Natural Products Insider is part of the Informa Markets Division of Informa PLC

This site is operated by a business or businesses owned by Informa PLC and all copyright resides with them. Informa PLC's registered office is 5 Howick Place, London SW1P 1WG. Registered in England and Wales. Number 8860726.

INSIDER Law
Pyramid Scheme 2019

FTC and MLM Neora butt heads in court over pyramid scheme allegations

The Federal Trade Commission has sued a Texas-based multi-level marketer over allegations that it's a pyramid scheme, but the MLM previously known as Nerium International isn't backing down.

The Federal Trade Commission (FTC) and Neora LLC, a multi-level marketer (MLM) in Texas previously known as Nerium International LLC, recently sued each other in federal court.

The narratives could hardly be more conflicting.

In a Nov. 1 lawsuit filed in New Jersey against Neora and its CEO, Jeffrey Olson, FTC lawyers portrayed the MLM as a “pyramid scheme” since its inception, focused on recruiting new distributors or so-called brand partners (BPs). The vast majority of Neora’s partners, government lawyers alleged, don’t earn a penny after expenses and quit.

“Unlike a legitimate multi-level marketing business,” the lawsuit proclaimed, “Neora’s compensation scheme emphasizes recruiting new BPs over the sale of products to consumers outside of the organization.”

On the other hand, Neora asserted the lion’s share of its commissions paid to its distributors are tied to product sales to end users, far exceeding a standard in case law distinguishing a legitimate MLM from an illegal pyramid scheme.

“Hundreds of thousands are or have been participants in Nerium selling over a billion dollars of desired products,” the company stated in a Nov. 1 complaint filed against the government in Illinois. “Yet, the FTC’s newly announced standards that it seeks to apply to Nerium and Mr. Olson would put virtually all MLMs out of business based on the FTC’s baseless assumption that no incentives can be paid for recruitment of participants even when the MLM makes robust sales to satisfied consumers.”

Kevin Thompson is an attorney in Tennessee who advises the direct selling industry and reviewed the court documents. He maintained FTC officials are trying to impose standards that don’t match the agency’s own guidance and the case law distinguishing pyramid schemes from MLMs.

“[FTC officials] have the luxury of demanding whatever it is they want using whatever standard they want,” said the lawyer, a founding member of Thompson Burton PLLC. “There’s no consequence when they’re wrong. It’s incredibly hard for a company to push back and, to Neora’s credit, they’re doing it.”

FTC officials began investigating Nerium in 2016, the same year the nonprofit Truth in Advertising Inc. (TINA.org) filed a complaint against the company with the Texas Attorney General and FTC. TINA.org told FTC officials in a July 12, 2016 letter that Nerium, via its distributors, was “using a plethora of deceptive and unsubstantiated health and disease-treatment claims to sell its products.” TINA.org also complained over what it called “deceptive, atypical, and unsubstantiated income claims regarding the financial gains consumers will achieve by becoming distributors.”

The company has “promoted the business opportunity for many years using wildly inappropriate income claims telling people that they can basically achieve life-changing incomes if they become Nerium distributors,” said Bonnie Patten, an attorney and executive director of TINA.org, in an interview for this article.

Neora, however, suggested in its lawsuit that even if FTC officials had evidence that the company misrepresented the efficacy of its products or the potential income as a distributor, such information does not “provide a basis for labeling” the company “a pyramid scheme.”

Thompson agreed.

“That’s a sideshow,” he said. “Assuming the worst, that Neora wrongfully marketed the product, it’s not the kind of mistake that puts them out of business and that would justify a significant monetary fine.”

Neora faces accusations in FTC’s lawsuit that it’s focused on recruiting new distributors, not actual retail sales. According to the government, Neora provides its recruits incentives to make a substantial upfront investment in its products and then pledge to make additional monthly product purchases.

The agency quoted a top earner who said in a 2015 promotional video that partners should do three things to “explode” their enterprise: “Number one: Recruit. Number two: Recruit. Number three: Recruit.”

“Participants in legitimate multi-level marketing companies earn money based on actual sales to real customers, rather than recruitment,” said Andrew Smith, director of FTC’s Bureau of Consumer Protection, in a press release, which announced the lawsuit against Neora. “But pyramid schemes depend on recruitment of new participants to pay out to existing participants, meaning that the vast majority of participants will ultimately lose money.”

Though Nerium in January announced its name change to Neora, FTC lawyers refer to the company as Nerium throughout their complaint. 

