Kevin Thompson – Lessons Learned From The FTC vs Vemma Law Suit
Kevin Thompson, the MLM attrorney, is part of the Vemma's Legal team, in this write up he shares his knowlege. Stuff to read for corporate executives as for Network Marketing professionals in the USA and those entering the USA market.
This was very interesting to read:
In fact, our guess is that most companies will stand pat and continue to take one of two ignorant approaches. The first is the “that won’t happen to us” approach. The proverbial logic behind this approach goes something like this: the FTC doesn’t pursue many companies; with each passing day, more and more companies invade the industry’s space; therefore, our company won’t be THE COMPANY that serves as the government’s sacrificial lamb.
Kevin Thompson:
This is Part Two of our series on the Vemma ruling. In Part One of our Vemma analysis, we dissected the Court’s ruling and attempted to explain the basis for the Judge’s conclusions. Part Two is a discussion on the Order’s implications for Vemma and the industry.
Before we begin, it’s important to understand that this Order only pertains to Vemma. In other words, companies throughout the industry are not bound by this ruling. However, it’s extremely valuable to study the FTC’s actions, as well as the thinking behind the Order, to learn what behaviors trigger Governmental wrath. The failure to glean valuable lessons from another’s mistakes would be just plain stupid.
WHAT IT MEANS FOR VEMMA GOING FORWARD
While the re-opening of its door was no small feat, Vemma faces tough challenges ahead. At the end of the Order, the Judge put forth several restrictions on Vemma, most notably the prohibition on having Affiliates self-qualify for bonuses by purchasing product. The Court is prohibiting Vemma from “paying 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. . . not members of the Marketing Program.”
Legalese aside, this means that Vemma can’t compensate Affiliates unless 50% or more of their sales come from genuine Customers. Because of this, Affiliates will be required to have more than 50% of their personal volume (or “PV”) requirement come from Customers outside the organization. Also, the Order prevents Vemma from selling the startup Affiliate packs.
In essence, these restrictions will prove, once and for all, if Vemma’s products have legitimate market value. If sales are driven by Customers, it’s reasonable that Affiliates will get paid and stick around to sell them. If not, it’s simple — the business is done. For the average consumer with a strong affinity for Vemma’s products and an interest in seeing them continue to do business, now’s the time for you to buy.
The other major restriction for Vemma relates to their income disclosures. While Vemma argued that its “results not typical” language was sufficient to meet FTC standards, the Court vehemently disagreed. Calling to mind an article I wrote on appropriate MLM income disclosures, the Judge mandated that Vemma operate under the FTC’s “clear and conspicuous” standard and include the following information in its income disclosures:
• The number and percentage of members who have made a profit through their participation;
• The beginning and ending dates when the represented earnings, profits, or sales volume were achieved; and
• The average and median amount of profit made by each member.
Weak income disclosures are pervasive throughout the industry. Rightfully so, it serves as ammunition for FTC and MLM opponents alike in their argument against the legitimacy of the industry. Companies operate out of fear that greater transparency will lead to fewer participants. Candidly, in my experience, I’ve seen the opposite effect. When companies are honest about the averages, it creates trust. People intuitively know that success is never easy. When I’ve seen companies lead with better disclosures, enrollments are rarely affected.
WHAT IT MEANS FOR OTHER MLM COMPANIES
From a macro perspective, the consequences arising out of the Vemma action directly implicate the COMMON PRACTICE of production requirements (i.e. requiring 100 pv each month to remain eligible for bonuses).
In my opinion, the action by the FTC against Vemma leaves companies with three choices in the future. While the first choice is simple and for many will be the most likely, the second and third would be modifications that would greatly benefit companies in the eyes of regulators.
I. STANDING PAT
For years, we’ve beaten the same drum in pleading for organizational reform – for the DSA, for company’s treatment of its procedures, and for practices within the sphere of MLM as a whole.
See: Pyramid Schemes: Saving the network marketing industry by defining the gray
Avon Writes Open Letter to DSA Member
Self Deception: a cancer holding the MLM industry back
Time to Revisit DSA’s Code of Ethics
Nonetheless, this gnashing of teeth has consistently fallen upon deaf ears. If the industry truly wants the kind of public respect that everyone admits is lacking, the collective good must take a stand and implement much needed changes. One such change deals with how we handle the issue of required monthly volume.
