Ordinarily when the Federal Trade Commission (FTC) comes knocking, it's a death sentence for whatever or whomever they have placed in their crosshairs. Despite the merits of any particular scenario, the efforts a company or individual must take to avoid an injunction or the freezing of assets (the FTC will seek to freeze any and all assets they presume to be associated with the violative conduct) are extremely onerous, not to mention the public relations hurdles that any FTC victim must overcome whether internally, across its salesforce of independent contractors, or its customer base.
Recently, Kevin Thompson and I have discussed openly about the shifting trends of public perception relating to the FTC's end goals and their adopted means to get there. While limited to network marketing here, the accumulation of FTC losses in the antitrust domain do not go unnoticed when we analyze FTC actions. The network marketing world, in my opinion, was able to claim victory against immediate rubberstamping of FTC assumptions in the denial of an injunction against Financial Education Services and a limited court order, in my opinion, against Success By Health of which I discussed in further detail here.
The opinion heard around the network marketing world came from the United States District Court for the Northern District of Texas – Dallas Division at the pen of Judge Barbara M. G. Lynn in the case Federal Trade Commission v. Neora LLC on September 29, 2023. We discussed our initial takes on the matter here.
While many across the industry have heard about this opinion and/or already read its contents to some degree and also provided initial reactions on what the decision may mean, I write this article to provide further context for the casual network marketer and the company executive alike as this decision limits the FTC's ability to bulldoze its targets. But this decision is also not the panacea that some are invoking it to be. This decision should catalyze the drive to do things right as opposed to being an excuse to become relaxed in one's approach.
The FTC's Claims
The Court went into detail regarding numerous aspects of the Neora business the FTC determined to be violative of the FTC Act: "(1) operation of an illegal pyramid scheme; (2) false earning claims, by misrepresenting the potential income Brand Partners could earn; (3) false or unsubstantiated efficacy, by misrepresenting the efficacy of EHT and/or Neora EHT; (4) false establishment, by misrepresenting that the effectiveness of EHT and/or Neora EHT has been scientifically established; (5) means and instrumentalities, by furnishing Brand Partners with the means and instrumentalities to mislead others."
Kevin Thompson discussed that Neora was ready to go to battle back in November 2019 when the initial suit began. To Neora's credit, and a testament to their grit, Neora came out swinging hard from day 1. They were furious. And as we can see from the outcome, justifiably so.
What Happened?
In short, the Court determined that the FTC failed to carry its burden on any of the claims they made, thus the injunction request was denied, and the FTC was ordered to pay legal costs for Neora with no other relief options available. The only question presented for the Court was the injunction because "In August 2021, the Court granted Defendants' Motion for Judgment on the Pleadings as to the FTC's § 13(b) claim for monetary relief and the recovery of sums for individual consumers, on the grounds that such relief is foreclosed by the Supreme Court's decision in AMG Capital Management, LLC v. Federal Trade Commission."
The FTC presented allegations based upon a variety of assumptions regarding the Neora business model and operational reality. My personal favorite was, "Since its inception, Nerium has operated as an illegal pyramid scheme. Unlike a legitimate multi-level marketing business, Nerium's compensation scheme emphasizes recruiting new [Brand Partners] over the sale of products to consumers outside of the organization." Followed by, ""In addition to the upfront investment in a[n Enrollment Pack], Nerium also incentivizes BPs to commit to designated volumes of product purchases each month."
We have repeatedly warned clients in the past of about the FTC's lazy approach here and have written previously about this case in particular:
"If we try, we can understand where the government is coming from in their approach. They do not care to dive into the minutiae of the numbers or understanding the specific details of the economic realities of any compensation plan, they reach a conclusion based upon a surface-level approach and then run backwards to determine what they perceive to be the realities of any business "since its inception. . . . In our opinion, we think the FTC grossly overstepped their bounds in its lawsuit against Neora and we hope they suffer appropriate consequences once the trial court reaches its decision."
The Court stated that the assumptions the FTC and their designated economist, Dr. Stacie Boswell, made were not supported by the evidence as to the pyramid allegations or any other related claim, most notably income claims and product claims. In cases past, courts have just accepted the FTC and its expert's assumptions as true without questioning those assumptions or requiring much proof at all. The FTC and its lone expert would go on to boast about how this was proof of competency, when in reality, they were racing a competitor with a parachute tied to its back.
Additionally, the Court found that there was not enough evidence in the record to support that the individual Neora independent contractors (Brand Partners) were agents of Neora to then implicate Neora in the income or product claims that they made. Where claims may have been at issue, they were either made by a third-party company not affiliated directly with Neora or done so far in the past as to be considered "stale." Neora had put into place stringent compliance measures to remedy those past issues, so an injunction would not apply under Section 15 of the FTC Act because that Section "requires proof that [Neora] are violating or are abour to violate the [FTC] Act."
