Discussion re. Vemma Preliminary Injunction Order

I think we're live. Okay. Hi, everyone. Kevin Thompson here, along with Thompson Burton partner, Kevin Grimes. And we've got a big order to talk about. We're going to try to keep it as brief as we can. I figured 15 minutes, 20 minutes maybe. And then we'll also field some questions, which I think you can submit via chat to us. But not quite sure how that all works. All right, so I'm gonna go first, and then I'm gonna throw some questions to Kevin Grimes because he's been on legal teams adverse to the FTC in the past, I think, notably early on in the Burn Lounge case, if I remember right, Kevin. And also Shrek alliance, is that right?

Exactly.

And maybe some others. Am I leaving out?

No, you're not. More than enough.

Yeah, that's right. So you've been there and you've done that. Okay. Immediate impression on the order. There's some good, there's some bad. Mostly bad. But Vemma has an opportunity. BK has his company back, albeit there are some restrictions. And he. His money is not frozen, which means he can actually now pay for a defense. Hang in there. So with that being said, you know, people always say, you know, how can I support the industry? What can I do? I'll tell you right now, Vemma needs some customers, and that's very simple. If you buy energy drinks, buy some Verve, because that, number one, shows the product has value, which it does. And number two, gives them some resources to fight off the federal government. Now, I will admit I'm surprised at the way this order is structured. I was. I was hopeful after seeing the evidence, after being in the courtroom, seeing the evidence the FTC put up there, there was a lot of optimism that Vemma had a shot. And I admit I was optimistic. But I was also the back of my mind, if you read my stuff, I hedged a little bit, saying, the Federal Trade Commission, they never lose. Right. It's a federal agency and a federal court in front of a federal judge. History has shown they don't lose. So that skepticism proved more accurate than the optimism. Here's the thing, and I've got the order in front of me in Burn Lounge, and I'm going to talk to Kevin Grimes about this. Burn lounge is a 9th Circuit decision. It's the most recent law that we've got, says that as long as the majority of revenue comes from ultimate users, the company is not a pyramid scheme. And ultimate users is defined as people in the program, people out of the program buying for legitimate reasons. This judge in this Case which I'm sure Vemma is going to appeal this decision. He didn't get that specific. It was, hey, look, if you're in Vemma, if you opt in to be an affiliate, which it's free to be an affiliate, if you make that choice, even if you don't buy an affiliate pack, even if you're not on auto ship, you're a participant, you're a victim really. And the idea of you being an ultimate user, not possible. So he goes with that definition. If you opt in as an affiliate, that volume doesn't really count. Using that standard, the FTC's argument was that 70% of the volume came from affiliates, 30% came from customers, therefore it's off. Now Vemma's expert said you need to judge people based on behavior, forget what they opted in at because it's free. And you know, people might opt in as an affiliate because they want to reserve the right to make money. You don't know, judge them by their actions, are they recruiting, are they on autoship, etc. Based on that standard, the majority of money was driven via ultimate users, legitimate consumption, etc. Judge was not persuaded. That is what stings the most in my opinion. So all that being said, Vemma's in business. If you're a Vemma affiliate, do your thing and sell some product. Now Kevin and I are going to talk about some restrictions that are there, but the company can sell product and can cut commissions, which kind of is a good thing. And also there is no longer a receiver who can essentially sell off all the assets and drive the company into bankruptcy. Now there is a court appointed monitor and a monitor has to observe the company's behaviors, which is a lot different from actually running the company. Now the monitor in this case is the same as the receiver, the old receiver. So that being said, enough of that. Kg, thanks for doing this. And a caveat to everybody, we haven't had all day to look at this thing. But Kevin, when you look at this order, what are some of your immediate impressions?

Well, some optimism like you have and also I'm not surprised at some of the things that the court kept in place. I guess I would say this is a win on several levels for FEMA in that they're now going to be able to reopen the doors, they're going to be able to do business, it's going to be under a very, very different set of rules and, and we can certainly talk about those some more. And I guess it will beg the question, we don't know when the next hearing is. Right now the judge talked about going to trial. That may well happen obviously if the parties can't settle. But I think the big question now is whether FEMA and its affiliates are going to be able to do business consistent with the limitations the court has articulated in the order.

