Vemma Analysis: Lessons Learned – Part 2

    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.

    2015-10-15This 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.

      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.

      • Cindy Shuffield

        I think you’ve done a really nice job with this, Kevin, I agree with most of what you say here, though I don’t think the FTC has made an over-correction with Vemma. Over the past year I’ve watched Vemma respond to complaints in theory but not in reality, and I’m glad that “courts look beyond a company’s policies and procedures and examine how the company OPERATES IN PRACTICE.”
        I don’t have experience with any other mlm expect Vemma, but I find it reprehensible if every company operates this way.
        That said, I don’t understand what the uproar is over having to get customers, except for those people who’ve operated in a disengenuous manner, but if you have as good a product as Vemma is supposed to be, then there should be no trouble selling it. There will just be legit customers, likely adults, who really like the product instead of kids who believe they are going to become millionaires and don’t understand that their autoship is funding their uplines’ commissions.
        If you have a good product, stand behind it and sell it to people who want it because they like it and not because they (customers) are getting some compensation for buying it. If you don’t have a good product that people want to buy, then it shouldn’t exist. It’s just going to be done with honesty and integrity. It’s really that simple.

        • Ken

          Actually VEMMA did a great job at responding to complaints it received! It’s why they were given an A+ rating by the Better Business Bureau…as far as the complaints the FTC received, those were not shared with VEMMA prior to the FTC’s action, so VEMMA obviously had no opportunity to resolve those particular complaints. And the kids and their autoship order funding their upline’s commissions statement is ridiculous…most of those kids were spending that much on Red Bull and beer every month….and the last time I checked Red Bull and Budweiser don’t allow you to drink their product, tell others about it, and get paid for it….at the very least they could have made enough to cover their own product purchase every month, not to mention the tax benefits of having their own part time or full time business. And what better market for a healthy energy drink than college students and millennials? Finally, considering that VEMMA had a 90% buy back policy for up to one year, the “woe is me” attitude on the part of some that “failed” and claimed they lost a lot of money is specious to say the least…

          • Georgy Porgy

            Ummmm, you might want to research something before typing it on the internet. Makes me wonder if any of the above is credible.

            VEMMA HAS AN F WITH THE BBB

            http://www.bbb.org/phoenix/business-reviews/multi-level-selling-companies/vemma-nutrition-company-in-tempe-az-97004349/

          • Cindy Shuffield

            Following the Vemma line, are you, Ken?
            How do you know “most of those kids were spending that much on Red Bull and beer every month” ? Where do you get your statistics?
            YPR targeted college kids, and 21 is the legal drinking age in my state, so if kids are drinking that much beer in a month, 1. they and whoever is buying it for them is breaking the law, and 2. they have some serious drinking problems–that’s a minimum of 1/3 of a gallon a day EVERY day in a month. Red Bull? Vemma cost (prior to the “sale”) is twice as much. When ya’ll compare costs, you compare the cost of 8 oz of Verve to 16 oz of Red Bull, Monster or whatever. Apples and oranges. I did my own survey, rather than checking online. Going into multiple stores, etc. Inventory loading–apparently that was a problem with college kids. Multiple stories about that online, if you want to research it for yourself, Ken. Or I can send you links.
            Interestingly, posts on BK’s FB had quite a few people who had months worth of Vemma on hand. Inventory loading or stockpiling just in case of a zombie apocalypse? Or keeping a lot on hand just in case Vemma was shut down for a while and they wanted to have plenty on hand…
            Buy back policy? It costs $20 to send that product back if you got the wrong thing, your fault or not. Or at least it did my daughter.
            Ironically, Ken, a lot of what you’re saying is the same thing Kevin talks about: policies being one thing and practice being something entirely different.
            BTW, presumably BK knew Vemma couldn’t make health claims, since he’d already been sanctioned (or whatever word you want to use) for doing that years ago. Yet there was a video of Brad Alkazin advocating giving it to someone with MS. A woman posted less than a week ago saying she’d opted to “take” Vemma instead of treatment for cancer, on BK’s wall, plus others saying they needed Vemma for this or that ailment. How is that addressing things.
            It’s incumbent on BK, he has a moral obligation at the very minimum, to tell her NOT to do that. He should do things like that PUBLICLY, not just to affiliates.
            But there isn’t any money in morality, now, is there?

