FTC - Vemma: Arguments over Vemma's Revised Pay Plan

Hi everyone out there, Kevin Thompson, mlm, attorney and managing partner at Thompson Burton. And this post is going to be about the news with the FTC and Vemma's argument about its pay plan. So just to recap, the court in Arizona modified the injunction that was in place over Vemma and there were some restrictions in the order, and those restrictions are covered in other posts that I've done. And the most serious restriction, the most important restriction, was the one that led to this little spat over Vemma's modified pay plan. So in particular, it's this restriction. You cannot pay compensation unless the majority of such compensation is derived from sales to customers. And so after the judge came out with this order regarding the injunction, a week later, maybe two weeks later, Vemma proposed a new pay plan. And that led to some back and forth between Vemma and the ftc. Vemma filed a motion with the court trying to get its pay plan approved with its what is known as the 51% rule. The FTC objected and they ultimately won. And there's been a lot of commentary about what this means for the industry and just what it means for Vemma. And candidly, I didn't read all of the pleadings carefully. I skimmed them, but I didn't read it carefully until today. I know I've been living under a rock, but I've had them sitting on my desk and I wanted to make sure I gave it the time and the attention that they deserved. And the rule was a bit confusing. So I dove in there today. I believe I understand the issues. I want to. I want to. I want to explain what this is all about as best as I can. So let me read that restriction again. Vemma cannot pay commissions unless the majority of such compensation is derived from sales to customers. Right now we're talking group volume. The majority of group volume in the organization needs to be derived from customers. Okay, now that's where the order stopped. So Vemma interpreted that to be this. I'm gonna write this out on paper. Suppose you've got $100 in commissionable money. Okay, so we've got $100. And let's suppose $60 is attributed to affiliate sales, $60 is due to affiliate consumption, and $40 attributed to customers. All right, $60 here, affiliate. Forty dollars here, customers. Now remember, the order says compensation cannot be paid unless the majority of the compensation is derived from customers. Well, here, out of the hundred dollars, forty dollars is derived from customers. So in this scenario, the majority of compensation is not derived from customers. So what does Vemma do they propose what's called a 51% rule. And anyways Vemma says this, you get paid on all of the customer volume plus the affiliate volume, up to the customer volume. So here's how it works, alright, you get paid on the $40 which is the customer volume. And remember the order says you cannot pay compensation unless the majority of compensation comes from customer sales. So you've got $40 commissionable volume on customer sales. What's less than 40? $39. So you don't get the full $60 on affiliate volume, you get 39 because 39 is 1 less than 40. Sorry, I'm getting confused on the right and left but 39 is less than 40. So here you get, you get paid on $79, the majority of which comes from customer sales. Right? So Vemma came up with this rule, it's clever actually, makes sense and says that the majority of the compensation is derived from customer sales. And so if you have insignificant customer numbers, you're not going to get paid on hardly anything. If you have good customer numbers, you'll get paid essentially a prorated basis on the on the affiliate consumptions. Another thing of issue here is that Vemma said that your personal purchases, if you're a Vemma affiliate, you cannot personally qualify for commissions. There are no personal volume requirements. So you just get paid on organizational volume. And the thinking is if you buy, you're not buying because you have to, you're buying because you want it because you don't have to. And why else would you buy it? That's the theory. Okay, so hopefully I hope the math makes sense. Now let's suppose here, you know, it's flipped. Let's suppose this here is all customer volume and that's affiliate. Well in that scenario the majority is clearly derived from customer sales and you get paid the full commission. FTC had a problem with that and their argument. It's essentially on the two key issues. Number one, yes, Vemma affiliates are not required to buy, but based on their history the judge could infer that people would buy to please their upline. Like the upline would put pressure on them. That was on that one issue and the judge agreed with them. The judge said, you know, based on the 10 years of history, it's foreseeable that people will be pressured to buy product as samples. Okay, judge agreed with them there. Regarding the Vemma's interpretation of the 51% rule, the FTC argued that you're still paying too much on affiliate volume. Basically it's an all or nothing Approach, if the majority of compensation is not derived from customers, back to this analogy, if the majority is attributed to affiliates, then you get nothing. You don't get paid on this and you don't get paid a prorated share of that. And their basis, they relied on Dr. Bosley's declaration. Their basis was that you're still paid well by recruiting affiliates. Right. So instead of, instead of being paid $100, you're still paid on 80. And in their mind, that still leads to a recruitment culture. The emphasis will still be on recruitment. That's their argument. And the judge was persuaded. And the judge relied on a little bit of the Amway 70% rule, where he said, well, back in Amway, 70% of the inventory had to be moved to customers or else they didn't get a bonus. Here it's 51%, it should be all or nothing. Now, he misinterpreted the 70% rule, which I've got a post heed up on that later. But then he also referenced the 10 customer rule as well in Amway's old business, where if you made the 10 sales, you qualified for commissions. If you didn't, you didn't qualify. All or nothing. So that's the deal. So now in Vemma, the majority of the organizational volume needs to come from customers and if it doesn't, you don't get paid. Now, what does this mean industry wide? Is this an attack on binaries? I don't think so. So in the FTC's brief, they mentioned binaries and cycling commissions and sort of implied that it leads to a recruitment culture, which there's some truth to that, and that there were not enough incentives to lead to retail sales. At the end of the day, the FTC is trying to put Vemma out of business. That's what they're trying to do. And I'm not saying they're making up arguments, they're not, but they're being very aggressive. In the 2004 staff advisory memoir, they wrote to the DSA and they said, you know, we take aggressive positions against people that are unwilling to follow the law. And it's not intended to, it's not intended to represent the state of the law. I think that's what's happening here. And also, if you remember, in Burn Lounge before in the ninth Circuit, actually, the FTC said that any commissions paid from internal consumption is inappropriate. And the 9th Circuit judge pushed back on that and said, no, you can have internal consumption, that's fine, as long as it's for legitimate reasons. So they take these aggressive arguments. I don't think it's to serve as a fence post, per se. That being said, if the FTC were to publish a press release or issue a statement regarding, you know, what they want to see, I'd pay better attention to that as opposed to them trying to take down a company so it doesn't represent the state of the law. The issue is over the interpretation of an injunction, which is only on Vemma, which according to the judge has 10 years of history and a lot of that history being bad according to the judge. And so this here is a situation that is very focused on Vemma industry wide. You need to pay attention. It's not black letter law yet. Is it gonna be? I don't think so. I think the 9th Circuit has already spoken on the issue and said that internal consumption is fine. To the extent that a company has too much internal consumption, the 9th Circuit said they're not going to decide the issue. So bottom line is you need some retail sales, period. And you need some policies that lead to meaningful retail sales and you need to properly emphasize product value in retail sales. And so in that regard, that's pretty obvious. But do you have to have the 51% rule here as interpreted by the FTC in the Vemma case? No. Anyway, hope that made sense. It's confusing stuff. There's a lot of information out there and I thought it would help to clarify. Take care.