Affiliates self-funding commission qualification = pyramid?
The single-biggest takeaway from the Vemma preliminary injunction order was the correlation of affiliates self-funding commission qualification.
This wasn’t just a Vemma issue, it’s patently widespread throughout the entire MLM industry.
Following the Vemma preliminary injunction, what could follow is the biggest MLM compensation plan shakeup we’ve seen in years.
Or not.
Before we get into the Vemma decision, let’s clarify exactly what we’re talking about here.
The issue at hand is MLM affiliates self-funding their monthly commission qualification. This is typically done through tracked “Personal Volume” (PV), which more often than not is an affiliate’s own monthly purchase of product (via autoship or otherwise).
This is a widespread practice throughout the MLM industry, with most opportunities counting both retail sales and affiliate purchases towards commission qualification.
As part of the Vemma preliminary injunction decision, Judge Tuchi granted the injunction but sought to preserve ‘aspects of the business (that) are (not) necessarily pyramidal or otherwise illegal‘.
To that end Tuchi granted a “tailored” injunction, with one of the clauses in it as follows:
Regarding the pyramid scheme, the Court will enjoin those features of Defendant’s Marketing Program and bonus structure that tie bonuses primarily to recruiting and to the purchase of product principally to stay eligible for those bonuses.
This will include a prohibition of the sale of Affiliate Packs, and the linking or tying of an affiliate’s eligibility for bonuses or accumulation of qualifying points to their own purchases of Vemma product, whether through participation in the auto-delivery program or otherwise.
What we have there is a landmark legal decision, directly correlating an MLM affiliate’s purchase of product for commission qualification to operation of a pyramid scheme.
No “ifs”, no “buts”, no “what abouts”… it’s right there in plain English.
In order to effectively cease Vemma’s product-based pyramid scheme, Judge Tuchi felt putting a stop to affiliate’s self-qualifying for commissions via purchases was necessary.
Prior to Tuchi’s decision, Vemma and other companies had argued affiliates who didn’t recruit and/or earn commissions were retail customers.
Thus the purchases these affiliates made were infact retail sales, equating to retail sales being made for said affiliates to qualify for commissions (regardless of whether any were paid or not).
As ridiculous as that sounds, that’s currently the grey status quo embraced by many established MLM opportunities.
As of a few hours ago, this is now the legal reality of such claims:
(Vemma’s) proposed reclassification of Affiliates to customers is not based in fact.
(Vemma) have offered no evidence to support a finding that a Vemma participant who intended to be just a customer accidentally identified himself or herself as an Affiliate, or had any motivation to do so.
In summary, MLM companies cannot make blanket assumptions about why their affiliates are affiliates.
And not offering a preferred customer class and instead trying to reclassify your affiliates as customers doesn’t cut it either, with Judge Tuchi labeling this practice a ‘misrepresentation (of) how many failed Affiliates there likely are‘.
So what does this mean for the MLM industry at large?
It means that the days of MLM affiliate’s qualifying for commissions via their purchase of products are over.
MLM affiliates are not retail customers and sales must be made to said retail customers in order for an affiliate to qualify for commissions.
Failing which, we have a legal correlating such behavior with the operation of a pyramid scheme.
Now the question is, “what is the MLM industry’s reaction to this decision going to be?”
I suspect a number of MLM lawyers are going to receive calls this weekend and early next week, with company owners wanting to know what the Vemma decision means for their business.
Either those lawyers are going to recommend the immediate implementation of retail sales volume qualifiers for affiliate commissions, or they’re going to sweep this under the carpet and hope they fly under the FTC’s radar.
We’ll be watching…
It’s from a District Court, so you can’t call it “precedent”. District Courts don’t have any lower courts they can bind to follow their decisions.
You must also look at the type of order. It’s about a Preliminary Injunction = temporary conditions while the case itself is handled in court.
A preliminary injunction was granted identifying MLM affiliates self-qualifying for commissions as a core tenet of a pyramid scheme.
That’s not a legal precedent?
Nope. Precedents will need to come from a higher court = the Circuit Court (or Supreme Court in some cases).
legal-dictionary.thefreedictionary.com/precedent
It’s explained near the end of that article. Wikipedia explained it too.
“FTC v. Koscot” has a precedent = those two prongs for how to determine the difference between pyramid scheme and MLM. That’s “new law”, binding for lower courts and for the Circuit Court itself.
Binding for other Circuits when they adopt the same rule themselves (but they can of course come up with modified versions).
Fair enough call then. I’ve changed “precedent” to “decision”.
Thanks for picking that up.
What would happen if this rule was applied to melaleuca?
