AdvoCare International L.P., a multi-level marketer (MLM) of energy drinks, shakes and supplements, and its former CEO have agreed to pay $150 million to resolve charges that the company operated an illegal pyramid scheme, the Federal Trade Commission announced Wednesday.
The settlement also bans Plano, Texas-based AdvoCare and its former CEO, Brian Connolly, from the MLM business.
AdvoCare and several of its promotors claimed the company “offers the average person a financial solution that will enable them to earn unlimited income, attain financial freedom and eliminate the constraint of traditional employment,” an FTC complaint alleged. In reality, the government stated, most distributors earned nothing or even lost money.
AdvoCare is renowned for its celebrity endorsers, such as New Orleans Saints quarterback Drew Brees, and sports sponsorships, the Dallas Morning News reported. The company is also the official sports nutrition partner of Major League Soccer (MLS) and the kit sponsor for FC Dallas.
“The company used endorsements from professional athletes, sponsorship of professional sporting events, conferences, podcasts and more to pitch what it called a life-changing business opportunity,” an FTC lawyer, Seena Gressin, wrote in a blog about the settlement. “The FTC calls it a pyramid scheme and says AdvoCare swindled hundreds of thousands of consumers.”
Under AdvoCare’s compensation plan, participants were eligible to receive discounts on products and sell them to the public after being charged $59 to become a distributor. But distributors seeking to “earn all possible forms of compensation” typically had to become “advisors,” requiring them to spend between $1,200 and $2,400 purchasing AdvoCare products and incur thousands of dollars of product purchase volume annually, according to an FTC news release.
“Keep in mind this is $2,100 of energy drink, which is a lot of energy drink for anyone to consume on their own," said Andrew Smith, director of FTC's Bureau of Consumer Protection, during a press conference Wednesday.
AdvoCare advisors’ income, FTC alleged, was based on their success recruiting advisors and generating purchase volume from their downline network of distributors—not on retail sales to customers.
“Legitimate businesses make money selling products and services, not by recruiting,” Smith said in a statement.
“The drive to recruit, especially when coupled with deceptive and inflated income claims, is the hallmark of an illegal pyramid,” he added. “The FTC is committed to shutting down illegal pyramid schemes like this and getting money back for consumers whenever possible.”
Aaron Haberman, an FTC official, told reporters the agency opened an investigation in November 2016 into AdvoCare and some of the other named defendants through a civil investigative demand.
"What prompted it was mainly Internet activity," he said during the press conference. "There was some reporting around AdvoCare’s conduct, but there was also a flurry of marketing and what we perceived to be deception ... and that’s what triggered the investigation.”
The agency's probe followed an article published in March 2016 by ESPN The Magazine profiling AdvoCare. In interviews with more than 30 current and former salespeople, "the vast majority" told ESPN "their focus, and the focus of their superiors, was on recruiting other distributors."
FTC officials often investigate marketers of health products suspected of making false and misleading claims, but Smith said during the news conference his agency was not challenging AdvoCare's product claims.
AdvoCare said it cooperated fully with FTC’s investigation.
“We strongly disagree with the FTC allegations, but we are committed to abiding by this agreement and moving forward,” AdvoCare CEO Patrick Wright said in a statement. “The strength of AdvoCare is and always has been our highly-valued health and wellness products, which remain in great demand by our hundreds of thousands of loyal customers.”
Earlier this year, AdvoCare tapped Wright to lead the company after its co-CEOs, Connolly and Reid Ward, stepped down. AdvoCare in May announced revising its business model, which would compensate distributors solely based on sales to direct customers. At the time, the company said it notified its more than 100,000 distributors about the change.
AdvoCare’s sales remain robust since making the change, according to the company.
Haberman, the FTC official, said AdvoCare would regularly burn through hundreds of thousands of distributors and need to replace them "to keep the business opportunities going."
“Our estimates are that nationwide in the period that we investigated, there were more than 1 million distributors in AdvoCare and … our estimate of consumer harm encompasses several hundred thousand distributors," Haberman added.
Under the stipulated order filed in the U.S. District Court for the Eastern District of Texas, AdvoCare and Connolly must notify its distributors about the lawsuit and settlement, disclosing they will no longer be eligible to earn income based on purchases from distributors in their downline.
In addition, distributors must be advised AdvoCare offers a 100% refund on unused products under its current policies if distributors decide to end their participation in the business opportunity.
AdvoCare and Connolly also must inform distributors they may get back some of their money from FTC if they incurred significant losses participating in AdvoCare’s business. According to the agency, in 2016, 72.3% of distributors failed to earn any compensation from AdvoCare, while another 18 percent earned between one cent and $250 and 6% earned between $250 and $1,000.
“When these distributors’ hefty costs are added, nearly all of them lost money,” Gressin, the FTC lawyer, wrote.
AdvoCare distributors Carlton and Lisa Hardman also settled charges that they promoted the pyramid scheme and misled consumers about the potential to earn income.
They have agreed to an MLM ban and to pay $4 million, which will be suspended when they surrender assets, FTC said.
Richard Parker and Joshua Lipton, attorneys in Washington representing Connolly, did not immediately respond to a request for comment. Keith Beauchamp, a Phoenix-based lawyer for Carlton and Lisa Hardman, also did not immediately respond to a request for comment.
Two other AdvoCare distributors also are named as defendants but are not part of the settlement. The case against them, FTC officials said, is continuing.