.‘

And with respect to relief defendant Bethany Alkazin, the FTC

must show that she: (1) received ill-gotten funds; and (2) has no legitimate claim to those funds.

Should they ultimately win the case, the FTC are seeking

permanent injunctive relief against all Defendants.

(The FTC) contends that all Defendants, including the individual Defendants, should be placed under a permanent injunction that, at a minimum, enjoins marketing activity that is likely to result in a pyramid scheme and deceptive income claims.

The permanent injunctive relief requested may exceed the scope of the Preliminary Injunction currently in place and may prohibit Defendants’ current marketing activities, as Defendants’ current marketing program is based on a binary compensation plan that incentivizes recruiting, creates little incentives for retail sales, and is likely to lead to pyramid activity.

(The FTC) will also seek joint and several liability against all Defendants for equitable monetary relief.

Vemma don’t immediately argue no violations took place, but instead assert that

the FTC’s claim for injunctive relief under Section 13(b) of the FTCA requires
proof of ongoing violations.

Vemma also argue that an important factor in the case is there being no intent to defraud the general public;

The Defendants’ intent is relevant to several issues, including the Court’s determination of appropriate relief.

Good faith is relevant for determining whether to issue a permanent injunction and whether to hold defendants individually liable.

The way I see it, whether you ran a pyramid scheme in good faith or not is immaterial to the fact that you ran pyramid scheme.

If you want to bring up good faith as a defense, it should be an afterthought to the much more serious offence of running a pyramid scheme.

It certainly shouldn’t be used a defense against the running of one (which is what Vemma seem to be pushing for here).

According to the proposed case deadlines, the completion of a “good faith discussion of settlement” is given a June 2016 date by the FTC. Vemma have provided a March 2016 date.

After that a “filing (of) dispositive motions” date in June 2016 is given by the FTC, February 2017 by Vemma.

Presumably a trial date will commence thereafter.

Arguing the difference between the two dates (the dispositive motions date is the final scheduled date on the proposed case deadlines list), Vemma and the FTC write

(Vemma) object(s) to the FTC’s proposed highly accelerated track.

The FTC had been conducting its investigation and working on this case for well over a year.

Already at a year disadvantage to the FTC, Defendants respectfully request adequate time to “catch up” to the FTC’s lengthy advance start.

The FTC disputes that the proposed track is “highly accelerated,” and notes that Defendants already have substantial information about the FTC’s theories, arguments, and evidence.

Further, Defendants are already familiar with and have access to their own business records.

Either way a trial is a long way off, with the FTC’s dates seeing one potentiall scheduled in the second-half of 2016. Vemma’s proposed dates would see one potentially scheduled in mid to late 2017.

The parties estimate that the trial will take 10 court days.

With no recruitment commissions paid out, Vemma acknowledging that they ‘continue to sell a substantial (albeit reduced) volume of products‘ and Boreyko already wanting to sell off assets to keep the company afloat, will Vemma even be around to defend in 2017?

The next settlement conference date has been requested ‘no later than March 15, 2016.‘

The FTC needs additional information about Defendants’ sales and commission records before it can propose an amount for equitable monetary relief, but will attempt to work with Defendants to obtain this information in an expeditious manner.

The FTC does not oppose an early settlement conference date as long as it has an opportunity to obtain and analyze the necessary sales and commissions records before the settlement conference.

Stay tuned…

 

Footnote: Our thanks to Don@ASDUpdates for providing a copy of the FTC’s and Vemma’s December 7th “Joint Proposed Case Management Plan”.