Direct Sellers Update: Regulation, Law & Policy

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.

A federal judge in Arizona recently rendered a 131-page order setting forth his findings of fact and conclusions of law following an 11-day bench trial, explaining why he believed that the Federal Trade Commission (FTC) had proven that defendants Success By Health (SBH) and various related entities and individuals had engaged in a pyramid scheme, made false income claims, and committed various other violations of the FTC Act. SBH’s conduct was particularly egregious and far out of step with best practices in the direct selling industry. That said, the court’s analysis of SBH’s conduct contained many sweeping statements that the FTC has already begun—and will certainly continue—to wield as a sword against legitimate direct sellers. 

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.

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.