Litigation can be influenced by venue choice and have a significant impact on a case outcome
By: David Rauf
Different venues can bring about an array of juror demographics, docket speeds or judicial precedents that can benefit one side.
The Federal Trade Commission’s (FTC) lawsuit alleging that Neora is an illegal pyramid scheme will be transferred to a Texas courthouse, a federal judge has decided. The ruling also accuses the direct selling firm of venue shopping to try and get the case moved to a friendlier jurisdiction.
Neora’s legal scuffle with the FTC is among one of the most high-profile legal cases at the moment, as the company is challenging the regulator on an issue that direct sellers have been contending with for years: the scope of the FTC’s authority to define an illegal pyramid scheme absent legislation or rulemaking on the issue. The FTC, in recent years, has issued guidance, and agency officials have given speeches to direct selling groups outlining parameters for what constitutes a pyramid scheme. However, there has been no official action to define the term, and direct sellers contend the FTC has continued to change the parameters.
Venue has been a major factor as both sides jockey for leverage in the case. Neora asked to have the lawsuit transferred to Illinois from New Jersey, where the FTC filed. Different venues can bring about an array of juror demographics, docket speeds or judicial precedents that can benefit one side. In this case, the reason was simple: A 2019 ruling from a federal appeals court that oversees Illinois was the first of its kind to shoot down the FTC’s authority to seek monetary relief under Section 13(b) of the FTC Act. The FTC case against Neora is based on 13(b), and so Neora was hoping to have the case play out in the only jurisdiction in the country to rule against the agency’s interpretation of a statute it has used for decades.
Some of the importance that venue will play in the ultimate outcome of the case could be mitigated by the U.S. Supreme Court before the FTC’s lawsuit even goes to trial. The Supreme Court is reviewing two cases in its upcoming term that are expected to decide the question of the FTC’s enforcement authority to recoup monetary relief under 13(b). One of those cases includes the ruling out of Illinois in FTC v. Credit Bureau Center LLC delivered by the 7th U.S. Circuit Court of Appeals in August 2019 in a 2-1 majority decision. A ruling from the Supreme Court on 13(b) is expected by next summer.
Texas courts haven’t been the friendliest venues for direct selling companies as of recently. Neora, which is based in North Texas, will be on its home turf, and traditionally that brings with it some element of home field advantage, although minor. But observers point to a class action lawsuit involving Stream Energy in which the company was alleged to be an illegal pyramid scheme under the Racketeer Influenced and Corrupt Organizations Act (RICO). The 5th Circuit Court of Appeals ended up affirming a lower court ruling certifying the class, and the case was then settled out of court at a value estimated to be more than $46 million. The settlement terms did not address pyramid scheme allegations.
Part of Neora’s strategy to try and secure a friendlier venue involved beating the FTC to the punch in terms of filing a lawsuit first. Before the FTC actually brought a case against Neora, the company preemptively filed its own suit in Illinois, seeking a declaration from the court that the agency is acting outside its statutory authority by trying to enact a pyramid scheme law that doesn’t exist on the books. The FTC then followed by filing its suit in New Jersey against Neora.
The competing lawsuits with similar claims filed in separate federal courts created a situation where federal judges will ultimately decide which side gets priority in terms of venue choice. In these circumstances, judges generally refer to what is known as the “first-to-file rule,” which gives deferential priority to a prior-filed action over a later-filed action.
And that rule would appear to have given Neora the upper hand on the venue question. But U.S. District Court Judge Freda L. Wolfson noted in her ruling that the first-to-file rule “is not absolute.” In a stinging rebuke to Neora’s request to move the case to Illinois, Wolfson wrote that the company’s litigation against the FTC was “motivated by bad faith, and venue gamesmanship.”
The judge also brushed off Neora’s contentions that it was never engaged in venue shopping. “The history of the parties’ settlement negotiations reveals otherwise,” she wrote.
On that note, Wolfson’s ruling details how the FTC, beginning in July 2018, presented Neora with multiple copies of draft complaints. Then in October 2019, the agency gave Neora a final draft complaint and told the company it was willing to delay filing in court to provide more time for a settlement. Instead of responding, Neora filed its own lawsuit three days later, leaving the judge to conclude the litigation “was merely an attempt to beat the FTC to the courthouse.”
In her ruling, Wolfson also denied the FTC’s request to keep the case in New Jersey, saying the jurisdiction’s “ties to this case are tenuous, at best.” The FTC had argued that Neora’s flagship product was developed and tested by a New Jersey-based company called Signum and that Neora had continually claimed that Princeton University, also based in New Jersey, had played a role in developing the product.
Neora’s back-up request for a venue transfer—Texas—was ultimately granted. Wolfson wrote that Texas made the most sense for a venue transfer since the company is based there and most of its distributors and executives are also in Texas, ultimately determining “that Texas has a greater connection to this lawsuit than any other potential forum.”
The case has been transferred to Texas. Neora now has until Sept. 9 to file a response to the FTC’s lawsuit. Meanwhile, Neora’s lawsuit against the FTC is still pending in Illinois. A federal judge there has to decide whether the case will proceed in that jurisdiction, whether to grant the FTC’s request to dismiss, or whether to transfer the case to Texas.
Legal experts note that the judge in Illinois is likely to be influenced by Wolfson’s ruling labeling Neora’s actions as a bad-faith attempt to venue shop, and that case is unlikely to continue in Illinois.
A possible outcome, they say, is that the judge bounces the case to Texas or outright dismisses Neora’s litigation, potentially forcing the company to file a counterclaim against the FTC in Texas, essentially unifying the two lawsuits under the same judge.
Either way, direct selling experts are hoping the case will provide some buffer on the FTC’s authority to seek monetary relief under Section 13(b) as well as its authority to define an illegal pyramid scheme.
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