Let's talk about some of those, those limitations. So the judge says, viewing all the evidence, the court concludes that measures less drastic than the relief sought by the FTC is available. And so he hasn't shut these guys down completely. Now limitations, that starts on page 21 of the order and the main question that I had and also the one that you had, but I'll let you answer it, not me because this is a hard one. This item number four, Vemma cannot pay compensation unless the majority of the pay is derived from non participants. Now is that a, is that a macro view of Vemma's revenue where you know Vemma As a whole 50% needs to come from customers or is that going to be each individual person? If you buy a hundred points and you only sell 30 to customers, is it going to be, how's it going to be implemented?

Yeah, I think it's a practical matter. It's got to be determined on an affiliate by affiliate basis. You know, obviously whether a particular affiliate receives compensation is a function of whether he or she is qualified. And it's been a long time since I've looked at Vemma's compensation plan. But obviously there are some, you know, individual requirements or your personal volume requirements and obviously there's some group volume requirements and there may well be other requirements in place. But whatever they may be, in order for John Doe or Jane Doe the affiliate to receive compensation, whatever activities and whatever sales generate compensation, I think it's very clear from this order that the majority of that volume compensation is ultimately paid on sales volume. What percentage of that volume is coming from customers versus what percentage is coming from affiliates? And so again how it's calculated in the Vemma compensation plan, it's clear that the majority needs to be coming from a customer.

Okay, so to answer your question, I.

Don'T think it's going to be okay for them to analyze this and pay compensation on a company wide basis. Let's just say for the sake of discussion that 50 plus percent company wide is coming from customers. Does that mean that they can pay compensation to all affiliates? I don't think so. I think it needs to be on an individual affiliate basis.

So if I'm advising Vemma, this is what I tell them. Number one, the 70% of people that you purport are customers. The people that aren't, they've never bought an affiliate pack. They're not on an auto ship. Those people convert them to customers. Just convert them right now to customers. Sell to those people. And kg, I think those people will continue to buy because why were they buying in the first place?

Right.

They weren't qualified to make money. So I think there's already a large customer base that exists. So number one, number two, I'm going to float this question to you. What about if they had a old school retail sales rule where you have a monthly PV requirement but 50.1% of that PV needs to come from registered customers to qualify. What do you think about that?

Well, I think that's a great idea. And in fact it's really not such an old school requirement. In fact, we've seen that articulated as recently as last year in the U.S. court of Appeals decision in the FTC versus Burn Lounge case. In fact, the court talked about they call them rules to promote retail sales. And you know, we also saw that in the Webster vs. Omnitrition decision. So it's, I mean you're right, that concept's been around for a long time but it's still, it looms very, very large in the minds of the federal courts. And so I think it's not just of critical importance. It's mission critical that companies do precisely that. Establish rules to promote and tie distributor affiliate compensation in a meaningful and material way to sales to customers.

Yeah. And the question is, you know, with so many programs out there, will the VEMMA affiliate stick around and build this business? I hope they do. It sounds like there's legitimate demand for the products, but it's going to be tough.

Well, yeah, I think without question the overarching activity of VEMMA affiliates needs to be customer acquisition. But of course that begs the question, why does somebody become a customer? Unlike affiliates who arguably have a dual motivation for getting involved. Number one, acquisition of the products. And number two, the ability to participate in the opportunity. Customers only get involved for one reason, the intrinsic value of the product. So the value proposition is everything. In fact, interestingly, in the court of Appeals decision in Burn Lounge, of the eight different factors the court articulated and explained, these are what we look at to analyze a program. The very first one that was mentioned was value. Part of my encouragement to VEMMA would be to take a serious, critical and hard look at its value proposition because again, this is the only thing that's going to attract or potentially repel customers. I define value as a mathematical equation as quality plus benefits divided by price. So if the quality and benefits of FEMA products remain the same but the price decreases, then the value goes up. And the more the price decreases, the more the value goes up. The higher the value, the more likelihood they will be to attract customers. Attract and keep customers.

Right. You know, is there, is there any opportunity for these guys to, excuse me, sorry. To appeal the, this injunction ruling? Because I imagine they're going to. Just because, you know, this whole idea of 50% having to come via retail sales, that's not what Burn Lounge suggests. Now that that is a factor. Retail sales are certainly important and you need to have incentives to that lead to meaningful retail sales. But Burn Lounge also said that we're not going to decide the extent of which rewards need to come from retail sales. Right. So we don't know if it's 50% or not. Now if your company has 50 plus percent, you're fine. But what about the other factors? What about the existence of a refund policy and anti inventory loading measures? And what else the emphasis of the program which the FTC dinged Vemma for emphasizing recruitment. But what about these other factors that were largely ignored? What about behaviors of affiliates they weren't recruiting does all that, can they potentially use that in their favor for an appeal?