          • Cindy Shuffield

            Georgy is right. BBB has revoked their rating. It’s an F.

          • Amos

            Either way, you would loose your money if the buy back was 90%… DUH?

      • Georgy Porgy

        Son of a gun! Kevin, I don’t know if BK is so bankrupt now that he can’t continue paying you or if you’re just turning over a new leaf. But very refreshing to see a somewhat biased view on the topic. And you are right, the FTC and supporters here will prevail. Once the dust settles, MLM will never be the same again.

        I don’t care what you’re selling but, when over 90% of the investors are essentially losing money – IT’S A SCAM! I’ve been posting this question and have yet to have one person reply with an affirmative example. Is there any MLM company out there where most of the participants can actually earn an income to make it their one and only income? I just don’t see how the model of MLM can even sustain that for most of the people going into it. It seems that you have to have losses by the majority just to feed the few. Anybody care to cite an example showing different?

        • WYNN

          Why isn’t anyone talking about azpack.com? This is the company owned by BK that does all the product packaging for Vemma and other firms! The receiver said Vemma paid Arizona Production & Packaging Company $45 million last year but couldn’t obtain financial statements on the firm! This company has a bottling facility of 240,000 sq. ft. and could be the “Golden Parachute/Cash Cow” for BK when Vemma fails!

          What happened to Tom and Brad Alkazin?

          Why did BK reopen Vemma just to be a retail seller of its products? The company can’t even be approved to accept Visa/MC/American Express! If you read the receivers reports, Vemma was already losing significant money. With its massive million dollar a month overhead, one could only imagine what Vemma’s monthly losses will be going forward! I wonder how many head office employees remain in his 50K a month 53,000 sq. ft. edifice!

          According to Bonnie Patton’s recent article in TruthAd, BK will be lucky to have his shirt left on his back once he settles with the FTC! I wonder what will happen to Kayla Oberg? I wonder what will happen to BK’s million dollar home at 3051 N Orchard, Mesa that Courtney and his poor kids are living in currently? I see BK has reduced prices on his other two Mansions in Scottsdale over the past week!
          12654 East Gold Dust Avenue, Scottsdale: $2,250,000
          #2 9933 East Happy Valley Road, Scottsdale: $2,675,000

          BK BOREYKO-VEMMA #RIP

          • Georgy Porgy

            AZPACK down in Tempe is an interesting branch of the BK realm. If I understand right, it’s where Monster energy drinks are packaged. Somebody told me that machinery that cans all of Vemma’s stuff is the same stuff that’s used to package Monster. How ironic. And if I understand it right, the different companies owned through BK pay rent to BK. Pretty cool tax set up. I can’t say for certain but that’s what a birdie told me.

        • Ken

          Then traditional business is a scam using your logic as the failure rate is extremely high, with a high percentage not turning a profit until the 5th year, and that’s after putting up their life savings, taking out loans for tens of thousands, hundreds of thousands of dollars or more, putting up their home as collateral, etc…Wanting to be a pro athlete is a scam-less than 2% ever make it to the professional level, and in the case of pro football, their career on average lasts less than 5 years. Name me anything in life where over 90% of people succeed?

          • Rich

            Public sector be beurocrats!

            • Georgy Porgy

              Ken. When people start a business there isn’t a big hoorah and an organization telling you that you can be successful, you just have to work hard. When you start your own business, people know it’s hard, people know they’re a high failure rate. But when you have an organization S-E-L-L-I-N-G you on that and they purposely keep the failure rates and pump you up with illusions of grandeur – THEN IT’S A SCAM!!! HOW IS THAT SO HARD TO UNDERSTAND!

