Last month, the Federal Trade Commission (“FTC”) settled with Vemma Nutrition Company for allegedly engaging in deceptive business practices and sales tactics akin to a pyramid scheme. According to the FTC, the company made deceptive income claims to its distributors and unsubstantiated health claims about its products, specifically representing that consumer demand for the products was higher than it actually was.  Vemma failed to disclose that most of its “affiliates” would not earn the income suggested by the depictions of wealth and luxury included in company advertising and recruiting materials.  Instead, the distributors’ compensation largely rested on recruitment of other distributors rather than product sales.

The settlement calls for Vemma to pay a $238 million judgment, subject to partial suspension, and requires the company to surrender business and real estate assets and produce compliance reports from an independent auditor for the next 20 years. Additionally, the company is barred from engaging in any business practice that encourages recruitment-based compensation or ties compensation to purchases. 

Takeaway: Marketers engaging in multi-level sales practices should make sure that sales-person compensation terms are fully disclosed in any recruiting materials and avoid using unrealistic depictions of wealth and luxury to recruit distributors.