Well, yeah, I think the bottom line, affiliates are going to spend their time where they get the biggest return on their investment of time. If they get the biggest return recruiting other affiliates, that's what they're going to do. If they get the biggest return from selling products, that's what they're going to do. Ideally, a compensation plan needs to incentivize and reward both in a balanced fashion and hopefully with a properly designed compensation plan there's a lot more money to be made by building a balanced business, which is one that properly balances the objectives of number one, product sales and customer acquisition on the one hand and, and distributed recruiting on the other. I think a huge challenge for the vast majority of direct selling companies out there is that their compensation plans really do not incentivize and reward product sales and customer acquisition in a material and significant way. They just don't.

Yeah, no, it's an issue. And what's going to happen is the heavy recruiters are going to go to other programs because what's the likelihood of those guys getting caught? Right. Yeah, is the rationale.

You know, I mean, I hear what you're saying, but on the other hand, what's the likelihood, yeah, it may be small, but it doesn't help if you're involved with the company when it happens. As you know, you know, the FTC and Burn Lounge sued, you know, the top distributors there. They've sued, you know, know, leading distributors at other companies. And of course if you do get sued, you're looking at things like potential lifetime bans, you know, being shed of a lot of money. And so, you know, I think the risk to big leaders is just the same or potentially the same as it is to the companies.

Yeah, it's one worth watching. Let me read some questions here from the public. Let's see, when can we order product? That's a. Well, there's a customer right there. I think Monday. I think the rumor is that these guys are gonna be open for business pretty soon.

Awesome.

And that's it. So kg, that was pretty easy to the Vemma affiliate out there. This is a very painful experience. I really don't know what to tell you other than I think you got a great executive and you got a great product. You know, the skepticism that I had, I just had a bad feeling. You know, I thought, I thought that Vemma presented facts that were compelling, where you judge people's motivation by how they act. And if people aren't recruiting and they're not on auto ship, well, you shouldn't count them as a business builder. But that just didn't work. So the company's in business with some restrictions. They can sell products, go out there and get some customers and those of you in the network marketing community, support a Vemma distributor, buy some product. Number one, it's good. Number two, it's less than what you can spend at a gas station and you'd be doing a good thing. So, Kevin, any closing thoughts?

Well, I. I think what might be helpful is just to talk about the potential significance of this order relative to the entire industry. What does it mean? The court certainly talked about some of the different business models that it found within Vemma and its top distributor talked about one of the programs was sign an affiliate up, get them to buy a $600 pack, get them to sign up, get him to sign up to affiliates and do the same thing and repeat that process. And I submit that that's really. Although that has been a model that has been present in the industry for a very, very long time, arguably since I'm nutrition, that's a very, very dangerous model. One of the things I talk. Oh, I'm sorry, go ahead.

No, yeah, it's like you're Painting a bullseye on your. On your shirt when it's, as you say, when you recruit distributors, teach them to get on auto ship and then teach them the priorities of number one and two. I stole that from you. If that's the general model, you're sort of asking for trouble. Now, was that consistent throughout the Vemma organization? I don't know, but there is an absolutely. There's absolutely a lot to learn from what drew regulatory attention to Vemma's program. One thing we're not talking about is income claims without disclosure. You and I are really big on that issue. And at the hearing, they showed some embarrassing videos where some crazy income claims were made and in small white font, you know, results. Not typical. It's not good enough anymore. So there's a lot that companies can learn. You know, having programs to incentivize meaningful retail sales, lots and lots of disclosure training materials to teach people how to sell. Doing away with this idea of buying to qualify for bonuses. Having that in the culture is a problem. So definitely a lot of lessons to be learned. I guess we'll cover that later. But today, it's gonna be a tough day for those reps. Good news and bad news. Good news, they're still in business. Money's not frozen. I wouldn't bet against bk. He's not gonna give up. And if he can sell product, he's got a shot and he can sell product.

Yeah, I would agree. And I hope things go very well for Vemma and bk.

All right. Hey, thanks, Kevin.

Absolutely. My pleasure. Okay.