Less than 5% of Nerium’s partners earn more from the company than they pay in fees and product purchases, according to the government’s lawsuit.

“At least 92% of Nerium’s BPs have quit, with half leaving the company within six months or less,” the suit added.

About two years ago, Nerium retained an econometrician, Walter Vandaele, Ph.D., of Ankura Consulting Group, to analyze its data from 2011 through 2017. His analysis found 77% of the commissions paid by Nerium from 2012 through 2017 reflected “sales of product to ultimate end users,” and roughly 60% of Nerium’s sales in 2016 and 2017 were to its “preferred customers” not participating in the business opportunity, according to Nerium’s lawsuit.

What’s more, the company noted it has avoided “inventory loading,” one of the concerns raised in pyramid scheme cases in which distributors stock up on more products than they need, by shipping product orders directly to the end customer.

“The FTC has yet to provide any data to substantiate their outrageous claims against our business model,” Neora said in an emailed statement. “Neora has complied with all laws and the FTC’s most recent 2018 business guidance regarding direct sales business models and is in no way a pyramid scheme.”

Two other companies have reached a settlement with the agency: Signum Biosciences and Signum Nutralogix. According to FTC, the companies “supply EHT supplements to Nerium and have helped to deceptively promote Nerium’s products.” A proposed settlement bars the companies from making unsupported claims.

EHT stands for eicosanoyl-5-hydroxytryptamide, a component in coffee. Nerium EHT is a supplement marketed for brain health, which FTC’s lawsuit alleged has been touted to “prevent, reduce the risk of, or treat concussions or chronic traumatic encephalopathy (CTE), Alzheimer’s disease and Parkinson’s disease.”

Neora suggested such statements were made years ago by its partner, Signum.

In an emailed statement, Signum, which “licenses technologies for use in Neora’s products,” described as “entirely unfounded” FTC’s allegations that the company and Neora engaged in false advertising.

“The FTC alleges that Neora and Signum engaged in a deceptive advertising campaign focused on neurodegenerative disease,” Signum said. “However, any messaging around neurodegenerative disease was entirely truthful and, in fact, based on the wealth of peer-reviewed and published research on both coffee and EHT, a coffee component originally identified and purified at Princeton University.  The FTC never once questioned the accuracy or rigor of the underlying research and acknowledged that it reflects high-caliber, cutting-edge science.”

Signum noted it decided to settle FTC’s complaint “in order to focus on what is most important to us: bringing innovative therapeutics to consumers.”

FTC staff during a years-long investigation demanded millions of dollars from Signum, which the company divulged would have left it “bankrupt and unable to continue our life-changing research.” But the agency ultimately offered a settlement in which the company would pay no money, what Signum characterized as “virtually unheard of with these types of cases.”

Signum also published a letter on its website addressing the settlement. “Signum chose to settle with the FTC under these terms to put an end to the extremely high costs associated with this inquiry,” the company stated.

In its lawsuit against FTC, Neora is seeking a declaratory judgment and injunctive relief. Among other relief, Neora seeks a declaration that “FTC’s current interpretation of the FTC Act regarding pyramid schemes adopts an arbitrary and capricious standard” that neither the evidence nor the prior law support.

Patten of TINA.org predicted Neora’s case against FTC will be dismissed. “To me, it seems like they’re asking the judge to legislate from the bench,” she said. “It looks more like a legislative wish list than something that a court could provide as a remedy.”

She added the agency has a long winning track record when it brings pyramid scheme cases, either winning on summary judgment, at trial or obtaining a favorable settlement.

“If you look at that track record, the FTC obviously knows what it’s doing when it brings these complaints, and they generally win them,” Patten said.

In October, the agency announced that AdvoCare International L.P., and its former CEO, agreed to pay $150 million and discontinue its MLM business model. AdvoCare in May revealed revising its business model, which would compensate distributors solely based on sales to direct customers.

In the current court battle between Neora and the federal government, the stakes are high, Thompson said. If Neora is successful, he suggested FTC’s power will be constrained to court precedence, “which is the way it’s supposed to be.”

“If that’s the case, the FTC will need to try to get its vision accomplished via … clear legislation regarding what is and is not a pyramid scheme,” he said.

“If the FTC is successful, they can bully anybody into submission,” the lawyer added. “They can change a standard on a whim ... and they can come for anybody based on new standards that nobody knows about and nobody understands.”

TAGS: Litigation
Hide comments

Comments

  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.
Publish