We’re not naïve enough to think the FTC’s pursuit of one major player will produce instantaneous change like the elimination of personal volume. In fact, our guess is that most companies will stand pat and continue to take one of two ignorant approaches. The first is the “that won’t happen to us” approach. The proverbial logic behind this approach goes something like this: the FTC doesn’t pursue many companies; with each passing day, more and more companies invade the industry’s space; therefore, our company won’t be THE COMPANY that serves as the government’s sacrificial lamb.
This is both a stupid and dangerous way to live. We’re confident that if asked, BK and Vemma executives would all say they did not see this coming. The second way of thinking is the “we won’t do anything until we have to” approach. We tell clients all the time – if you wait until the FTC knocks on your door to implement necessary reforms, it’s already too late.
After the Court granted the FTC a Temporary Restraining Order, Vemma attempted to make changes to both its procedures and training and marketing materials. In the Court’s eyes, the damage was already done. “The Court has no reason to believe at this stage that Vemma’s violations of the FTC Act are not continuing or likely to recur.”
Like Vemma, many companies’ comp plans require a participant to purchase a certain number of personal volume within specified periods of time. This PV then dictates a participant’s rank and bonus eligibility. As someone pointed out, it’s no easy feat to name a company that doesn’t operate within this paradigm.
However, Vemma paints a good picture that this paradigm is more often than not a detriment to the overall goal of operating between the lines of legality. This practice often drives massive internal consumption (by design) and prevents products ending up the hands of actual customers or ultimate users. That is why companies, at the very least, should reform in a manner that mirrors our next suggestion.
II. HALF-AND-HALF
If companies refuse to eliminate the PV requirement in its entirety, then they should at a minimum require that 50% (or more) come from third-party customers. In case it went unnoticed, this directly mirrors what the Court is requiring Vemma to do. This half-and-half approach (appropriately termed because it doesn’t eliminate PV but requires that HALF of it come from customers) would force participants to place a greater emphasis on finding the customers necessary to generate meaningful retail sales. By itself, this measure would dramatically curb recruitment-heavy cultures.
While this reformation looks good on paper, it nonetheless must be carried out in practice. As the Omnitrition, BurnLounge, and now Vemma cases all indicate, courts look beyond a company’s policies and procedures and examine how the company OPERATES IN PRACTICE.
If companies simply allowed its distributors to self-report and “certify” that they were moving product to customers in satisfaction of a 50% customer rule, this self-reporting measure would be met with laughter by regulators (literally). The customer volume MUST come from verifiable customers that place their own orders or sign a copy of a physical receipt.
For the half-and-half to act as an anti-pyramidal safeguard, a company’s actions must speak louder than its words. If a participant doesn’t derive half of the required PV from customers, then the company cannot allow him or her to derive any commission. While this option is better than nothing, there’s still something better.
III. ELIMINATING PV ALTOGETHER
When speaking to various clients, we often share with them an invaluable piece of information: CUSTOMERS ARE GOOD FOR BUSINESS! The statement always evokes a sort of sarcastic laughter over its simplicity. However, we repeat it time and time again because in direct selling practice people’s actions so rarely reflect such a “novel” proposition.
In our opinion, PV requirements with an ability for distributors to “self-qualify” leads to a “buy to qualify” culture. It’s just inevitable. It’s why I recommended that the DSA modify its Code of Ethics to address this issue. As stated by the Court in Vemma, “Evidence that distributors purchase and consume product for the purpose of qualifying for recruitment incentives is evidence of a pyramid scheme.” If a company wants to be bullet-proof, removing any sort of volume requirement needs to be considered.
Conclusion
In my opinion, the bubble is about to burst. Absent much adult supervision, the industry has grown tremendously over the past decade. When there’s parabolic growth, there’s always a corresponding correction. The FTC’s action against Vemma is an example of an over-correction, which you typically see in bubble scenarios. I fully expect the FTC and the anti-MLM groups that are forming to be successful achieving some measure of reform. But all is not lost. Companies that offer legitimate products at competitive prices are going to be able to adjust and thrive in this era.