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Vemma Allowed to Re-open: The conditions and what they might mean for the industry

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Article by: Jana Bangerter
October 12, 2015

The Federal District Court of Arizona issued an order detailing the decision to allow Vemma to reopen its doors for business, while the case is being litigated. This is big news; as pointed out by MLM lawyer Kevin Thompson in his last article about the case, in the last sixteen cases the FTC has brought against MLMs, the defendants have not been allowed to resume control of their company. This decision is not permanent nor is it an across the board win for Vemma. However the court concluded “that measures less drastic than some of the relief the FTC seeks are available to remedy the harms shown” (14)*. You can read the court document yourself, but we’ll give you the basic facts and give you our opinion as to what this means for the industry.

Vemma will no longer be under the control of the court appointed receiver[1]. Additionally, the asset freeze that the court issued earlier this month will end.

However, Vemma will be subject to continuing restrictions. The law firm who acted as the receiver will become a monitor reporting back to the court on Vemma practices. And while Vemma will be allowed to resume operations, the monitor will have access to business premises and records. Some business actions, such as disposing of major assets or creating new business entities, are prohibited without notifying the FTC and obtaining approval from the Court.

Furthermore, major aspects of Vemma’s business model are prohibited under the Preliminary Injunction. We’ll go through and discuss each briefly here, but you can find the full list starting on page 21 of the preliminary injunction document. Keep in mind; all of these prohibitions are temporary and specific only to Vemma. However if any of them become permanent at the end of the case, they would set a precedent that could mean serious changes for several common business practices in the MLM industry.

The first prohibited business activity on the list is paying compensation for recruiting new members. It’s unclear if this refers only to direct compensation for recruitment, which Vemma already doesn’t do, or if it includes bonuses for which recruiting new people is one step to qualification.

Items two and three on the list prohibit the same behavior but each coming from a different active party (the company, and the distributors). The wording doesn’t follow industry terminology. Rewritten in more familiar terms, this is a prohibition against a Personal Volume qualification requirement. Here are the actual list items:

2. Encourages or incentivizes members to purchase goods or services to maintain eligibility for bonuses, rewards, or commissions rather than for resale or personal use;

3. Induces others to encourage or incentivize members to purchase goods or services to maintain eligibility for bonuses, rewards, or commissions rather than for resale or personal use; (21)

It’s worth noting that virtually all unilevel and binary plans, and many breakaway plans, have a PV requirement. In order for Vemma to comply with this, their compensation plan will have to undergo major changes. Whether or not Vemma can find a way to make their compensation plan work without a PV requirement is yet to be seen.

4. Pays any compensation related to the purchase or sale of goods or services unless the majority of such compensation is derived from sales to or purchases by persons who are not members of the Marketing Program; [emphasis added]

This prohibition could be the most important and the most difficult for Vemma to adapt to, and it’s not completely clear what the court means. Is a majority literally 51% of an affiliate’s[2] downline volume? In that case would we see a variable cap on commissionable affiliate volume changing based on the customer volume from the same period? Alternatively, this requirement could be read to suggest that some bonuses could apply to affiliate volume, but that those bonuses would need to account for less than bonuses paid out for sales to people who aren’t part of the marketing program.

According to knowledgable sources the majority of Vemma’s volume comes from purchases made by customers or affiliates who are functionally customers. However, the court declined to consider any affiliates customers in issuing this order. If, going forward, Vemma creates a clear distinction between actual affiliates and members who are functionally customers; they should be able to meet this requirement. The question remains, how?

5. Constitutes a pyramid scheme; or

The fifth restriction is pretty obvious. This is probably in there as a catch-all provision to allow the court to prohibit conduct that it didn’t otherwise describe.

6. With specific reference to Corporate Defendants’ existing Marketing Program:

a. Sells Affiliate Packets;

b. Links or ties an Affiliate’s eligibility for bonuses, or the Affiliate’s accumulation of bonus qualifying points, to that Affiliate’s purchase of the Corporate Defendant’s product, such as through auto-delivery or Two & Go;

The pressure to get affiliates to buy product packs to qualify for commissions, and to sign up for an autoship for those orders so they were sure to qualify every month, were two practices the FTC targeted in their complaint against Vemma. It is not surprising to see the court prohibit them. Many companies in the industry have packs and incentives for autoship orders, so if this restriction survives the entire case and becomes precedent for future cases, it would have a huge impact on the industry as a whole.

It is hard to overstate how big of a win it is for Vemma (and potentially for the industry) that they got out of receivership and are able to resume business operations. We’re far from the end of this case, and it will be interesting to see how Vemma will walk the tightrope the court has put before them. If the restrictions in this preliminary injunction are an indication of the restrictions that the entire industry will have to operate under going forward, then this could be one of the most important cases the industry has seen in a long time.

 

*Page numbers appearing inside parentheses indicate locations in the Preliminary Injunction document.

[1] If you’re not familiar with the concept of a court appointed receiver taking control of a company’s premises and assets, check out this article explaining the FTC’s MO when taking down an MLM company.

[2] Affiliate is the word used in Vemma’s corporate lingo to identify a distributor.

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Jana Bangerter

Jana Bangerter | Associate Editor

Born in Detroit, Jana spent her childhood in Michigan, Mexico, and Southern California developing an...

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