Direct Seller Beats FTC Pyramid Scheme and Income Claim Allegations
In November 2019, the Federal Trade Commission filed a lawsuit against direct selling wellness company Neora, LLC (f/k/a Nerium International, LLC) and its Chief Executive Officer alleging that the company operates as an illegal pyramid scheme and falsely promises recruits they will achieve financial independence if they join the scheme.
The lawsuit also alleges that defendants deceptively promote “EHT” supplements as an antidote to concussions and chronic traumatic encephalopathy caused by repetitive brain trauma, as well as Alzheimer’s disease and Parkinson’s disease. The FTC sought to permanently stop the defendants’ alleged deceptive practices and return money to consumers.
According to the FTC, Nerium is a multi-level marketing company that sells supplements, skin creams, and other products through a network of “brand partners.” Further, according to the FTC, Nerium operates an illegal pyramid scheme that pushes distributors or brand partners to focus on recruiting new distributors, rather than retail sales to customers.
Nerium allegedly incentivizes recruits to make a substantial upfront investment in Nerium products and then commit to additional product purchases each month. Brand partners also receive greater compensation from recruiting new brand partners than they earn from retail sales, the FTC alleges.
According to the FTC’s complaint, one of Nerium’s top earners advised in a 2015 promotional video that there are three things brand partners should do to “explode” their business: “Number one: Recruit. Number two: Recruit. Number three: Recruit.”
According to the FTC, Nerium and its CEO also misrepresented that brand partners can earn substantial income and achieve financial independence. The complaint alleges that Nerium promises “lifestyle-changing income” to its recruits, and that social media posts by Nerium and its brand partners feature brand partners who were supposedly able to retire from their jobs or earn a six-figure income. The FTC alleges Nerium’s compensation plan is structured so that, at any particular time, the majority of brand partners will not make substantial income and will instead lose money.
The FTC also alleges that Nerium, its CEO and others deceived consumers in their marketing campaign promoting the supplement Nerium EHT. They allegedly claimed without substantiation that EHT can enhance brain health and prevent, reduce the risk of, or treat concussions or chronic traumatic encephalopathy, as well as Alzheimer’s disease and Parkinson’s disease.
The complaint also alleges that in an effort to capitalize on growing awareness of concussion-related CTE among football players, Nerium recruited former professional football players to pitch the products to parents and coaches concerned about children’s health.
On September 28, 2023, a federal district court rejected the agency’s “overemphasis on recruiting” test and denied the FTC’s request for relief on all claims, including, but not limited to, unlawful pyramid scheme, unsubstantiated product claims and unsubstantiated earnings claims.
The court opined that while sales data is a significant component in any pyramid analysis, it is not enough to look at the compensation plan in isolation – without also assessing actual operational data and the internal business structure. Notably, the court then tackled the issue of third-party liability (e.g., knew or should have known, facilitation or substantial assistance, etc.) and held that the FTC did not present sufficient evidence that consumers believed that distributors were agents of Neora. The court also noted Neora’s compliance program – a lesson for digital marketers vis-à-vis onboarding, training, auditing, monitoring, remedial action and adherence to applicable legal regulations.
As to the earnings claim allegations, the court found that Neora did not guarantee any level of income for distributors and disclosed typical earnings in a disclosure statement. Lastly, the court found that Neora is not currently making claims that their products cure, treat or prevent human disease. As such, the court concluded that an injunction against Neora and its distributors is not warranted because it would be no more effective than the aforementioned compliance program.
The case is Fed. Trade Comm’n v. Neora LLC, Civil Action 3:20-cv-01979-M (N.D. Tex. Sep. 28, 2023).
Richard B. Newman is an FTC defense lawyer at Hinch Newman LLP. See FTC Civil Investigative Demand (CID) attorneys for information on “The Art of Responding to an FTC CID.”
Informational purposes only. Not legal advice. May be considered attorney advertising.
