FTC want Vemma’s “irrelevant evidence” excluded (Koscot)
At the core of the FTC’s pyramids scheme case against Vemma is the issue of a lack of significant retail activity, along with deceptive income claims.
Thus it was surprising that one of the first moves we saw Vemma’s attorney’s make, was to solicit affidavits from the general public.
To this day I don’t know what they have to do with demonstrating Vemma has significant retail activity, or that the income claims they made weren’t deceptive.
(Vemma) suggest that because they have some satisfied consumers, they cannot be found to have violated Section 5 of the FTC Act, 15 U.S.C. § 45(a).
However, several federal cases have held that the existence of “satisfied” customers is not a defense under the FTC Act.
Turns out neither do the FTC…
Directly calling out Vemma’s objection to a preliminary injunction being granted, the FTC write
(Vemma) suggest that their drinks have actual value. However, product value is clearly irrelevant to determine whether Defendants are making deceptive earnings claims, promoting an illegal pyramid operation, or providing others the means and instrumentalities to do the same.
More than a quarter of a century of jurisprudence makes clear that the alleged value of a product is not relevant to pyramid analysis.
The benchmark Koscot case is invoked by the FTC, who claim it has nothing to do with product value.
The seminal case on pyramid analysis is In re Koscot Interplanetary, Inc., 86 F.T.C. 1106 (1975), a multilevel marketing company that purportedly sold cosmetics and toiletries.
In Koscot, the administrative court held that a pyramid scheme is “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.”
Notably, Koscot recognized that sales of product had taken place and that, therefore, the product must have some market value.
Nonetheless, the Koscot court pointedly ignored product value in its analysis.
Instead, it focused on whether the scheme promised “rewards unrelated to the sale of the product” to ultimate users.
In Vemma, you pay $600 to qualify for commissions, sign up for autoship and then get paid for recruiting others who do the same.
Aside from calling up fifteen affiliates a month to ask if they are inventory loading, Vemma otherwise has no idea what happens to product a Vemma affiliate purchases.
Why is that important?
[E]ven where rewards are based upon sales to consumers, a scheme which represents indiscriminately to all consumers that they can recoup their investments by virtue of the product sales of their recruits must end up disappointing those who can find no recruits capable of making retail sales
If retail activity is truly insignificant in Vemma, then the above pretty much lays out their effective business model, and more importantly what Vemma affiliates are getting paid to do.
That is, signup for autoship to qualify for commissions and then get paid to recruit new affiliates who do the same.
To that end the FTC have submitted a mountain of evidence (1000+ pages) suggesting this is how Vemma is being marketed.
The opinion in that case concludes that Koscot’s scheme was an illegal pyramid because “recruitment with rewards unrelated to product sales, is nothing more than an elaborate chain letter device in which individuals who pay valuable consideration with the expectation of recouping it to some degree via recruitment are bound to be disappointed.
The FTC also bring up another benchmark case, Webster v. Omnitrition International, with a similar conclusion cited:
In Webster v. Omnitrition International, Inc., the Ninth Circuit approved the two-prong Koscot test for defining an illegal pyramid scheme, again without considering product value.
The FTC’s complaint itself has nothing to do with product value, whether Vemma affiliates love Verve or any of the other nonsense that is no doubt in the affidavits Kevin Thompson collected.
Furthermore, going off the tone of Vemma’s objection to a preliminary injunction, next Tuesday they intend to rock up to court and do anything but address a lack of retail sales and deceptive income claims.
It is (Vemma’s) compensation structure and marketing practices that are relevant to the Court’s analysis here, not the purported value of its products.
Defendants charged with Section 5 violations often argue that their products have value, but courts have not found those argument compelling.
What would be compelling is Vemma countering with actual retail sales revenue figures and a general explanation as to why misleading financial data is credible, but I digress.
Because product value is irrelevant to a liability determination of whether Defendants made deceptive earnings claims or deceptively promoted an illegal pyramid, evidence of product value is irrelevant, has no probative value, and is inadmissible under Fed. R. Evid. 402.
Even assuming that defendants do have thousands of satisfied consumers, it does not excuse their violation of the law.
Testimony or evidence concerning satisfied consumers is irrelevant and should be precluded.
The presentation of any value-related evidence at a preliminary injunction hearing will serve only to confuse the issues and waste time on the presentation of irrelevant evidence under Fed. R. Evid. 403, without countervailing benefit.
Will Vemma get to hijack the September 15th preliminary injunction hearing with “irrelevant evidence”?
