Neora demands pyramid scheme legalization, sues FTC
An FTC investigation has revealed less than 1% of commissions paid out by Neora were tied to retail sales.
Rather than admit the company operated as a pyramid scheme, Neora is suing the FTC.
Both Neroa’s and the FTC’s respective lawsuits were filed on November 1st. The FTC’s investigation however begun in June 2016.
In their lawsuit, Neora claims the FTC suing them for being a pyramid scheme is an attempt
to retroactively change federal law and to effectively preempt state law.
Seeing as pyramid schemes are illegal as per the FTC Act, which was enacted in 1914, I’m stumped as to the basis of this claim.
Rather it seems Neora are the ones trying to change federal law – via citation of an executive order signed by President Trump on October 9th.
This behavior of the FTC is precisely the behavior that the President prohibited in his October 9, 2019 Executive Orders.
The Executive Orders are premised on the stated principle that “Regulated parties must know in advance the rules by which the Federal Government will judge their actions.”
Again, pyramid schemes are illegal in the US as per the FTC Act.
But uh yeah, here comes Neora and Jeff Olson claiming they’re not “able to know the law.”
In their own words, Neora paying 99% of commissions tied to recruitment is
a long standing, legitimate, and popular method of making direct sales to consumers: multi-level marketing (“MLM”).
At the heart of Neora’s complaint is the old “but we have products!” excuse.
In the MLM context, the States, the federal government, and the courts have correctly addressed pyramid scheme claims against entities that do not sell legitimate products, but rather concentrate on the sale of their “business opportunity.”
Because of the lack of sales of products, pyramid schemes must necessarily fail.
Neora (and Nerium before it) most certainly had products. But you can have products and still be a pyramid scheme, if the majority of products are sold to participants of the MLM opportunity.
This is commonly referred to as a “product-based pyramid scheme”.
Again, this is nothing new… yet Olson is claiming when he
launched Plantiff Nerium in 2011 with a compensation plan and business structure designed to comply with state laws (which have been preempted by federal law), federal law, and court decisions, he could not have known that in 2018-2019 Defendant FTC would decide to improperly reinterpret the law on pyramid schemes without proper legislation or rulemaking and, instead, utilize the enormous pressure of its so-called “fencing in” strategy in an attempt to unilaterally and retroactively change the definition of a “pyramid scheme” under the FTC Act.
Pyramid schemes were just as illegal in 2011 as they are in 2019. The only difference over the past few years is that now the FTC are actively enforcing the law on a much more regular basis.
And let’s face it, this is actually what Neora and Olson are upset about. They had plenty of time to change their compensation plan to emphasize retail sales, but didn’t.
Tellingly, there’s also nothing about the deceptive medical and marketing claims the FTC has also gone after Neora for in their lawsuit.
The reason why we have Neora’s lawsuit is because Neora can’t prove retail sales.
The company claims in order to prove it’s not a pyramid scheme, they’d have to spend
millions of dollars to retain renowned econometrician, Dr. Walter Vandaele, to produce a very costly and thorough economic analysis definitively establishing that Nerium has not been operating as a pyramid scheme.
Putting aside Neora happily spending millions defending the FTC’s lawsuit and pursuing their own lawsuit, this is a bogus claim.
At any given time any MLM company should be able to produce reports pertaining to generated retail sales revenue.
If they can’t, there is none and with respect to MLM companies, that’s concrete evidence a company is operating as a pyramid scheme.
Hiring econometricians to perform economic analysis and who knows what else is entirely unnecessary.
There’s been no allegation of incorrect economic management against Neora by the FTC. They’ve simply said less than 1% of Neora’s paid commissions are tied to retail sales, therefore it’s a pyramid scheme.
Despite only pursuing action against companies its investigated and found to not have a healthy mix of retail and recruitment sales revenue, Neora claims the FTC is seeking
to “eliminate” multi-level marketing in the United States through the use of enforcement and “fencing in” rather than through a proper change in the law or through proper rulemaking.
Again pyramid schemes are illegal in the US, so we’re not sure what laws Neora is referring to.
In the background of Nerium’s lawsuit, the company goes to great lengths to avoid mention of “retail customers”.
Instead “product sales to end consumers” is used, which is a tactic both Herbalife and Vemma tried to defend their pyramid lawsuit (both failed).
