Following is a guest post from attorney Kevin Thompson with an early analysis of the FTC settlement with Vemma.
By Kevin Thompson, Thompson Burton PLLC
More than two months after news broke of a potential settlement, Friday marked the release of the FTC’s Final Order against Vemma and founder BK Boreyko. Despite some exacting standards, Vemma’s ability to conduct business remains intact. What the settlement means for Vemma’s long-term viability remains a mystery, but the FTC’s actions against Herbalife and Vemma indicate a shift to a new regulatory attitude: Majority Retail or Death!
The Order’s Provisions
The FTC received a $238 million judgment against Vemma and BK. However, the FTC agreed to partially suspend payment of the entire $238 million judgment in return for BK’s payment of a $470,136 fine via the liquidation of personal assets. This liquidation sends me a signal that the FTC is more concerned with the “optics” of a penalty rather than the issuance of a debilitating one. In all seriousness, among a few other items, they’re requiring that he sell his golf-cart (or else!). I presume life will go on for Bk Boreyko without his E-Z cart. The current FTC’s obsession with “optics” remains a topic of discussion for another day.
This near half a million cash payment serves as a moratorium on the entire judgment as long as BK and Vemma comply with the order moving forward.
The prohibitions against the company internal structure are largely the same as what was in the Court’s original preliminary injunction order. For the sake of brevity, I’m going to only provide the high points of the Settlement Order (as we wrote extensively about the specifics of the Vemma restrictions in a previous blog post. In addition to agreeing not to make unsubstantiated health and income claims, the three main stipulations Vemma must comply with in order to conduct future business is as follows:
- No recruitment rewards;
- No personal purchase requirements; and
- No payout to distributors UNLESS 51% or more of a distributor’s personal or downline revenue comes from bona fide retail customers.
These restrictions will follow Boreyko around, regardless if he operates Vemma or some other company.
Obviously, number three above is the big one. The FTC makes sure to narrowly define a retail customer as a “person who is not [a] participant in the business.” Plain and simple, Vemma has to produce customers to stay in business. While the 51% rule isn’t as arduous as Herbalife’s 66% rule, it’s a tall hill to climb. After decades of legal precedent that stayed away from the how much internal consumption is TOO much, the FTC now has back to back settlements on the books with finite retail requirements.
What This Means for the Future of Network Marketing
In less than six months, the FTC and Chairwoman Edith Ramirez have made clear that network marketing companies over-reliance on internal consumption (via the Staff Advisory Opinion of 2004) is a way of the past. Don’t believe me? Just take a glance at the FTC’s press release accompanying the Settlement, entitled, “Dismantling a Pyramid: Lessons from the Vemma Settlement. Towards the end, the FTC addresses the affect of Vemma on other network marketing companies.
The raison d’être for any legitimate business is to sell products to people who aren’t affiliated with the company. This isn’t just a theoretical point. An MLM’s compensation plan should reward real sales to customers outside the network. That’s not how Vemma and Herbalife operated, and the FTC alleged that both companies ran afoul of the law in different ways. The FTC orders require Vemma and Herbalife to change their business models to comply with the law, and given their different business structures, use different remedies to reach that result. What other MLMs do will depend on their structure and circumstance. But here are two key features that the Vemma and Herbalife orders have in common. Both companies will have to distinguish between the people who join just to buy the product vs. participants who join to make money – and they must track those sales separately. And both will have compensation schemes that incentivize sales to people outside the network instead of recruitment of new participants.
Chairwoman Ramirez recently stated that the Herbalife settlement was to serve as a guidepost rather than an outright requirement, but to me the FTC’s directive seems clear. If companies refuse to establish a customer-dominant methodology or create a clear way to distinguish customer and distributor sales, the FTC can inflict a lot of pain. Valid arguments can be made that this new-ish FTC attitude lacks solid legal foundation. But as I’ve written in the past, the FTC’s position is now one of “dismiss at your own risk.” (I’d encourage you to check out a recent article by fellow attorney Jeffrey Babener for a discussion of whether current legal precedent supports the FTC’s current attitude).
Vemma’s current settlement reminds me of the Home Alone movies. While we’re all pulling for the hero, Kevin McCallister, I always think to myself that maybe he just had bad parents. Otherwise, there never would’ve been a sequel. This is not Bk Boreyko’s first altercation with the FTC. We want him to pull out, but at the same time, it’s important to learn where he went wrong. Going forward, Bk needs to surround himself with a new staff that can erect guardrails to keep the man in check. Or, to stay with the Home Alone analogy, they should ensure he’s actually on the plane.
There’s a larger mystery that lingers regarding the future FTC’s stance on network marketing. President elect Donalad Trump is going to appoint 4 new FTC commissioners (5 commissioners serve at one time, 3 from the president’s party, 2 from the other). It will completely remake the FTC and require them to reconfigure its priorities. It creates a question as to whether the future FTC will pursue network marketing companies as aggressively as the current one. Will the future FTC stay on track with this 50% retail expectation? Will they sue more companies to further crystalize this attitude? It’s all debatable. We’ll know more once the individuals have been chosen. But the bottom line remains: Customer sales are vital. If a company wants to be in business for the long-term, one that can outlast several presidential administrations regardless of political party, customer sales are crucial for longevity
Kevin Thompson is an MLM attorney, proud husband, father of four and a founding member of Thompson Burton PLLC. Named as one of the top 25 most influential people in direct sales, Kevin Thompson has extensive experience to help entrepreneurs launch their businesses on secure legal footing. Recently featured on Bloomberg TV and several national publications, Thompson is a thought-leader in the industry.