A dietary supplement MLM has won a case in Texas in which the U.S. Federal Trade Commission had tried to cast it as an illegal pyramid scheme rather than a legitimate network marketing operation.

Hank Schultz, Senior Editor

October 2, 2023

5 Min Read
Pyramid scheme

Neora, a multi-level marketing firm, has won an important court victory over the Federal Trade Commission, which had alleged the firm was operating an illegal pyramid scheme. 

Neora, which is based in Dallas, bills itself as a “holistic beauty” company that sells a variety of dietary supplements and skincare products. 

On Thursday, Sept. 28, a federal judge in the Northern District of Texas overseeing the case (Fed. Trade Comm'n v. Neora LLC) ruled FTC’s claims were invalid. 

FTC first sued Neora, which at one time did business as Nerium International, in 2019, alleging the company was an illegal pyramid scheme. The lawsuit claimed distributors and so-called “brand partners” were compensated primarily for bringing new people into the scheme and that very few of them made any money. 

Line between MLMs and pyramid schemes 

The border between an illegal pyramid scheme and a legitimate network marketing operation is drawn along those lines—that is, to what extent independent distributors are compensated for actual sales of products to consumers and to what degree their income depends on recruiting new “downline” distributors. 

A judicial test was established for making this decision, referred to as the Koscot test, after the 1975 case in which it was first promulgated. 

Another consideration revolves around how many products distributors must purchase each month to maintain eligibility for certain commission levels. It is sometimes alleged distributors in some organizations end up with large inventories of products in this way that often can’t be resold before their shelf life expires. 

Decision called big win for industry 

The ruling was hailed as a significant victory for the MLM model, which has been challenged by FTC in several complaints. Some of those have gone to trial, adding to case law in this area, while others, like the Herbalife and Advocare cases, were settled out of court. 

“Big, BIG win for the direct selling industry, as Judge Barbara Lynn (N.D. Texas) grants judgment for Neora LLC (formerly Nerium) on all of the FTC’s claims, including that the company was operating an illegal pyramid scheme and made deceptive income and product claims (both directly and through its distributors),” according to a blog post by lawyers for the firm Kelley Drye & Warren LLP (Kelley Drye). 

“When we proactively filed suit against the FTC on Nov. 1, 2019, challenging the over-reach of the FTC, we knew we would have a battle on our hands, but we were supremely confident that the facts and data would show the truth,” Neora CEO Jeff Olson said in a statement. “Living out our mission statement of making people better sometimes means taking the road less traveled, making the hard choice to defend what is right at all costs. This isn’t just a win for our industry, it’s a win for American entrepreneurship.” 

Joseph N. Mariano, president and CEO of the Direct Selling Association (DSA), expressed hope that the “decision in the Neora case will help provide clarity about the direct selling business model to regulators, consumers and the public.” 

“The court cited the company’s robust inventory repurchase agreement and strong compliance efforts that all DSA members abide by,” he said in a statement. “The decision reinforces the importance of these principles as core tenets of consumer protection and Neora’s adherence to them as part of their membership in the association.”    

FTC did not respond to a request for comment in time for publication. 

Expert witness fails to sway judge 

Testimony by a government witness, Dr. Stacie Bosley, Ph.D., an economics professor at Hamline University in St. Paul, Minn., was a factor in the case. According to the Kelly Drye lawyers, Dr. Bosley testified she did not believe sales of products to brand partners (BPs) really constituted sales to end users. Dr. Bosley has testified in other court cases involving MLMs

Senior District Judge Barbara M.G. Lynn appeared unswayed by Dr. Bosley’s testimony. 

“The FTC provided no evidence from actual BPs or participants and made no effort to show that Dr. Bosley’s rigid theoretical opinions regarding BP-purchasing motivations based on the compensation plan are borne out in reality,” she wrote in her opinion

Industry seeks to regulate itself 

Other questions raised by regulators about the industry in general include whether an MLM has made misleading statements about income potential.   

Some of the lessons from case law and from the settlement between Herbalife and FTC have been codified in the best practices guidelines put out by the Direct Selling Self-Regulatory Council (DSSRC), a division of BBB National Programs that was set up in 2020 in partnership with the DSA. According to the DSA, the guidance includes information from federal regulatory guidance documents as well as lessons taken from relevant case law. 

Guidelines for income claims 

The DSSRC guidance mandates among other things that: 

  • Companies have a rational basis for believing claims at the time they are made. 

  • Companies have firm documentation for any earnings claim made. 

  • Claims should take into account the investment distributors must make in purchasing products in order to qualify for certain compensation levels. 

  • Companies must consider the overall impression made about earnings potential both by the company itself and its distributors on their own social media posts. 

As instructional examples, the guidance shows several types of improper earnings claims made by a hypothetical MLM dubbed WeSell. The missteps included claims of annual income in the $4,500 range when the actual average distributor earned only $239.  

Another example showed a picture of a luxury yacht with the quote “WeSell made this possible!” 

Still other examples noted disclaimers were buried below the portion of the message usually seen on mobile devices and that claims of earning $800 for hosting an event didn’t deduct the costs of products sold and the food and beverage outlay for the “party.” 








About the Author(s)

Hank Schultz

Senior Editor, Informa

Hank Schultz has been the senior editor of Natural Products Insider since early 2023. He can be reached at [email protected]

Prior to joining the Informa team, he was an editor at NutraIngredients-USA, a William Reed Business Media publication.

His approach to industry journalism was formed via a long career in the daily newspaper field. After graduating from the University of Wisconsin with degrees in journalism and German, Hank was an editor at the Tempe Daily News in Arizona. He followed that with a long stint working at the Rocky Mountain News, a now defunct daily newspaper in Denver, where he rose to be one of the city editors. The newspaper won two Pulitzer Prizes during his time there.

The changing landscape of the newspaper industry led him to explore other career paths. He began his career in the natural products industry more than a decade ago at New Hope Natural Media, which was then part of Penton and now is an Informa brand. Hank formed friendships and partnerships within the industry that still inform his work to this day, which helps him to bring an insider’s perspective, tempered with an objective journalist’s sensibility, to his in-depth reporting.

Harkening back to his newspaper days, Hank considers the readers to be the primary stakeholders whose needs must be met. Report the news quickly, comprehensively and above all, fairly, and readership and sponsorships will follow.

In 2015, Hank was recognized by the American Herbal Products Association with a Special Award for Journalistic Excellence.

When he’s not reporting on the supplement industry, Hank enjoys many outside pursuits. Those include long distance bicycle touring, mountain climbing, sailing, kayaking and fishing. Less strenuous pastimes include travel, reading (novels and nonfiction), studying German, noodling on a harmonica, sketching and a daily dose of word puzzles in The New York Times.

Last but far from least, Hank is a lifelong fan and part owner of the Green Bay Packers.

Subscribe and receive the latest insights on the health and nutrition industry.
Join 37,000+ members. Yes, it's completely free.

You May Also Like