The law has long required that in order to establish that a MLM is a pyramid scheme, the FTC must establish that the actual compensation paid to the MLM business participants is primarily for recruiting other business participants and that the sine quo non is that the compensation payments be unrelated to product sales.
This is a flawed defense because a pyramid scheme can simply attach products to recruitment revenue, hence the term “product-based pyramid scheme”.
Nerium’s data shows that its compensation is primarily based on product sales and is never paid solely for recruiting, thus Nerium is not an illegal pyramid because it is not certain to collapse if it runs out of new recruits.
By their own admission, 1% of Nerium’s commissions paid out are tied to retail sales.
If 99% of your commissions are paid on the purchase of product by recruited affiliates, who by Nerium’s own data are losing money leading to high churn rates, it’s a given that the collapse of recruitment equates to a reliance on new recruits.
An MLM company without significant retail sales is primarily paying compensation tied to recruitment, which Neora acknowledges, as per “the law”, is required to “establish a MLM is a pyramid scheme”.
Neora also tries to frame the FTC as having a problem with who commissions are paid out to (recruiters).
The FTC’s new emphasis on to whom the compensation is paid rather than the source of the funds paid as compensation is contrary to the established law because it does not address the inherent fraud of an illegal pyramid – the inevitability of collapse.
I’m not 100% sure but I think this refers to the FTC pointing out that only those at the top of Neora make any money (another pyramid scheme hallmark).
Neora is also upset that the FTC hasn’t provided them details of their economic analysis.
The FTC claims this analysis is evidence Neora is a pyramid scheme and, according to Neora, refused to share it with the company unless they had to file a lawsuit.
The FTC has flatly refused to provide Nerium with its own alleged analysis upon which it bases its belief that Nerium is a pyramid scheme.28 In fact, the FTC has advised that it does not intend to share its analysis with Plaintiffs until after a lawsuit is filed
The FTC’s analysis is based on ‘at least sixteen waves of documents, complete copies of its internal databases through 201724, and detailed economic analysis of same’ provided by Neora to the FTC.
Neora argues that running an MLM company paying 99% of commissions tied to recruitment isn’t illegal “under the law”.
And when they told the FTC that, the regulator supposedly “abandoned the law”.
As per their own commissioned analysis, Neora claims 77% of commissions paid out are “for sales of product to ultimate end users.”
The problem is the vast majority of “end users” are distributors (thus tying commissions paid out to recruitment instead of retail sales).
One redeeming claim made by Neora is that
in 2016 and 2017, about 60 percent of Nerium’s total sales were to non-business participant “Preferred Customers”.
Omitted however is whether those preferred customers are genuine retail customers or distributors who failed to qualify for commissions and/or hadn’t recruited anyone yet (failed arguments also raised by Herbalife and Vemma).
Ominously, Neora states that if 1% of commissions paid out are tied to retail sales makes for a pyramid scheme
then there are likely no legal MLMs in the U.S.
This simply cannot be the law and it is not.
One last point I’d like to clarify is my stance on Neora’s business model, and reliance on the FTC’s investigative data.
An MLM compensation plan with no retail volume requirements and an emphasis on distributor autoship recruitment lends itself to being a pyramid scheme.
You can pull “but we don’t require our distributors to purchase anything” pseudo-compliance, as Neora has done.
But at the end of the day if the majority of distributors are qualifying for commissions on their own purchase as opposed to retail volume, and the majority of commissions paid out are tied to these purchases (typical of a distributor autoship recruitment scheme), then you’re looking at a pyramid scheme.
Neora can file a lawsuit and harp on about this not being explicitly referenced in US law, but I don’t like their chances in court.
If 99% of commissions Neora is paying out have nothing to do with retail sales, as the FTC alleges, best of luck defending that.
Remember, if the FTC’s 1% analysis is factually correct (and I have no reason to believe it isn’t, given Neora’s compensation plan), then Neora prevailing in either action equates to the legalization of product-based pyramid schemes in the US.
I can’t see that happening.
What I would like to see is a definitive ruling, although one could argue we already got that in 2014 with FHTM (they also had “products” and “end consumer”).
Stay tuned for continued coverage on both the FTC’s and Neora’s respective cases.
Update 6th February 2020 – On December 23rd the FTC filed a motion to dismiss. A hearing is scheduled for May 20th, which will likely be around the time of our next update.
The arguments for dismissal are the usual lack of jurisdiction and failure to state a claim, i.e. not worth covering separately.