The FTC overplayed their card here and they were punished for their arrogance.
What Does All Of This Mean Going Forward?
There are two big takeaways from this opinion that I find most important.
First, and more technical in nature, this is an opinion from a federal district court in Texas. This means that this decision may be used to persuade other courts, but it has no bearing on how other courts may rule throughout the country. If your company is sued in California, Tennessee, or anywhere for that matter, this case can be used as a roadmap, but the judge has the discretion to rule as consistently or inconsistently with this decision as they so choose based on their own findings. In this case, the Court dismissed much of the FTC's "victories" in the Vemma case, which was filed in Arizona. The bright side of this in my opinion is that the Success By Health case was in Utah and the Court there took somewhat of a similar approach. The result there differed dramatically because of defendant-specific issues as well as the defendants' inability to provide rebuttal evidence to combat the FTC's case.
Second, and more substantive in nature, is that there was no new law presented within this decision but rather the FTC failed to support the allegations it made with evidence. Because the FTC brought the case, it was their duty to prove the claims that they made by a preponderance of the evidence, 50% and a feather is what we learned it as in law school. This means that the FTC simply needed to provide evidence that made it more believable than not that their set of facts were accurate. It's not a high bar at all, and the government still failed.
The FTC took the well known Koscot factors to their theoretical conclusion with the Neora compensation plan and business model as opposed to taking it to its operational conclusion. The FTC argued that because recruiting could be viewed as the primary factor in Neora's business that that must be the reality. Neora's ability to provide data-driven responses to the FTC's claims led the Court wanting more from the FTC in response. The FTC's lack of additional witnesses and inability to counter Neora's rebuttal is what ultimately led the Court no choice but to side with Neora here. This was similarly the case with income claims and product claims with the Court either stating that the claims were too minimal and/or old for there to be much to dive into or the FTC failed to prove that Brand Partners were, in fact, agents for the company.
I would advise not taking much stalk in the agency analysis of this case and focus more on the ability for companies to combat a theoretical reality of a compensation plan with factual data that retail customers are present. The idea of independent contractors has been and will remain a hotly contested issue across the country, so it would be ill-advised for companies to relax their compliance measures in the thought that they are no longer responsible for the actions of their salesforce. The conclusion in this case on that front had to do more with the FTC's poor argument as opposed to any genuine basis in law.
How Should The Industry Respond?
Positively. This is a major win for the industry and yet again another decisive blow to the FTC as they turn their focus to their ultimate prize, a very small business known as Amazon. However, network marketers should not take this positive outcome as an excuse or reason to turn reckless. Active compliance measures as well as robust record keeping should be placed at a premium for all companies in this space. This case means absolutely nothing if companies or distributors cannot provide evidence to counter a regulator's perspective.
As I have discussed previously, companies and distributors need to remain cognizant of what is expected of them. This decision is not a license to now rest on your laurels, it should catalyze further innovation in the space to ensure that all companies and distributors have implemented the necessary precautions to defend themselves against the FTC with comprehensible and provable data to push back against the FTC's narrative. Neora was able to push back against that narrative to then watch the FTC fall on its faulty assumptions. If Neora did not have the resources or, more importantly, the records to rebut the FTC's case, then Neora would have likely faced the same fate as so many companies before it.
This is a victory for the industry to be proud of, but we mustn't stop fighting for a better future. The work has only just begun.
New Amway Safeguards For That Better Future?
In the Amway case from the 70s, Amway was successful largely due to some of its "safeguards." Those safeguards were designed to mainly prevent inventory loading, e.g., a generous buyback policy, a customer sales rule, etc. This case provides a new, more modernized framework for companies. Below are some of the key factors that companies should be aware of going forward:
- Be careful with Minimum Volume Requirements. If an MVR exists, consider having a coinciding retail sales rule, i.e., if there's a 100 point minimum per month, consider requiring that 50 points come from retail or preferred customers.
- Generous refund policy
- Consider adding a brief, multiple choice question at the time of enrollment to ask for the main reason for the new enrollee's decision to join, e.g., save money on products, generate a small stream of income, generate a meaningful amount of income, support a friend, etc.
- COMPLIANCE!
- Monitor for infractions
- Discipline the field for those infractions
- Education of sound business practices
- Professional marketing materials
- Income disclosure statements shared generously
- Culture: The tone of the messaging from corporate needs to emphasize product movement to customers, not to overly emphasize recruitment. It's an art, not science.
Here, at Thompson Burton, we've been advising clients for years on how to tackle these big unknowns as the FTC kept their cards close to their chest. A better future future for the industry begins with strong counsel, and we have the track record of being just that.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.