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Neora Sues FTC

Neora (renamed earlier in 2019, formerly known as Nerium) sued the FTC: Neora and Olson Complaint for Declaratory Judgment (Final) 4848-5392-3755 v.1 on the same day the FTC sued them: Nerium International, LLC_ Complaint for Permanent Injunction and Other Equitable Relief – November 1, 2019 There are numerous interesting aspects in the Neora lawsuit against the FTC, including (the number in parentheses is the paragraph of the Neora lawsuit against the FTC:

  1. (General) The idea that an MLM would sue the FTC is unique, and to submit the lawsuit on the same day as the FTC’s lawsuit against them, in a different district, after three years of discussions, is amazing;
  2. (General) Neora probably used the old name of Nerium to attract less attention to themselves with the lawsuit;
  3. (1) I agree the FTC has been sneaky in not being willing to define unacceptable behaviors in an industry-wide manner, under the guise of “flexibility” in doing their regulatory job, as this attitude does not help the MLMs, their distributors, the FTC, nor the general public. However, Neora and the rest of the MLM industry should be careful what they wish for, because the FTC should define a lower limit on retail sales (sales to non-distributors) relative to internal consumption (distributor purchases), as well as transparency on tool scams;
  4. (1) I do not not agree that the FTC is trying to retroactively change federal law and federal law trumping state law is a well-accepted concept;
  5. (1) I do agree a new law is needed to define MLM illegal pyramid operations and would be helpful to address RICO fraud tool scams, AND it could be done without limiting the FTC to only defined issues;
  6. (1) The October 9, 2019 Presidential Executive Orders requiring regulators to use laws and the rulemaking process is a good point. However, there is a 4-5 decades-long track record of unacceptable practices in court decisions that mitigate the need for the FTC to completely back off in the interim, as millions of people are being scammed. Also, keep in mind Executive Orders can be canceled by the next President, so it would be much better to make the Executive Orders law as well;
  7. (2) I don’t believe the FTC is trying to get rid of MLM, but some of the comments by the FTC’s Andrew Smith, which are non-binding, are troubling. The specific Andrew Smith  comments I’m concerned about will be addressed throughout this analysis. On the other hand, MLMs, and the DSA for that matter, refuse to address the twin evils and illegal behavior related to lack of retail sales and tool scams mentioned in bullet #3 above, so there is plenty of blame to go around;
  8. (2) Overemphasis on recruiting can, and should be, defined. The Vemma and Herbalife cases defined it as at least as much product must be sold to non-distributor customers compared to product purchased by the distributors, both on an individual and overall basis, or a bonus isn’t paid out. I consider this to be an absurdly low requirement, as no business I can think of could survive if half of its sales came from those associated with the company. However, as long as free market demand can be demonstrated, there is no need for MLM to require only super-sales people to be involved. Just because MLM is unique doesn’t make it wrong and/or illegal;
  9. (2) There is no need to complicate the issue with multiple compensation terms, such as Threshold, Convex, and Duplication. The rules should be simple for the MLM to implement, the FTC to regulate, and prospects to understand. See #7, above. However, I don’t believe the FTC’s Andrew Smith “unilaterally announced, adopted, and outlawed” the new concepts, he was merely illustrating some of the thinking behind the “unfair and deceptive” business practices to add clarity to the compensation issue. These three concepts will be discussed in more depth later;
  10. (3) The term “sales” must be defined as sales to non-distributor customers. Internal (distributor) consumption is acceptable, and acceptable to earn bonuses from, if and only if there are significant retail sales to non-distributor customers, generally regarded as at least 50% of total purchases from the MLM. Definitions are important;
  11.  (4) The definition of a pyramid scheme doesn’t appear in the FTC Act, so it is impossible to change it.
  12. (4) It is not known what is meant by “…no incentives can be paid for recruitment of participants….” Is this a reward for the joining fee, distributor purchases, or both?