Footnote: Our thanks to Don@ASDUpdates for providing a copy of the FTC’s September 11th “Motion To Exclude Irrelevant Evidence At The Preliminary Injunction Hearing”.
i think kevin thompson, vemma attorney, solicited affidavits from vemma affiliates, because of this comment from the judge during the TRO hearing:
so, the judge showed some willingness to hear ‘satisfied customer’ arguments from vemma, and thompson must have jumped at this ‘window of opportunity’.
since the judge has made this statement during the TRO hearing, it is unsure if he will allow the affidavits collected by thompson.
I don’t think affidavits from affiliates trying to keep their business opportunity alive was quite what the Judge had in mind.
Do you have a link or source to that one?
The judge asked a lengthy question, but you didn’t post the answer to it.
the source is vemma’s reply to the FTC’s motion for preliminary injunction :
this is how the FTC responded during the TRO hearing:
vemma will not Go Down, on affiliate pack statistics. it will Go Down on autoship statistics, UNLESS as babener suggested in his article on behindmlm, the court accepts that reasonable amount of products bought on autoship is bonafide self consumption. this is a strecchhhh in my opinion.
IMHO, it’s a reasonable extrapolation to attempt to copy Herbalife’s anti-Ackman tactics.
the difference between vemma and herbalife is that MOST herbalife affilates are NOT on autoship, and there is no joining pack, except for a refundable membership kit.
herbalife members bring in more discount members, because increasing volume increases their discount ranging from 25% to 50%.
I know that, you know that, and KT knows that, but does BK know that? Or even understand the difference?
I see that as a good result, if I interpreted it correctly. It means the court may look at factors like product value even if it finds the existence of a pyramid scheme, and FTC will look at it too.
FTC usually holds the position of “it either is illegal or it isn’t, there’s nothing in between — there’s no half-crime”. And that’s correct enough from a legal perspective in most cases.
The opposite idea may lead to defense arguments like “my client only exposed half of it!” in certain types of cases.
a factor like good product value cannot make a pyramid scheme legal.
product value in the context of vemma, may help the court make a decision about – were affiliates [both active/inactive] buying products on autoship for the inherent product value, or for earning commissions, or in the hope of earning commissions.
in the case of wholeliving vs toolman [vemma has referred to this case in their FTC reply], the district judge had found that autoships of 100$-200$ per month for personal use, were not ‘inventory loading’, as customers and affiliate orders were sent directly by the company by ‘direct fulfillment’, and hence affiliates had no reason to carry more inventory than they required for personal use.
the judge found the personal autoship was not Large Enough to cause harm.
but, there are many differences in the wholeliving and vemma businesses. for example, PV volume in wholeliving, could not be fulfilled by downline PV purchases. PV volume could be filled either by personal consumption, or retail, or a mix of both.
secondly there was a lot of retail in whole living.
thirdly, affiliates were earning in wholeliving, even without being on autoship.
it was confusing, and i was getting a little lost, but here is the decision in wholeliving vs toolman:
In FTC v. BurnLounge, the court made reasonable efforts to fairly calculate consumer harm.
“Reasonable efforts to fairly calculate consumer harm” will be different from case to case. The case against Vemma will probably bring in some new arguments / new methods for calculations.
There’s nothing wrong in that idea. I have checked it from multiple perspectives.
“Autoship MLMs” will usually try to find some “acceptable products” people can accept to pay for, in order to generate “sales activity” (or actually purchase activity) from upline to downline.
120 PV to qualify for commissions = $160 per month = too expensive for long term purchases by college students, but acceptable in short term if they feel they get some product value in exchange for the money.
60 PV + (60 PV + 60 PV) = $80 per month = more acceptable.
There’s a second alternative too, but I don’t remember that one.
There may be possible to find some “consumers only” purchases = people who never paid for the opportunity to earn rewards, but purchased some reasonable amounts of products each month.
Data like that may indicate similar types of consumer purchases among the others too, bona fide sales to end users rather than reward motivated purchases.
I was partially referring to BurnLounge / DeBoer there
The Appellate Court reversed that “75% disgorgement discount” on the grounds that courts don’t give that type of discount. They follow ordinary “full price” practice, but I don’t think that practice is written in stone.
I believe it may not be written in stone because of this …
… because it’s about equitable powers of the court, not about damages decided by a statutory law.
Both FTC and the court seemed to accept some potential effect of “satisfied customers”, that it might affect something in a judgment.
To make it become more understandable …
Posts #8, #10 and #12 are part of the same “series of posts”, related to Anjali’s post #1 and #4.
I checked BurnLounge, some specific factors from cross appeal 2013.
* consumer harm calculation
* “discount” on disgorgement amount
* reversal of that discount
It will be in Vemma’s interest to reduce the general impression of “consumer harm”, both the impression and the amount.
FTC on the other hand will try to show substantial harm to consumers. The case isn’t solely about proving the existence of a pyramid scheme, it’s about more than that.
