Vemma Settles with FTC

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It’s a new day for Vemma Nutrition Co.

The Federal Trade Commission announced Dec. 15 that it has approved a settlement agreement in its case against the Arizona-based company, bringing an end to a more than year-long, multimillion-dollar legal battle. The agreement offers a clear path forward for CEO B.K. Boreyko to continue operating Vemma as a customer-focused network marketing company, while also establishing specific rules related to distributor compensation and income claims.

The settlement covers Vemma Nutrition Co., Vemma International Holdings Inc. and Boreyko, and a separate settlement covers former Vemma distributor Tom Alkazin and Alkazin’s wife, Bethany, who had been named as a relief defendant in the original federal court action. The settlement outlines specific business practices from which the defendants are prohibited in engaging, including paying compensation to a distributor unless a majority of that individual’s revenue comes from sales to people who are not a part of the business venture, making deceptive income claims and making unsubstantiated health claims. In addition, Vemma has agreed to…

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DSN will continue to update this story as additional details become available.

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Vemma Launches New Comp Plan

Vemma may be down, but don’t count it out.

When the Federal Trade Commission served Arizona-based Vemma Nutrition Co. with a temporary restraining order on Aug. 24, many observers inside and outside the direct selling community assumed it marked the end of the 11-year-old company. But Vemma’s management team has fought back. First, it regained some control over the business, while the court case continues, and restarted product sales to the tune of nearly $1 million in October. More recently, it launched a revised compensation plan that puts it squarely back in the business of direct selling. It expects to pay its first commissions Dec. 2.

The company once again began selling product on Oct. 8, offering a “thank you” sale, with discounts as much as 40 percent off the prior retail price. Happy customers began posting pictures on social media soon after, celebrating the arrival of boxes of Vemma, Verve and Bod-e products. The company continued to mark its progress through its various social media accounts, tweeting on Oct. 28, “We’re blessed with a second chance and we’ve sold $809,522.00 so far this month! You all are AMAZING, thank you!!”

At that point, the company had not yet gained approval for a new compensation plan, so no commissions were paid on any of those sales. But Vemma’s goal has been to get back to direct selling as soon as possible. The company recently obtained the FTC’s approval for a new compensation plan, which it began marketing Nov. 12. By Nov. 25, company executives say, sales had reached nearly $1.59 million since Oct 8.

Getting back in business has not been easy. After it was served with the temporary restraining order, or TRO, more than three weeks passed before Vemma was able to make its case to the judge. The company currently is operating under a preliminary injunction that restricts many of its operations. Its new compensation plan is a binary structure as in the past, but in order to qualify for any commissions or bonuses, at least 51 percent of the total sales for an Affiliate’s entire organization must come from sales to customers who are not participating in the business opportunity. In addition, Vemma has removed any bonuses on first-time product orders, and Affiliates’ personal purchases no longer qualify them for commissions. Only personally enrolled customer and Affiliate purchases can qualify an Affiliate for commissions.

In addition to the restrictions put in place by the court, Vemma has had to contend with the logistical fallout from the TRO. One of the first hurdles was staffing. In the first few hours after Vemma was served with the TRO, a court-appointed receiver had laid-off nearly all of the employees. Another hurdle was establishing a mechanism for accepting customer payments by credit or debit card. Vemma has been transparent about its challenges in re-establishing a relationship with a merchant account that would integrate with the company’s system, describing the challenges in social media posts addressing customer service and acknowledging wait times of up to two hours for phone support. International sales also have taken a hit. Before the FTC action, Vemma was operating in 50 markets. So far, it has only been able to reopen in the U.S. and Canada.

The company’s recent sales volume, particularly in light of those challenges, shows that Vemma is a customer-driven model, said Richard Brooke, a veteran of the direct selling channel. “It may have been a recruiting-driven model for growth, but the backbone, bedrock of the company is customers,” Brooke said. “…The only people who would jump through those hoops are people who absolutely want your product.”

With the company back in business, the Vemma team also continues to prepare for its ongoing legal battle. Experts say defending a case of this nature typically costs millions of dollars, with the cost of preparing for the preliminary injunction hearing alone running $500,000 to $1 million. Vemma has established a Direct Selling Defense Fund, which is accepting donations to assist with the expenses.

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.”

Vemma Regains Partial Control of Business; Judge Appoints Federal Monitor

A federal judge has returned partial control of Arizona-based Vemma Nutrition Co. back to the company’s management team, by granting only part of the preliminary injunction sought by the Federal Trade Commission.

The 10-year-old company essentially had been shut down since Aug. 24, when the FTC served Vemma with a temporary restraining order that it obtained on an ex parte basis. That TRO had come with the appointment of a temporary receiver to run the business and a freeze on the assets of the company as well as the other named defendants: CEO B.K. Boreyko and top distributors Tom and Bethany Alkazin. U.S. District Court Judge John J. Tuchi heard arguments related to the FTC’s request for a preliminary injunction on Sept. 15. He issued his ruling approximately one hour before the temporary restraining order was set to expire on Sept. 18.

Under the preliminary injunction, the judge is permitting Vemma to…

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Vemma Battles FTC to Restart Operations

Arizona-based Vemma Nutrition Co. had its day in court Sept. 15, making its case and asking Judge John J. Tuchi to lift or modify the terms of the court order that has put a halt to the company’s business.

In August, the Federal Trade Commission sued Vemma, accusing the company of being a pyramid scheme, making false and misleading income claims, and failing to provide appropriate income disclosures. The FTC requested and received an ex parte temporary restraining order with asset freeze and the appointment of a receiver, which meant Vemma executives did not have an opportunity to offer a defense prior to the order being issued. The FTC has asked the judge to extend the government’s control of the company with a preliminary injunction. It is the first significant FTC action in the direct selling space since the Ninth Circuit of the U.S. Court of Appeals’ 2014 ruling that BurnLounge Inc. was an illegal pyramid scheme. The court’s final decision will join existing case law in shaping the legal standards that govern direct selling in the United States and may provide new insight into how federal regulators view the distribution channel.

The more immediate issue for Vemma, however, is that the temporary receiver appointed in the case has shut down all company operations, including its international business units and retail sales. “There is no doubt that if this injunction is left in place we are never going back,” Vemma’s counsel said in his closing summary before the judge. The temporary restraining order expires at 2 p.m. local time on Friday, Sept. 18, and Judge Tuchi said he will issue his ruling before that deadline.

The courtroom was packed for the all-day hearing, which included cross examination of witnesses on both sides of the case: FTC investigator Matthew Thacker; professor Stacie Bosley, who provided an analysis of Vemma’s compensation plan for the FTC; Truth in Advertising Executive Director Bonnie Patten; Kenton Johnson, Executive Vice President of Robb Evans & Associates, the temporary receiver currently running the company; professor Emre Carr, Vemma’s compensation analysis expert; Allison Tengan, Vemma’s Vice President of Legal Affairs; and Vemma COO Brad Wayment.

During the hearing, the FTC continued to shape a sweeping case that Vemma’s compensation plan improperly paid Affiliates for recruiting and not for product sales to end users, its marketing materials made inaccurate income claims, and its compliance efforts were ineffective. The defense offered testimony to refute those assertions, arguing that the government built its case without using actual purchasing data from the company and by cherry-picking often out-of-date marketing materials. The defense also focused much of its time before the judge on building a case for why the TRO should be lifted or modified, including establishing that the receiver spent a combined 90 minutes with company management before deciding that he could not continue any aspect of Vemma’s operations under the terms of the TRO.