  13. (4) Also, what is meant by “…satisfied consumers?” Distributors, non-distributor customers, or both?
  14. (4) I agree most MLMs should be put out of business, as described in #3 above.
  15. (4) Regarding the bulleted items in this section,
    1. The FTC has evidence of Neora being an illegal pyramid and Neora will have its day in court. That’s how it works;
    2. I agree the FTC should be more open to sharing it’s information before submitting a lawsuit;
    3. There should be no need to hire an “expert” to determine whether Neora is a pyramid scheme or not, it should have been behaving in that manner all along;
    4. The FTC has always had the authority to use its own statute, that’s how it works, and where is the Vandaele’s analysis;
    5. That’s how it works. If the company doesn’t want to comply with a regulator, they take them to court;
    6. The fencing in relates to companies that were punished and then didn’t follow through with their commitments. However, I do agree the FTC should pursue rule-making changes and even changes to the law, although this would be very difficult, as Congress is dysfunctional. But MLMs should be careful what they wish for;
    7. This refers to merger cases, not MLM scams;
    8. The “law” has precedent in various court rulings, which have the force of law. MLM scams should be shaking in their boots, as it appears the FTC is finally waking up, and Neora’s push for more laws/rulemaking is going to take down most MLMs;
    9. I don’t think the FTC made this proclamation. Andrew Smith apparently made a troubling comment regarding allowing only two levels of payout, but that was his opinion and not FTC policy;
    10. It’s already common for MLM not to pay any compensation to the sponsoring or any other distributors for the mere act of signing someone up, as this is a “red flag” indication of an illegal pyramid, even though a particular MLM using this practice may have lots of retail sales to non-distributors, making this a moot point;
    11. The FTC already tried this in the BurnLounge(?) case and got shot down by the court. Again, “sales” to WHO is the important issue, does this include distributor purchases, non-distributor customer purchases, or both;
    12. Two is still multi, but point well taken. Again, this is not official FTC policy, but the statement of a single FTC employee. And as discussed previously, the “fencing in” issue is related to MLMs that don’t follow their settlement/court ordered commitments;
    13. Again, this is not FTC policy, but it would be helpful to define it by law and/or regulatory Rulemaking that includes public comment;
    14. No doubt Andrew Smith stepped in it with this line, but this is not FTC policy and probably not something rising to the level of litigation;
    15. I agree that regulatory Rulemaking and/or a new law defining an illegal pyramid would be helpful to everyone, including MLM companies, the FTC, and consumers, and;
    16. I’ve seen no evidence of this, as “fencing in” is generally a term used to enforce existing court rulings/settlements with individual MLMs;
  16. (4) These “tactics” have not been adopted by the FTC, they were verbally discussed by an FTC employee. Trump’s executive order is not a good fit for MLM scam guidance because there are a lot of court decisions and settlements which are precedent;
  17. (5) There’s not a lot to “reign in,” as decribed above;
  18. (9) MLMs are legal, but not MLM scams. MLM scams (aka pyramid schemes) are defined in #3, above;
  19. (10) The definition of a pyramid scheme is either not understood or it is understood and ignored;
  20. (11) Most state statutes have been corrupted by the DSA and MLM scams. There aren’t two categories of potential profit sources (signing up other business participants and product sales), there are three (signing up other business participants, product sales to non-distributor customers, AND internal consumption by the distributors). Again, the lawsuit smooths over the issue of internal consumption and external sales;
  21. (12) There were several attempts to redefine illegal pyramid schemes/scams since 2000. All of them were never made into law, and if they had been, illegal pyramids would have been legalized, because the bills defined an illegal pyramid where there is a lack of a reasonable return policy and NOT any retail sales to non-distributor requirements;
  22. (13) The FTC didn’t just dream up a new approach, it is the same principle used in the 1979 Amway decision, the 10 customer rule;
