Burbach is Co-Chair of Foley and Lardner’s State Attorneys General and FTC Consumer Practices
SSN: What triggered the lawsuit?
EB: Connecticut-based Truth in Advertising (TINA) is a self-proclaimed tax exempt “consumer advocacy group,” which also sometimes refers to itself as “journalists.” TINA consists of merely seven people. TINA is funded by Hyatt Hotel heiress Karen Pritzker. In 2016 TINA learned that Neora (at that time known as Nerium) had won an award from the Direct Selling Association (DSA) so it decided to “investigate” Neora.
TINA had no consumer complaints about Neora (at that time known as Nerium). Nevertheless, TINA submitted its own complaint about Neora’s advertising to the FTC. TINA proclaimed that Neora and its Brand Partners were violating the FTC Act by making income and product claims.
TINA requested that the FTC open an investigation of Neora. On June 21, 2016, the FTC issued a 28-page Civil Investigative Demand (CID) (a type of civil subpoena)
Over a period of nearly three and a half years Neora produced millions of documents, emails, sales and compensation data files, etc., to the FTC. The FTC had all of this information and full access to renowned expert econometrician, Dr. Walter Vandaele (a former economic advisor to the FTC’s Director of the Bureau of Economics, who has a Ph.D. from University of Chicago and was a professor at Massachusetts Institute of Technology (MIT) and Harvard).
His analysis was that Neora was not even close to being a pyramid scheme, but the FTC nevertheless demanded that Neora stop operating as a multi-level marketing company and that its owner, Jeff Olson, not work in the MLM industry.
The FTC threatened to sue Neora and Olson in a Chicago federal court. On Nov. 1, 2019, Neora and Olson sued the FTC in Chicago federal court seeking a declaratory judgment that they were not violating the law and related injunctive relief.
Unhappy with Chicago, that afternoon the FTC sued Neora, Olson, and two Signum companies, the suppliers of one of Neora’s products, EHT, in federal court in Trenton, New Jersey. However, the FTC had already settled with Signum for no money and inconsequential injunctive relief, which caused it to make no changes.
The FTC publicly announced its lawsuit with a press release titled “FTC Sues Multi-Level Marketer Neora, formerly known as Nerium, Alleging it Operates as an Illegal Pyramid Scheme—Nerium also falsely promotes brain health supplements, agency says.”
Interestingly, even today, October 22, 2023, the FTC’s web page attacks on Neora and Olson are still live and make no mention of Neora’s own lawsuit or Judge Lynn’s September 28, 2023, 56-page opinion rejecting all of the FTC’s claims.
SSN: What surprised you the most about the FTC’s strategy in this case?
EB: That it pursued a pyramid scheme claim when it long had Neora’s actual data. Instead, the FTC avoided using the “primarily generated from” Koscot analysis (the very test which the FTC had long recognized—including in at least 20 federal court pleadings—until Neora). Instead, it favored an amorphous “over emphasis on recruiting” test.
But at trial, even the FTC’s own expert, behavioral economist from Hamline University Stacie Bosley, admitted that it has “no metric.” Judge Lynn’s opinion describes it and her analysis as consisting of “rigid theoretical assumptions” not “born out of reality,” “unsupported by the evidence,” and “slavish.”
I was surprised the FTC went forward with its income and product claims when it knew it could not call any alleged injured person at trial. Instead, in its closing argument, the FTC referred to an injured rep. named “Maria.”
I was also surprised that the FTC had its expert neurologist and neurosurgeon sign sworn expert reports regarding Neora’s EHT product.
SSN: Has Neora set a new legal standard for direct selling legitimacy?
EB: Judge Lynn’s extensive opinion very clearly sets forth that Neora’s business model and practices are legal and thus a standard to which the industry can look.
SSN: Does this case get us any closer to a federal statute defining a legal MLM?
