A federal judge has returned partial control of Arizona-based Vemma Nutrition Co. back to the company’s management team, by granting only part of the preliminary injunction sought by the Federal Trade Commission.
The 10-year-old company essentially had been shut down since Aug. 24, when the FTC served Vemma with a temporary restraining order that it obtained on an ex parte basis. That TRO had come with the appointment of a temporary receiver to run the business and a freeze on the assets of the company as well as the other named defendants: CEO B.K. Boreyko and top distributors Tom and Bethany Alkazin. U.S. District Court Judge John J. Tuchi heard arguments related to the FTC’s request for a preliminary injunction on Sept. 15. He issued his ruling approximately one hour before the temporary restraining order was set to expire on Sept. 18.
Under the preliminary injunction, the judge is permitting Vemma to resume some operations within a set of restrictions. For example, the defendants are prohibited from engaging in a marketing program that pays compensation for recruiting new members; encourages or incentivizes members to make purchases to maintain eligibility for bonuses, rewards or commissions; pays 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 who are not members of the marketing program; or constitutes a pyramid scheme.
They also are prohibited from making any material misrepresentations, including those related to income opportunities. In any instance in which the company makes an income, profit or sales volume claim, it must clearly and conspicuously disclose: the number and percentage of members who have made a profit through their participation; the beginning and ending dates of when the represented earnings, profits or sales were achieved; and the average and median amount of profit made by each marketing program member.
As for its marketing materials, the defendants are prohibited from furnishing any materials that contain false or misleading representations and must give the FTC five days to review any new marketing or sales materials before it is distributed. If the FTC objects to any of the materials, the defendants can’t use them without court approval. The preliminary injunction specifically prevents Vemma from selling affiliate packs and from linking bonuses or bonus qualifying points to an Affiliate’s product purchases, such as through auto-delivery or the Vemma Two & Go program.
The judge lifted the freeze on the defendant’s assets but included restrictions designed to preserve the assets of the defendants. The judge also is replacing the temporary receiver with a monitor, who will observe Vemma’s business practices to ensure they are complying with the terms of the preliminary injunction and monitor how the defendants use assets. He is recommending that the same company that served as the temporary receiver—Robb Evans & Associates LLC, a company specializing in serving as appointed corporate fiduciary that also served as the receiver in the FTC’s case against Fortune Hi-Tech Marketing—remain in the monitor capacity.
The case is the first significant FTC action in the direct selling space since the Ninth Circuit of the U.S. Court of Appeals’ 2014 ruling that BurnLounge Inc. was an illegal pyramid scheme. Executives across the industry are monitoring the case closely to understand the outcomes as the case proceeds.