The U.S. District Court in Arizona just released its order on the Vemma TRO/asset freeze and receivership. Here’s the quick summary, but the analysis has many angles and moving parts that invite much analysis and interpretation.
- The Temporary Restraining Order. The court found that there is a substantial likelihood that Vemma was running a pyramid scheme. However, the court also found that there were parts of Vemma’s business that were being operated legitimately. Therefore, the court amended the TRO and allowed Vemma to continue to operate those parts of its business that were being run legitimately, but enjoined Vemma from engaging in those practices that it viewed as illegal. As it relates to Vemma’s sales and compensation program, the court enjoined Vemma from incentivizing distributors to buy products to become eligible, or maintain eligibility, for compensation rather than for resale or personal use. (Emphasis added – this is HUGE!). This is seemingly contradicted by another statement in which the court prohibits Vemma from paying compensation related to the sale of products unless the majority of compensation is derived from sales to buyers who are not members of the Marketing Program. (Emphasis added).
- Vemma remains enjoined from paying commissions on the sale of Affiliate Packs and on the sale of products to distributors if such sales accumulate sales volume that qualifies the purchasing distributor for compensation. This provision directly impacts Vemma’s autoship program; we will analyze this in much greater detail in upcoming analyses.
- The Asset Freeze. Vemma’s assets and the personal assets of the defendants are unfrozen. The court found that the FTC did not present sufficient evidence that the assets were at risk of being dissipated.
- The Receivership. The court found that because Vemma is prohibited from engaging in illegal practices, it was unnecessary to have the business run by the receiver. However, the court recognized that Vemma had engaged in numerous illegal actions, so it re-cast the receiver as a court appointed monitor to oversee the defendants’ management and operation of the business. This is a significant step as it puts Vemma’s management back in charge of the company. Of course, the problem is that the company is a mere shell of its former self since the receiver fired most of its employees.
The content of the court’s order simply begs for analysis, and we will be breaking it down into dozens of individual issues for you. However, it’s important to understand that while this is a considerably stronger outcome than other MLMs have experienced in the past following FTC action, the company has been devastated so the FTC still has its “win” (although it certainly has egg on its face for other reasons that we will discuss in subsequent posts). But as I pointed out in my last blog, we have much work to do.
In my opinion, today’s ruling is yet another scenario of another governmental entity acting under the color of the law overstepping its bounds. The FTC misled a federal judge to convince him to grant an order that effectively killed Vemma’s business. Then, before Vemma had a day in court, the FTC’s receiver overstepped the bounds of the Court’s order by firing the majority of Vemma’s employees. Vemma received no hearing until weeks after the FTC had done everything it could do to effectively kill the company.
In reading between the lines, today’s court order indicates that the court viewed the FTC’s action as overreaching. Notice that I said “overreaching,” and not that Vemma was innocent of the charges. That’s a key distinction because in so doing the court sent a message that the FTC went too far in convincing the court to issue the draconian relief set forth in its original order that froze Vemma’s assets, turned the company over to a receiver, and shut the business down.
Vemma was not an altar-boy, and the court’s order recognizes that. Indeed, the court’s order indicates that it believes that the FTC will successfully prove that Vemma was operating an illegal pyramid scheme. I’m not commenting on whether or not that is true, but nobody can credibly argue that Vemma and its distributors were not too aggressive in some practices. But did Vemma’s transgressions justify the FTC’s initial actions in killing the company? Or are we faced with a situation in which the FTC, as the top-cop in the consumer protection arena, is exhibiting and exercising a bias against direct sales?
I am not one to espouse conspiracy theories, but how many consumer (and OSHA, and EEOC, and on and on …) complaints have been filed against WalMart, McDonalds, or any other high-profile business? Does the government shut them down, freeze their assets, and appoint a receiver to liquidate the company? Does the government shut down an auto company when the company builds cars knowing that they have flaws because they calculate that the lawsuits from the ensuing accidents will cost less than fixing the problems? I have yet to hear of an asset freeze or ex parte shut-down of a tobacco company, although the harm they cause to individuals, our health care system, and society at large dwarfs any harms alleged to have been caused by Vemma.
Obviously these are extreme examples, but they are fitting. Let’s face it, the government does not kill businesses in other fields, even though their transgressions are far more devastating in terms of life and property than the harm that can be caused by a flawed direct selling company.
Let me be clear. I am not defending pyramid schemes. There is NO ROOM in the direct sales distribution channel for pyramid schemes. I am however shouting loudly about the bias that the FTC has for the direct selling industry. The court’s action in amending the Vemma TRO highlights that less draconian remedies are appropriate and suitable to address problems within our industry while legal proceedings wind their way through the courts. The Vemma case highlights this fact very clearly. The FTC identifies a target with an objective to shut the company down, conducts a flawed investigation, presents highly selective evidence to the court, and kills the company, all without due process of the law. What other industry gets such treatment? I can think of none.
So what do we do? One thing is for sure; we DON’T sit back crying boo-hoo, we’re such poor victims of the big, bad FTC. Direct selling is built on high-energy, high-output people who get things done! So these are my recommendations:
- Make sure your house is in order. This is KEY! There’s no sense in trying to fix a system if each of us cannot fix ourselves. My guess is that every company knows, or at least has a good idea, of where it’s pushing the envelope. Find out if you’re overstepping the bounds, and let’s clean up our act.
- Get in contact with your federal government officials. Contact your Senators and your Congress-person. You have a voice. Use it.
- Work together. Sure, every company is in competition with one another. But on industry-wide issues such as the FTC’s abuse of power against direct sellers, a unified voice will have far greater effect than everyone working individually.
I anticipate that change will be slow, but let’s get the conversation started!