  23. (14) Note the wording “…sales of goods to the public.” This is not a term used by Neora or other MLMs very often. Also, see comment #20, above and note the lack of the third term, which separates internal and external consumption;
  24. (14) “Pyramid schemes are said to be inherently fraudulent because they must eventually collapse.” Actually, many pyramid schemes never collapse, they simply keep scamming new people over time. For example, Amway has been around for 60 years. I asked the “esteemed” Robert FitzPatrick, aka Mr. Saturation, when Amway is going to collapse, and got crickets in response;
  25. (14) The term “ultimate user” is an unfortunate use of a vague term, and one the MLM scams have taken advantage of for decades. It compares the signup/renewal fee to the internal/external consumption bonuses combined, and that is only an extreme example of what is an MLM done wrong. It is much better to decouple internal and external consumtion and compare the bonus from the external consumption to the combined signup/renewal fee and internal consumption bonus, both from the distributor AND company perspective to determine whether one or both (distributor and/or company) are an illegal pyramid. In other words, it is possible for the distributors to not be an illegal pyramid because they don’t profit from the signup/renewal fees, but the company is an illegal pyramid because the majority of the profit comes from the signup/renewal fees and internal consumtion, rather than external consumption profit. If the fourth element of MLM profit, tool scam profit, is considered, then it should be included with the signup/renewal fees and internal consumption profit and if these three together exceed the external consumption profit, the MLM can be considered an illegal pyramid, in addition to RICO fraud. For the first time, the FTC references the tool scam issue in their lawsuit: https://www.ftc.gov/news-events/blogs/business-blog/2019/11/ftc-alleges-neora-formerly-known-nerium-operates-illegal?fbclid=IwAR0sls3k-SXcmYIagETV49-5hUEZEkj8n7XcBrj_-Y5R3bJrAJpw9kc_OT4, which states, in part, “The complaint notes that Nerium also charges BPs numerous fees, including for sales aids, business cards, letterhead, registration at Nerium conferences, and access to its software app. In the end, according to Nerium’s own reports, more than 90% of BPs in the United States earn less than they pay Nerium in product purchases and fees…” but unfortunately addresses only the 99% or so lower level distributor losses and not the 1% or so upper level distributor profit;
  26. (15) Not ALL MLMs are illegal pyramid schemes, but most of them are;
  27. (15) Neora is trying to have it both ways, by claiming the FTC is trying to enforce a law that doesn’t exist while simultaneously trying to describe a law that doesn’t exist. Even the FTC has maintained that a ruling that applies to one company doesn’t necessarily apply to other companies. Neora just shot themselves in their own foot, citing precedent for the FTC to prosecute others;
  28. (16) Neora needs to read the FTC guidance on their website, the FTC doesn’t consider ONLY the signup fees, but ongoing distributor purchases as well, when determining whether an MLM is an illegal pyramid;
  29. (16) There is no new emphasis on to whom the bonuses are paid, the question is who is buying the most of the products, distributors or customers;
  30. (17) That means Neora had over a year to submit their lawsuit against the FTC and didn’t do it. The FTC threatened to sue Neora’s suppliers in New Jersey because that is where those companies are based, and have since settled out of court, essentially pleading guilty because of the terms of the settlement;
  31. (18) While I do not believe the FTC has changed their definition of what an illegal pyramid is, I agree they should be willing to share their economic analysis with Neora;
  32. (19) That “very broad” investigation obviously included the illegal drug claims to which the two suppliers have already plead guility to, so it’s confusing that Neora chose to use this statement from a 28 page complaint;
  33. (20) Then Neora should issue the numbers publicly themselves, if they are so proud of their business.
  34. (20) See the footnote. If Neora changed their operations since 2017, that doesn’t excuse their behavior from before 2017. Also, it would be very difficult to change their behavior from internal consumption to selling overpriced products to customers in such a short period of time, and they probably tried to do what Herbalife unsuccessfully did, label failed distributors who couldn’t sponsor anyone as discount customers;
  35. To be continued….

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