Melaleuca sells products only to its members and the compensation is based 100% of what their members cunsumen.
The court couldn’t allow it. It’s the very core of the complaint that affiliates paid for qualification.
Vemma will need to introduce a new “affiliate-consumer class”, where affiliates can buy products for self consumption — not related to any qualification criteria.
Affiliates must sell the products rather than the opportunity.
It isn’t solely about rules. Vemma had multiple pyramid scheme complaints from college principals and parents.
It’s about “harmfulness to consumers and the society as a whole”. If a company isn’t harmful then there’s no reason to shut it down or to prosecute it in court.
That includes “potential to become harmful” too.
@ Juan
I was wondering when someone would ask that questions. Thanks.
Can anyone name ONE MLM COMPANY that can pass the rules as we know them as of today?
Oz posted this:
There is no “gray” area in that statement.
I think we can all agree there are several if not dozens of MLM companies that ARE NOT in compliance with this “self-qualifying for commissions” issue.
I also agree with N Norway that for whatever reason, the FTC (and other regulators) often wait until the consumer complaints reach a certain level before even investigating a company.
I am interested in hearing what others believe will happen to companies like Lightyear and other Coded Bonus-type plans. Why do they allow these companies to exist when the majority of the income earned by the top distributors is coming from Recruiting?
First of all, there has been no final ruling or finding on the pyramid allegations in the FTC vs Vemma case, (and there may never be if a settlement is reached.) All the evidence has not been presented.
However…
…in approving the FTC’s Motion for a Preliminary Injunction the judge explained why he thought it probable that the FTC would prevail on the pyramid allegation. That’s what the excitement is about. His decision communicates the Court’s mindset and methodology.
In his statements the Judge clarified and perhaps even defined how a Court may identify an illegal pyramid scheme and differentiate it from a legal direct sales organization.
As it is probable that the FTC will prevail against Vemma, it it is probable that the FTC would prevail against Melaleuca.
Too early to tell. This is not a final decision (i.e. precedent setting case) and while this will definitely set the tone for the actual ruling, it’s not final.
But you can bet a lot of MLM company leadership are crapping their pants, and the public ones see people dumping their stock afterhours this weekend.
A sad day for BK and Vemma who deserved a reasonable opportunity to remedy some issues, but Vemma is no Zeek Rewards and every major bank in the country that participated in the mtg backed securities scammed more Americans out of their money than any illegal pyramid deal in history.
What next? Don’t expect the big dogs to sit idle and let the FTC come attacking their business models.
Amway with 3 million distributors is one of the most powerful voting blocks in the country with major influence in Congress.
I suspect the leaders they control in Washington will be hearing from them. In 2016 this All disappears when Donald Trump becomes President.
The industry needs to get out the vote. At this writing, he is a land slide winner in 2016. Watch how the big dogs now handle the FTC.
@OZ,
Don’t post this if you think this is to circumvent anything because I have no intentions to promote this as a workaround but:
As long as I am a consumer/NONaffiliate i can order product and they are considered retail sales and everything is fine.
As soon as I tick a box, become an affiliate, and order those same products they are no longer considered retailsales but purchases for self-qualification.
Therefore:
Then what stops me – as an affiliate- to not log in to order products (or set up a new customer only account) and order product as a consumer/nonaffiliate thus trying to qualify ?
correct, i came to the same conclusion in post#22 on the thread:
behindmlm.com/mlm/regulation/vemma-verdict-ftc-wins-preliminary-injunction-granted/#comment-347491
are you saying that some product based pyramid schemes are harmful and some or not?
ALL product based pyramid schemes are harmful and if the FTC receives enough complaints they will get prosecuted like vemma.
what saved vemma’s ass [partially] was that it showed the product had value via some retail sales, and that product purchases were refundable, thereby reducing some of the harm of inventory loading.
So your viewpoint is lesser crime is no crime?
@EmJay
If the account is in your name, you’re still an affiliate self-funding your own commission qualification.
If the account is not in your name but you as an affiliate are placing orders through it under someone else’s name, for the sole purpose of commission qualification, then you are engaging in fraud.
That’s exactly what he got? A fair chance to fix some issues.
I don’t think BK should feel dissatisfied with the outcome, but some affiliates will not like it.
They will more likely try to distance themselves from the case, e.g. they may point to some differences.
I tend toward the viewpoint he’s thinking if he can throw enough strawman examples into his post/s, people will forget what has transpired.
Correct. Some are more harmful than others, or can be seen as more harmful than others from a regulatory perspective.
But then they must first have the right degree of harmfulness to receive all those complaints?
I haven’t read that part. It sounded more like some of your own ideas than something from a court decision.
I don’t really get your idea?
