Neora not a pyramid scheme, rules Texas Court
Following a bench trial held last October, the Northern District Court of Texas began deliberation on FTC v. Neora.
On September 28th the court handed down its findings, ruling in favor of Neora.
The FTC sued Neora (then Nerium), all the way back in 2019.
Claims the FTC made against Neora, under Section 15 of the FTC Act, include;
(1) operation of an illegal pyramid scheme;
(2) false earning claims, by misrepresenting the potential income Brand Partners could earn;
(3) false or unsubstantiated efficacy, by misrepresenting the efficacy of EHT and/or Neora EHT;
(4) false establishment, by misrepresenting that the effectiveness of EHT and/or Neora EHT has been scientifically
(5) means and instrumentalities, by furnishing Brand Partners with the means and instrumentalities to mislead others.
The FTC originally also sought monetary damages under Section 13(b) of the FTC Act. This was denied earlier however due to the Supreme Court’s AMG decision.
This left the Texas Court only to decide whether the FTC should be granted an injunction as requested relief.
The court’s findings were based on Neora having
approximately 30,000 to 35,000 active BPs. BPs has remained relatively stable since 2018.
As of trial, Neora has approximately 163,000 PCs.
Over the life of the company, there have been approximately 400,000 BPs and 1.7 million PCs.
Evidence was presented indicating that median tenure for BPs and PCs may be approximately 8 months and 2 months, respectively.
BP stands for “Brand Partner”, typically referred to a distributor or affiliate.
PC stands for “Preferred Customers”. Preferred Customers are typically on autoship but the court also lumped regular retail customers into this classification.
Crucially, the court did made the correct distinction between BPs and PCs;
In contrast to BPs, “Preferred Customers” or “PCs” and “retail customers” or are customers who purchase Neora products and do not participate in Neora’s business opportunity.
What we don’t know though is the total number of Neora’s cited PCs are active customers is unclear.
What we do know is;
Consistently, over 90% of Neora’s revenues come from product sales; the remaining 10% of revenues come from sales of starter enrollment Product Packs to BPs and upgrades, and nonproduct sales.
An estimated less than 1% of Neora’s product sales are made to Retail Customers.
The majority of Neora’s product sales—somewhere between 75 and 80% of sales—are made to PCs.
In summary; 90% of Neora’s revenue is from product sales, of which 76% to 81% are made to retail customers (both preferred customers and regular retail customers).
Based on that data, here’s how the Texas Court addressed the FTC’s claims.
The FTC’s claim that Neora is a pyramid scheme
To determine whether Neora is a pyramid scheme, the Texas Court applied the Koscot test. This is standard procedure.
The Federal Trade Commission established the Koscot test for determining what constitutes a pyramid scheme:
Such schemes are characterized by the payment by participants of money to the company in return for which they receive
(1) the right to sell a product and
(2) the right to receive in return for recruiting other participants into the program rewards which are unrelated to sale of the product to ultimate users.
This is of course quite broad and each MLM company the test is applied to must be examined individually.
Typically from what I’ve seen, what it comes down to is retail sales volume. That is, how much of an MLM companies revenue is generated from retail customers versus participants in the income opportunity.
There isn’t a hard figure but we typically go with 51% as a guideline.
Here’s the court’s application of the first Koscot prong to Neora;
The first element of the Koscot test, whether BPs pay money in exchange for the right to sell a product, is clearly met here; to enroll as a Neora BP and receive the right to sell Neora’s products, one must pay a minimum of $20 for an Enrollment Kit.
In analyzing the second prong the Court cited the FTC’s witness, Dr. Bosley.
Dr. Bosley testified that the FTC provided her with two legal assumptions for her work in this case, both taken from the Ninth Circuit’s decision in BurnLounge:
First, that an ultimate user is limited to a person who would have purchased the product even if not for the business opportunity;
And second, that rewards don’t have to be completely unrelated to ultimate user sales in order for something to be a pyramid scheme, i.e., that the existence of some sales to ultimate users for consumption does not prevent the plan from being an illegal pyramid scheme.
Dr. Bosley also relied on her own third, uniform assumption: that BPs mainly purchase product in pursuit of the business opportunity, and thus none of BPs’ purchases for personal consumption qualify as sales to an ultimate end user.
Put differently, Dr. Bosley— and, by extension, the FTC—assumes that purchases by BPs are never ultimate user sales.
The Court finds that Dr. Bosley’s third assumption is not supported by the evidence, and the FTC provides no other evidence to show that BP purchases should be uniformly treated not as sales to ultimate users.
In addition, the Court finds that the FTC improperly discounts the significance of the large volume of sales to PCs when evaluating whether the recruitment-based rewards, discussed previously, are “unrelated to” sale of Neora product to ultimate users.
