Judge Rejects Vemma’s Proposed Compensation Plan over Inventory-Loading Concerns

A federal judge has denied Vemma Nutrition Co.’s motion to approve its revised compensation plan, under the terms of a preliminary injunction issued against the Arizona-based company last month.

In his preliminary injunction issued on Sept. 18, U.S. District Court Judge John J. Tuchi ordered that Vemma could resume business operations within a set of restrictions, including a prohibition on 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 who are not members of the marketing program. He also required Vemma to obtain FTC approval before it issues new marketing or sales materials.

Since that ruling, court records show, the company and the FTC have been in frequent contact as Vemma has worked to restart operations. One point of contention has been establishing the company’s new compensation plan. Vemma’s proposed plan included: adjusting the number of Personal Volume points an Affiliate needs to qualify for bonuses, not counting an Affiliate’s personal purchases toward those Personal Volume points, and a “51% Rule,” designed to meet the preliminary injunction’s requirement for retail sales. The rule would have paid full bonuses to an Affiliate if 51 percent or more of the sales within the Affiliate’s organization were to customers outside the compensation plan. Affiliates would have been eligible for partial bonuses if their sales fell below the 51 percent threshold, using the amount of customer sales as the baseline.

The FTC rejected this, saying it would incentivize recruiting over customer sales and put pressure on Affiliates to engage in or encourage inventory loading. The FTC also made specific reference to Vemma’s binary compensation plan structure, writing in its objection to the court, “In addition Vemma’s ‘51% Rule’ is insufficient as a safeguard to address the natural incentives of Vemma’s Binary Plan, because it allows substantial compensation to be paid to an Affiliate even if the majority of the Affiliate’s downline sales volume is generated by sales to or purchases by other Affiliates rather than Customers.” At an impasse, the company took its plan to the judge on Oct. 16. Judge Tuchi heard arguments on the motion on Oct. 21, took the matter under advisement and issued his ruling Oct. 28.

Tuchi sided firmly with the FTC, writing, “Because the 51% Rule can provide significant compensation to an Affiliate whose sales are principally to downstream Affiliates, who may well be inventory loading, and because the proposed compensation plan does not include other anti-inventory loading safeguards or otherwise incentivize sales to Customers rather than Affiliates, the proposed compensation plan does not meet the provisions of the Preliminary Injunction or go far enough to prevent pyramiding behavior that violates the FTC Act. The FTC suggests that the Court require that any plan proposed by Vemma only provide for the payment of a bonus to an Affiliate whose organization’s sales to Customers are at least 51% of the total sales for the organization. While Vemma requested that the Court not dictate the terms of its compensation plan, the Court notes that the FTC’s suggestion would serve to remedy the issues incumbent in the present 51% Rule.”

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