There won’t be anything stopping you from purchasing as a consumer. But Vemma will need to stop “qualifying purchases” from affiliates. It cannot accept “walkarounds” either.
It normally means that Vemma cannot have “qualifying criteria” bundled with product purchases.
Nothing… except your bottom line.
Vemma violated EVERYONE of the Amway safeguard rules by encouraging self-consumption and ignored retail.
If you really want to setup 10 fake customer accounts to qualify yourself for bonus, and somehow place enough orders to do so, there’s certainly nothing to stop you from whatever company safeguards or audits they chose to implement.
BUt can you AFFORD to do so?
Inventory loading is illegal when it’s forced / encouraged by upline or company itself. If you are doing it… voluntarily, are you sure you’re doing it voluntarily, or forced by the system? And again, can your wallet handle it?
The time for self – remediation is over. Self-regulation clearly has not worked.
Accordingly, the judge ordered Vemma to operate within certain parameters, which by extension should set the ground rules for the entire direct sales industry going forward.
You mentioned the banking industry. It also proved unable to police itself and you witnessed the results, devastated lives and more regulation and more government oversight.
We may have a certain aversion to regulation (maybe it impedes creativity and free enterprise etc.) but its necessary none the less.
Hopefully the free for all that has been taking place in the direct sales industry can be curtailed. This ruling is a step in the right direction.
I think any reasonably knowledgeable person would agree that the priority of any company providing a product or service is … if they want to remain in business … the sale of that product or service.
Is there any indication that Vemma’s main priority has ever been the sale of its product, as opposed to sale of the “opportunity”?
One indication for me, particularly as many/most new affiliates likely have little or no experience selling a product, would be freely provided training emphasizing sale of the product, free sales tools, etc.
I haven’t been able to find anything like this.
All the training I’ve found relates to selling the “opportunity”, e.g., “building your team”, “team leadership”, rather than product and sales tools seem to be sold, rather than freely provided, to affiliates.
Like this (pdf):
nolink://www.google.ca/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0CB0QFjAAahUKEwiG3uG7_IPIAhVFWj4KHbK2AKA&url=http%3A%2F%2Fleadlinepro.com%2FVemma-WB-Training.pdf&usg=AFQjCNFmkfRuiLAIe1sS1-BjkM65v4hZSQ&cad=rja
Is there any real demand for Vemma products that would exist if the “multi-level” compensation component was eliminated and the affiliate income, and bonuses, were limited to actual retail sales by the affiliate? Or Vemma dropped MLM entirely and was instead sold only in retail stores?
And what effect would that have on the compensation of upper management folks like Boreyko?
Is there anything at all that might indicate Vemma wasn’t designed to be a product based pyramid scheme?
The answer, as you’ve found, is simple: Vemma simply conflated the two. Opportunity *is* the product. You BUY (not sell) your way to success. The message had been subverted long time ago.
@ K Chang
“The message had been subverted long time ago”
BINGO! It all comes down to this: What are the Top Distributors (who account for 80% of all volume) actually selling.
A quick look back will give us some guidance:
Amway – in the beginning, they sold household items, vitamins,etc
RIGHT?
Well, that is where the true answer LIES.
The BIG MONEY was not being made from the sale of those items or the overrides on them by building a team.
ENTER REALITY:
Dexter Yager was earning two thirds of his income from his tape-book-rally business.
So Dexter, a one-time beer salesman from NY, was literally SELLING TOOLS from which he derived the majority of his income.
HOW ABOUT TODAY
So, we go from SELLING THE TOOLS that promise Hope and Opportunity to SELLING Product-Packs and Auto Ship that promise the same.
The critical thinker can just follow the money to see what they are actually SELLING.
The Overpriced products are just part of the overall scheme but not the focus.
Where’s the morality in all this?
We hear so-called MLM experts talking about Vemma’s chances as if their success in court would be a good thing.
I have no problem with a lawyer defending a company in a courtroom. That’s how the legal system works, lawyers have to defend good and bad things to ensure justice is thorough.
Fine. But, can people seriously defend practically any MLM outside the courtroom?
A look at almost all income disclosure statements says to me that MLM is a dreadfully depressing lifestyle choice for all but a lucky (or worse) few.
To anyone arguing about technicalities of autoship, or whatever, I say this – Forget that stuff and ask a simple question about any MLM ‘opportunity’: would you be happy to see your kids, or parents, give time and money to become a late-stage entrant to it?
If you can’t (honestly) say “yes”, then don’t go around defending it.
Note: ‘late stage’ is key. You can’t go around saying ‘as long as you get in early’ because then you’re tacitly approving the ripping-off of later entrants.