          • Georgy Porgy

            Ken. When people start a business there isn’t a big hoorah and an
            organization telling you that you can be successful, you just have to
            work hard and there isn’t a single collective capitalizing on your success or failure. When you start your own business, people know it’s hard,
            people know they’re a high failure rate. But when you have an
            organization S-E-L-L-I-N-G you on that and they purposely keep the
            failure rates hidden and pump you up to have delusions of grandeur so that they capitalize whether you succeed or fail – THEN IT’S A
            SCAM!!! HOW IS THAT SO HARD TO UNDERSTAND!

        • Georgy. Your assertions are assuming that affiliates/distributors actually follow directions and take steps necessary to run their business like a business.

          The reality of the situation is systems work. People don’t.

          • Georgy Porgy

            Problem being Kevin, this system worked on smoke and mirrors. Making people believe one thing. Granted, there’s a sucker born every minute but, when you capitalize on people being gullible and unquestioning – well you know where I’m going with that.

            • Cindy Shuffield

              And that’s why they focused on college kids, in my view. “I can be a millionaire? Cool.” They don’t do the research to see this is a scam. We talk to our kids about drugs, alcohol, strangers, but I never thought about these kinds of predators. These kids believe what they want.
              You can work really hard as a college kid, but if the business model is flawed, there’s little chance of success. Not too many college kids have the kind of money required to follow this through. At least not in our area.

            • Georgy? We capitalize on selling products. People can choose to buy on their own. There are even money back guarantees. There’s no way to make money by “swindling” people.

            • Oh wait. Are you talking about Vemma? If so, I’m not a Vemma rep. If you’re talking about the industry in general, yes, most of us operate ethically and within the rules.

        • I’ll even be bold enough to go so far and say this …

          Instead of of focusing on the 90% who “fail” …

          Focus on what the Top 1-10% are doing …

          Ask yourself if you can duplicate that.

          If the answer is yes, then go for it.

          That’s what I’ve been doing for 18 years as a full-time network marketer.

          My wife and I decided to treat this as a profession, not a hobby.

          • Avert Scams

            Unfortunately you can’t duplicate what the 1-10% who are often the people who joined the MLM when it was launched and are enjoying bonuses from their down line. By design of MLM companies, you can only duplicate what they did if it was to be re-theoretically re-launched and you are one the first people to join.

        • Neil Key

          Georgy I can name two. LegalShield and Primerica. Just from a pure sales perspective it can be done. Of course it all depends on an individual effort.

        • Avert Scams

          l am not into MLM and l don’t support the business model. However, l think l know why your question is never answered. 1)What percentage are you referring to when you say ‘most of the participants’? 2) How much should ‘participants earn… to make it their one and only income’? It obviously depends on the countries’ cost of living, individual goals, ambitions etc. The very reason people move from one company or to the other offering higher perks even though their previous job was ‘their one and only income’. The two are too subjective to be measured.

      • Vemma Nein Danke

        It needs international rules. We need seller and not team building. Instead MLM a MCM Multi Customer Marketing. Good analysis Kevin. We also assume that BK is playing for time, but a losing battle results.

        • Cindy Shuffield

          Love your name. I speak and read ein bisschen Deutsch and it makes me laugh.

          • Vemma Nein Danke

            thanks, Danke!

      • RJ

        Companies that offer legitimate products at competitive prices ? Sounds like non-MLMs.
        You try to argue that Vemma is worth $3 a can when I can buy a 4 pack of Aldi Energy drinks for $2.49 every single day. And that’s overpriced.
        It comes down to : massively overpriced products combined with the money making and health lies recruiters tell= huge failure rates.
        Its a doomed business model.
        You cant deliver legit products at competitive values when you have unlimited up-lines all taking a piece of the action in exchange for nothing.

      • Great advice! Trouble is… the greed can’t be tamed.

