Direct Sellers Update: Regulation, Law & Policy

Direct sellers can breathe easy for the time being. On August 20th, Judge Ada Brown for the United States District Court for the Northern District of Texas set aside the Federal Trade Commission’s (FTC) rule imposing a national ban on noncompete agreements, preventing the rule from taking effect across the country.

The recent FTC approval of a final rule banning non-compete agreements has sparked concern and uncertainty among direct sellers. Understandably, many are wondering how this ruling will impact their businesses and what steps they can take to protect themselves against unfair competition and misuse of their intellectual property. However, amidst the apprehension, it’s essential to remember that there are avenues for safeguarding your interests, and the FTC’s rule may not be as set in stone as it initially appears.

In part one of our series about the pivotal decision in the Neora case, we provided a high-level overview of the court’s decision and its potential widespread effect on the direct sales industry.

In a long-awaited decision, last week Judge Barbara Lynn in the United States District Court for the Northern District of Texas granted Neora, LLC (formerly, Nerium) a victory, denying every single claim the FTC brought, including the FTC’s argument that Neora was operating an illegal pyramid scheme and made deceptive income and product claims.

The lawsuits, filed by the Department of Justice, on behalf of the Federal Trade Commission, alleged that the distributors, who styled themselves as “wellness advocates” and touted their expertise as medical practitioners, made numerous claims during webinars conducted in 2022 that doTERRA’s products could prevent, treat, or cure COVID-19.

Most direct sales companies have arbitration agreements and class action waivers in their distributor and consumer agreements these days.  Those provisions go a long way in making sure your company is protected from bet-the-business, expensive, and time-consuming class actions and other litigation.  But a recent decision out of California, Sellers et al. v. JustAnswer, LLC, 289 Cal. App. 5th 444 (2021), underscores the importance of ensuring your company’s registration process is appropriately structured, especially if your online registration processes involve click-wrap agreements.

The Business Opportunity Rule is up for its scheduled 10-year review, and the results could have a dramatic impact on the direct sales channel.

The direct-selling industry is paying close attention to the Orage lawsuit because if Amway’s IBOs are deemed employees under either standard, many other MLMs will likely see challenges to their independent-contractor classifications.

A recent paper by members of the Federal Trade Commission’s (FTC) Bureau of Economics describes a new pyramid-scheme hallmark to add to the FTC’s growing list: A pyramid scheme creates and exploits overly positive recruitment expectations to increase the company’s profits. In other words, by misleading potential participants about the earning potential from recruitment-related rewards, pyramid schemes induce participants to join even if they have no expectation of earning a profit from retail sales.

On January 17, 2020, a federal judge in Arizona granted the Federal Trade Commission’s (FTC) request to both temporarily shut down the multi-level marketing company Success By Health, as well as taking the more extreme step to freeze the assets of top executives. Success By Health is best known for its mushroom-infused instant coffee product “MycoCafe.”

Self-regulatory policing by an independent body is a longstanding tradition in many industries that has now made it to the direct selling world. But, since its inception, we’ve fielded many questions from our direct selling clients about what the Direct Selling Self-Regulatory Council (DSSRC) is and what its impact will be.

Two executive orders issued last month may decrease the FTC’s ability to regulate industries through informal guidance documents. Because the FTC’s regulation of the direct selling industry relies heavily on guidance, the orders are particularly relevant to our multi-level-marketing (MLM) and direct selling clients. Although any assessment of the practical impact of these orders is speculative at this point, we believe they may affect the FTC’s regulation of direct sellers in a few important ways.

A recent Memorandum Opinion and Order from the Northern District of Texas in Ranieri v. AdvoCare illustrates the challenges plaintiffs may face in alleging a RICO claim against a direct selling or multi-level marketing (MLM) company. In that Order, the Court dismissed the plaintiffs’ RICO claim against AdvoCare for failure to state a claim based on the argument in AdvoCare’s motion to dismiss—filed by Winston attorneys on behalf of AdvoCare—that the plaintiffs had failed to properly plead a RICO “enterprise.” 

On October 2, 2019, the FTC announced a settlement with AdvoCare International, L.P., in which AdvoCare, without admitting or denying the allegations in the order, agreed to abandon its multi-level compensation plan.[1] Under the order, AdvoCare must pay the FTC $150,000,000, which will be deposited into a fund for equitable relief.

We are pleased to announce the launch of our blog covering regulatory, legal, and policy issues affecting direct sellers. Our goal is to bring important legal, regulatory, and policy developments and updates straight to you.