After a year of legal battles and nearly $23 million in legal fees, a Dallas-area-based beauty and wellness multi-level marketing company has won a victory over allegations of a pyramid scheme from the Federal Trade Commission.
Regulators sued Neora and its co-chief executive officer Jeff Olson in 2019, alleging that the global company's brand partners, or independent contractors, earned more from hiring new brand partners than they earned from retail sales. He argued that the rewards for the new system were greater.
The victory drew attention from across the industry, as it was the first time since the 1970s that a direct sales company had defeated the FTC's pyramid scheme claims in court. In Texas, independent contractor sales like Neora make up his $4.3 billion sector, according to the Direct Selling Association.
Deborah Heise, co-chief executive officer of Olson, said the ruling underscores the importance of protecting the rights of legitimate direct selling companies.
“This is a David versus Goliath issue,” Olson said of the legal battle between Neola and the FTC. “They have unlimited resources and no repercussions.”
Neora, based in Farmers Branch, sells skin care creams, supplements and other wellness products through representatives called brand partners. Its structure is similar to that of beauty company Mary Kay, where independent contractors can receive discounts on beauty products and also earn commissions by selling products. Brand Partners can also recruit, train, and mentor other Brand Partners and earn commissions based on sales.
According to the FTC, this model is called into question when “your income is determined primarily by the number of jobs you have, rather than the amount of product you sell.”
Government crackdowns and pyramid scheme investigations have forced multi-level marketing companies such as Carrollton-based United Sciences of America and Fortune High-Tech Marketing to cease trading, while companies such as LuLaRoe Fashions Inc. Major industry powers have been hit hard by government lawsuits.
A settlement with the FTC could have cut off Neora's ability to sell. The company said in a statement that the victory “not only dispels the unwarranted and frivolous accusations that threatened our reputation and sowed doubt among our customers, but also ushered in a new era for the direct selling industry.”
The commission permanently suspended the company and asked consumers to return their money. However, North Texas Senior District Judge Barbara MG Linn rejected the FTC's request in a 56-page decision in September.
Lin found that Neora's profits primarily come from selling products and are “not dependent on recruiting new participants” to sell products.
The FTC also alleged that the company misled the public about the benefits of brain health supplements. The judge ruled that Neora's products made no claims to cure, treat, or prevent disease, and denied the agency's request for an injunction on those grounds.
Although all of the FTC's claims were dismissed by the courts, the impact of this case on Neora over the past several years has been significant.
In response to the FTC's complaint, the company was given a 90-day grace period to find a new bank, its insurance premiums increased and suppliers tightened terms, including requiring cash upfront, Olson said. said. Some of Neora's management team has left the company, and the group estimates it has lost hundreds of millions of dollars in revenue.
The case began in 2016. Mr. Neola was issued a civil investigative demand, or administrative subpoena, for information by the FTC in June of that year, Mr. Heise said. The company produced more than 6 million documents for the agency and spent the next three years arguing over the materials until both the company and the agency filed suit against each other on November 1, 2019.
make an example
Olson said the government is trying to make an example of Neola's case: instead of forcing Congress to adopt new legislation on the definition of a pyramid scheme, use the court's decision as new guidance for the multilevel marketing industry. He said that he is doing so.
“The only solution they would agree to is one that would destroy our company, and if we had agreed to that, we would have been out of business and we did nothing wrong. “It would have been,” Olson said.
Heise said the agency was essentially asking the company not to become a multi-level marketing company. Hythe said regulatory commissions have historically gone after direct selling companies, and in some cases, for good reason. But Neola wasn't a bad actor, she said.
The agency sued Advocare International, a Richardson-based health and wellness multilevel marketing company, in 2019, the same year as Neora.
The FTC alleged that the company deceived consumers into believing they could earn large sums of money as “sellers” of its health products. According to the complaint, Advocare encouraged distributors to focus on recruiting new contractors rather than selling products to customers.
AdvoCare and its former CEO agreed to pay a $150 million settlement and stay out of the industry to resolve pyramid scheme accusations from the FTC.
“The FTC was clearly targeting our industry,” Heiss said. “This was not just a case about Neora, it was a case about the network marketing industry as a whole.”
Last June, the FTC settled Blessings in No Time. This was the “Blessing Loom” pyramid scheme run by Prosper DJ and his wife, which targeted the black community with false promises of high income with no risk. They will be ordered to pay more than $10 million and will be prohibited from operating a multi-level marketing business.
The Direct Sales Association has filed two court briefs in connection with this lawsuit, setting out the legal standards that it believes should be followed. In a statement in September after the ruling, the group called it a “long-awaited decision.”
“Yesterday's decision in Neola helps clarify the direct selling business model for regulators, consumers and the public,” said Joseph N. Mariano, President and CEO of DSA. I hope that will happen.” “The court cited the company's robust inventory repurchase agreements and strong compliance efforts followed by all of his DSA members.”
get your business back on track
Neora has about 35,000 active brand partners, or independent contractors, across the U.S., each with an average income of about $1,300 in 2021, according to court documents.
“I cannot in good conscience agree to anything that would take business out of the hands of independent contractors who have built their own businesses,” Heise said.
Throughout the company's life, Neola reported in court filings that it had approximately 400,000 brand partners and 1.7 million preferred customers, customers who purchased Neola products at a discount and did not participate in Neola business opportunities. Did. Prior to January 2019, Neora was known as his Nerium International, which he founded in 2011.
Neora has about 140 employees worldwide, Heise said.
Breaking the pyramid scheme rap
In his ruling, Lin wrote that the FTC's sole witness offered no evidence from actual brand partners and made no effort to show that the witness's “theoretical opinions” about brand partners' purchasing motives were realistic. He said he had not.
The district judge also said regulators did not recognize the difference between a brand partner who solicits others to sell to them and a brand partner who becomes a brand partner to buy products for himself at a discount. .
Lin is a disappointed victim of an illegal pyramid scheme, where a brand partner who never made a sale and never got a commission, hired another brand partner who never made a sale and never got a commission. I wrote that the FTC is wrong to think that there is.
“Courts need to look at how businesses actually operate,” Lin wrote. “The fact that his 80% of revenue comes from final user sales greatly impacts our finding that Neora is focused solely or almost exclusively on adoption rather than sales. .”
After seven years, company leaders say Neora is back to operating as before. However, it was not without its challenges. This lawsuit made it extremely difficult for the company to grow and recruit new brand partners. When someone searches for this company online, his FTC claims calling Neora a pyramid scheme still appear in the first result.
“No matter how good your SEO is, you can't drive them away,” Olson says.
