The FTC announced today that it had settled charges with multi-level marketer and seller of health and wellness drinks Vemma over allegations that it operated a pyramid scheme. The FTC initially filed the action in August 2015 in federal court in Arizona, alleging that Vemma encouraged participants to buy products to qualify for bonuses and to recruit others to do the same. The settlement puts an end to the litigation, which saw the FTC and Vemma go to battle over the extent of revisions necessary to Vemma’s marketing plan to ensure that Vemma operated legitimately and not as a pyramid scheme.
Ultimately, the stipulated order looks a lot like those entered in previous FTC pyramid cases like BurnLounge and Fortune Hi-Tech Marketing, with a few important distinctions, including:
- Compensation based on sales and not purchases. The order prohibits linking or tying a participant’s compensation, or eligibility to receive compensation, to that participant’s purchase of goods or services. See Section II(B). While included in the preliminary injunction order, this provision has not previously been included in FTC pyramid orders like BurnLounge and Fortune Hi-Tech Marketing.
- Compensation derived primarily from non-participants. The order prohibits paying a participant compensation unless the majority of the total revenue generated during such period by the participant and others within the participant’s downline is derived from sales to non-participants. See Section II(C). Again, while a similar provision was included in the preliminary injunction order, previous pyramid orders have not included this provision. The language in the permanent order also makes clear that the determination must be made in connection with a “fixed pay period.”
- Additional disclosures of material information. The order requires certain disclosures in connection with any claim concerning earnings, profits, or sales volume, including: (1) the number and percentage of participants who have made a profit through their participation in the program; (2) the beginning and ending dates when the represented earnings, profits, or sales volume were achieved; and (3) the average and median amount of profit made by each participant. See Section V(A). These disclosures have not been required in previous pyramid orders, although they were required in the preliminary injunction order.
The order imposes a $238 million judgment against Vemma, which will be partially suspended upon payment of $470,136 and the surrender of certain real estate and business assets. A separate order was entered against Vemma affiliate Tom Alkazin and his wife, Bethany Alkazin, which imposes a judgment of more than $6.7 million, although it will be partially suspended upon payment of $1.2 million.
The settlement comes two months after Chairwoman Ramirez spoke to the Direct Sales Association (DSA), the trade association representing many multi-level marketing and direct selling companies, about business opportunity and income representations and ensuring that compensation plans ensure that sales are primarily to consumers who are not pursuing the business opportunity. We covered that speech here. As part of that speech, Chairwoman Ramirez signaled that the FTC would be issuing further guidance on MLMs in the near future. We’ll continue to monitor and post developments relevant to MLMs and direct selling companies here.