        • barb may

          I left a mlm company in the uk because the qualification was over £600 a month either by recruiting others or doing it yourself Most people can’t recruit they end up buying their qualification. I did and couldn’t afford to stay in the company paying to get paid from my team. I would like to see this stopped. So much of this company’s product;s are sold on Ebay because of the buying qualification being so high.

        • Cindy Shuffield

          “Greed can’t be tamed”
          That pretty well sums it up.

      • RJ

        Companies that offer legitimate products at competitive prices ? Sounds like non-MLMs.
        You try to argue that Vemma is worth $3 a can when I can buy a 4 pack of Aldi Energy drinks for $2.49 every single day. And that’s overpriced.
        It comes down to : massively overpriced products combined with the money making and health lies recruiters tell= huge failure rates.
        Its a doomed business model.
        You cant deliver legit products at competitive values when you have unlimited up-lines all taking a piece of the action in exchange for nothing.

        • Cindy Shuffield

          Oh, RJ, they get something in return.
          They get the “admiration” of their superiors! And calls from the mighty leaders! For the (mostly) low-self-esteem kids, who’d do what ever to hear one of those guys call, Skype, facetime for a few minutes. My daughter was interviewed on a call-in “show” where other affiliates listened in for inspiration, to talk about her success. She’d recruited no one and sold no product. But, it kept her going for a few more months.
          Oh, and “the only way to fail is to quit.” At this stage, I sort of feel sorry or Kevin. I hope he got paid up front, and not in product.

      • Bankable Bodies

        Vemma has sorted out ‘seasoned’ networker’s whose blurred lines caused the blunders in marketing confusion. A phenomenal formulation to include quality premium ingredients is continuing from people’s appreciation of the products!
        Restructuring of these clarifications was a blessing to elevate into a level never seen before with hybrid marketing. FTC’s Officials did Vemma a favor bringing
        it to their attention to pioneer a precedent for future growth within the industry!

        • Georgy Porgy

          That’s right, don’t mind the after taste on the kool-aid, it’ll go away soon.

          • Bankable Bodies

            You sound like Trump-keep your ignorant insults to your self and obvious disparaging opinionated comments. 2oz shots of significant ultra trace minerals doesn’t even leave an initial taste no less any aftertaste. Perhaps you prefer choking down a bunch of pills?

            • Georgy Porgy

              Oh wow. Google drinking the kool-aid and you might get a joke for once.

              Seriously?

              • Bankable Bodies

                Yes this is serious how it happens people who know nothing about a company’s credibility comment as a “joke”. Save your comments for a Stand Up stage.

              • Georgy Porgy

                Okay okay. But one last joke.

                There once was a company called Vemma . . .

              • Bankable Bodies

                I pity people finding fault to have a hobby-your comments are clueless! It’s been a blessing to finally be rid of inexperienced greed seekers-Good Luck!

      • Avert Scams

        The only reason why MLMs are said to have high failure rates, in my opinion, is because most of the time customers join the ‘opportunity’ or opt-in to become distributors so that they can qualify for discounts even though the products are for personal consumption. These discount seeking ‘consumers’ are counted as active distributors and they inflate the failure rates. For example, Kyani Nitro Xtreme is $69.95 while retail cost is $79.95. If you need regular supplies it makes sense to become a ‘distributor’ even if you have no intentions to sell even a single product. It is the very reason why It Works forces discount seeking customers to sign a 3 month auto-shipping contract. Even Vemma is said to have requested to down grade its discount seeking distributors to customers because they knew that the numbers were skewed. The only way is; 1) to impose a deterrent upgrade fee which forces only serious distributors to upgrade membership. 2) Demote to the rank of ‘consumer’ anyone who does not sell products equal to or more than what is auto-shipped to them for personal consumption. You are only compensated if your retail sale ‘leg’ is longer than your ‘down line’ sales. To wrap up, it is not surprising that 10% of MLM distributors who become successful are part of the 50% who are serious about the promoting the business and its products. That’s my opinion.