EB: Most states have laws defining a legal MLM. Until Congress adopts a federal standard (or the FTC does so through formal rulemaking), Judge Lynn’s thorough opinion sets the standard.
Judge Lynn started off by rejecting the FTC’s attempts to avoid the “primarily generated from” test, the very test which the FTC had long recognized (at least until Neora). She then clarified that in the 5th Circuit, the Torres “exclusively” test sets forth an even higher burden for the FTC.
With regard to earnings claims, Judge Lynn said it best when she addressed the confusion in the industry: “Defendants aspire to abide by the law regarding permissible income claims, and in the absence of clear guidelines on what the law is, have revisited and revised their practices over time.”
SSN: What are the reputational implications of a case like this?
EB: Huge. After years of being publicly vilified by the FTC, self-proclaimed advocacy groups, and others, thank goodness that Jeff Olson, Neora, and its employees and Brand Partners can now regain their reputations.
SSN: What are the takeaways in terms of bulletproofing the comp plan and disclosure statements?
EB: An accurate answer would take more space than we have here. However, making sure your compensation plan produces sales and compensation results comply with the “primarily generated from” test.
SSN: Losing their banking relationships was a huge hurdle for Neora to overcome. How can other companies protect against this happening to them?
EB: Unfortunately, as the country learned during “Operation Choke Point,” the FTC is well aware that making allegations (regardless of the facts or law) against a direct selling company results in loss of banking relationships. Companies can best protect against this by complying with the law and being prepared to have sufficient evidence to quickly respond in court to any allegations to the contrary. [“Operation Choke Point” was a controversial initiative of the U.S. Department of Justice during the Obama Administration that investigated U.S. banks and their dealings with payday lenders, gun retailers, and other companies.]
SSN: Aside from solid comp plans and compliance programs, what should direct
sellers make sure to have in place to protect them from these types of lawsuits?
EB: With legally compliant compensation and compliance programs in place and, importantly, in action, direct selling companies should be prepared to have sufficient evidence to quickly respond in court to any allegations to the contrary.
SSN: Why did this case take so many years to complete?
EB: The short answer is the FTC.
The FTC spent the first three and a half years investigating Neora, requiring production of millions of documents, emails, and data at great expense to Neora.
Negotiations were had before and after the suit, but unfortunately, the FTC’s “overemphasis on recruiting” belief that no one should be paid any compensation other than the person making the sale (or perhaps up one level) ensured that a settlement could not be reached if Neora (and the industry) wanted to continue operating as a multilevel-marketing company.
The FTC fought hard in litigation against Neora and Olson thus stretching it out to four years. Some examples:
- The FTC opposed Neora and Olson’s efforts to transfer the FTC’s Trenton, N.J., federal court lawsuit to the proper venue in Dallas, Texas. That procedural dispute took 9 months (on July 27, 2020, Judge Wolfson ordered the transfer).
- Despite the U.S. Supreme Court’s April 22, 2021, AMG opinion making clear that the FTC could not seek monetary relief from Neora or Olson, it nevertheless refused to drop its claims against Neora, thus requiring Neora and Olson to spend the time and money to file motions seeking court relief. It was not until the hearing that the FTC withdrew its opposition. On August 22, 2021, Judge Lynn granted Neora and Olson’s motion for judgment on the pleadings on the issue.
- During the investigatory stage, the FTC refused to let Neora and Olson see its alleged economic analysis. However, it advised that it would be provided once a lawsuit was filed. Nevertheless, after the lawsuit was filed the FTC still refused to produce its alleged economic analysis citing “deliberative process privilege.” Similarly, it refused to produce an organizational representative, its in-house economist, or other witnesses for depositions, and refused to produce documents, thus requiring Neora and Olson to spend months to obtain court orders requiring them. Fortunately, we were successful.
- Federal courts are often busy, not least of which because they not only handle civil lawsuits like ours, but also criminal cases, which must take priority. The fact that our lawsuit was pending during COVID certainly also added to the court’s timing for trial.
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