No, but it can probably reduce the amount of “fairly calculated consumer harm”.
Then I won’t look at it now. I will most likely get lost too.
Sorry my english is bad!
Anyway sorry, the product “Vemma” is not good. See scientific review in the prosecution of New York occupied.
Customers are in Europe, the members of the Affiliates, mother, grandmother, aunt, just family. They are set program Moderately under pressure, it will support required, or as is known in many cases, ends of the contact with the family.
Some affiliates who actually stop working for Vemma, order the product further, because the upline, her friends are and it is not about to disappoint them.
In Europe, the methods the company Vemma, the methods of a sect. once captured by Vemma and it is almost impossible to convince people with arguments and facts. Recruit new affiliates with false promises was the goal.
I am convinced that Vemma is an illegal pyramid scheme. I hope it is forbidden.
Thanks for the good information!
The result here may tell us something important, but I don’t know exactly what yet. 🙂
FTC tries to get some of Vemma’s evidence excluded as “not relevant for the case under the Koscot standard”.
Vemma included that evidence for some reason, because the lawyers saw it as “important enough to be included”.
There’s two conflicting standards here …
1. The defendant is presumed to be a legitimate MLM business = the evidence may be relevant from that perspective.
2. The complaint is presumed to be factually correct until the opposite has been proven in court = the case is about a pyramid scheme test, not about other parts. Vemma’s “satisfied consumers” evidence may be irrelevant from that perspective.
I will go for the first one = the evidence will be allowed. The evidence seems to be relevant for due process / fairness of the case. But the evidence will most likely not play an important role.
The case isn’t solely about the complaint, i.e. the complaint itself cannot limit the defendant’s rights to use relevant defense strategies.
It seems to be a relevant defense strategy to try to get the case thrown out of court by proving legitimacy (“FTC has misinterpreted the facts”).
It will not be in conflict with “the complaint is presumed to be factually correct”. The plaintiff can have failed to include something in its complaint, e.g. misinterpreted the whole case.
even i think thompsons affidavits will be allowed.
but vemma will lose based on autoship statistics and poor earnings of affiliates who invested in the autoships.
do you think there is a chance the court will allow vemma to continue selling product without the commission structure? i don’t think the FTC has ‘contested’ the ‘value’ of the products?
That prediction wasn’t meant to be taken too seriously. I’m only guessing, or “testing legal theories on an actual case” the day before the case is tried in court.
“Vemma is a pyramid scheme according to our complaint, so this case is about pyramid schemes as they are seen under the Koscot standard”.
“Vemma is a legitimate MLM business, and we should be allowed to prove that in court. The Koscot standard will not be correct from that perspective”.
That last argument is correct enough from the perspective of what the case currently is about. It’s about the Preliminary Injunction, whether it should be allowed, modified or denied.
So I have simply applied a “current perspective” — “the most current legal issue”. It’s not correct to apply the Koscot standard to that issue, i.e. it will not be correct to deny any rights the defendants legally have.
“Pyramid scheme cases”
The primary standard is “Not all MLM companies are illegal pyramid schemes. To be able to identify facts correctly, a court must look at how the business operated in reality”.
The secondary standard may be the “Koscot standard”. It can’t be used to limit the reality standard. It can only be applied when it is supported by the reality, and it can’t “over rule” the reality.
Amway was allowed to bring its own “Amway rules” as a defense in 1975 or 1979. That defense wouldn’t have been relevant either under the “Koscot standard”.
I have no idea, I haven’t even looked into that question.
I would probably have used a certain type of strategy, trying to protect the AP&P production plant, allowing it to produce for other companies. I looked into that part, but not the one you’re asking about.
We will need to wait and see anyway.
I learned strategic principles from computer games, e.g. “Dungeons and Dragons”, in the 1990’ies. They covered Sun Tzu, Clausewitz and other famous strategic thinkers. 🙂
In addition to that, I will look at “What can the court accept?”, from the perspective of a sales person. Court decisions are just as much about “selling” as any other area of life. The only difference is the type of sales arguments, they will need to be adjusted to that specific type of sale.
So I would have tried to identify “areas of interest” that can be separated from the case as a whole.
* BK Boreyko’s living expenses, child support, etc. can clearly be separated from the case as a whole. I would have asked for the same. A court will respect an order from another court, so it will not bring Boreyko in conflict with it.
* I would most likely have tried to protect the production plant, e.g. by pointing to some employment factors. It CAN be separated from the case as a whole. A court will need to protect interests of the society as a whole, so there’s a fair chance to protect that one.
Federal Rules of Evidence
Here we must SEE the conclusion first before it will make sense to interpret rules.
The evidence was allowed, but we don’t know the details yet.