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”.