For these reasons, the Court finds that the FTC has not established the second prong of the Koscot test, and concludes that Neora is not operating as an illegal pyramid scheme.
The FTC’s claim regarding Neora’s income and product claims
These claims (of which there are three), saw the FTC allege Neora is ”
violating § 5(a) of the FTC Act by making deceptive representations that Neora BPs are likely to earn a substantial income (Count Two), and making misleading or unsubstantiated health claims about EHT (Counts Three and Four).
In determining whether Neora was responsible for income and product claims made by its distributors, the court accepted Neora’s position that it
does not control and has no right to control how much BPs work (if at all), how much they spend on their pursuit of the business opportunity, or how they exercise their choice of work activities.
Moreover, the fact that BPs sold Neora product does not qualify as a manifestation of Neora’s intent.
For the foregoing reasons, the Court concludes that the FTC has not carried its burden in establishing that Neora BPs acted with actual or apparent authority on behalf of Neora, and thus has not shown that BPs are not Neora’s agents.
This finding saw the court dismiss Neora being responsible for product claims made by its distributors.
With respect to income claims, the court agreed with the FTC but, within the context of granting an injunction, found their presented evidence “stale”;
The Court agrees with the FTC that some of its examples of income-based statements by Neora are problematic and misleading as to the amount of money typically earned by a Neora BP, and lack any curative disclaimers or qualifiers.
However, in arguing that Defendants are making misleading income statements, the FTC primarily relies on evidence that is, in the Court’s view, somewhat stale in light of other evidence reflective of Neora’s recent operational practices.
Such evidence includes exhibits that reflect the Nerium brand, and thus predate the 2019 rebranding to Neora, or reference discontinued programs or rewards.
Although proof of past violations can be relevant to whether an actor “is violating, or is about to violate” the FTC Act, for purposes of awarding injunctive relief, the probative value of these older Neora statements decreases in light of other evidence presented at trial indicating that Neora has updated and revised its policies regarding permissible income and income-related representations in its messaging.
For example, Neora employees testified that Neora no longer describes BPs earning full-time income, and avoids using dollar amounts or terms such as “millionaires’ club,” “financial freedom,” “residual” or “dream” income, or “dream lifestyle.”
Instead, Neora now advertises earnings potential through the business opportunity as “modest supplemental income,” and consistently uses income disclaimers on its materials.
Since 2016, Neora has stopped using oversized checks to recognize high-earning BPs, and has stopped using testimonials, lifestyle claims, and success stories, including those promulgated in the Success from Home magazines.
The Court notes the FTC has not yet promulgated a formal rulemaking providing guidelines as to how direct selling companies may describe earnings or income opportunities without running afoul of § 5.
With that context, the Court concludes that the FTC has not established that Defendants are violating or are about to violate § 5(a) of the FTC Act by making deceptive income claims, and the Cornerstone Wealth factors do not justify issuing an injunction based on Defendants’ past violations of the law.
The evidence at trial establishes that Defendants aspire to abide by the law regarding permissible income claims, and in the absence of clear guidelines on what the law is, have revisited and revised their practices over time.
The more recent alleged misrepresentations pointed to by the FTC are lesser in number and do not justify an injunction.
The FTC’s claims regarding “means and instrumentalities”
This claim pertains to Neora “furnishing consumers with the “means and instrumentalities” to mislead others”.
The court’s finding is pretty concise;
Overall, the evidence at trial does not establish that Defendants provided BPs with the means and instrumentalities to deceive consumers.
On the contrary, the record reflects a concerted and consistent effort for Defendants to inform and train BPs with the tools and knowledge to sell Neora products without making misleading income or product statements, and to find and correct missteps as they happened.
Accordingly, the Court finds no violation of § 5 of the FTC on a means and instrumentalities theory.
The Court’s decision
Having ruled against the FTC on all counts, the court denied to issue an injunction against Neora.
Judgment for Defendants Neora, LLC and Jeffrey Olson is GRANTED.
The FTC was additionally ordered to pay all legal costs.
I think a year to reach a decision on FTC v. Neora was a bit much but I can see why; it’s a complicated case.
I want to start off by saying that Neora making 76% to 81% of product sales to retail customers is great. That alone should have seen the FTC pause before committing to a federal lawsuit.
On that basis alone, I’m comfortable with the finding that Neora isn’t a pyramid scheme. It does however raise one very important question, which I’ll get into later.
Outside of 76% to 81% of Neora’s product sales being to retail customers (which to me is the most important facet of this case), the FTC charging ahead with its case has unfortunately led to some truly ridiculous conclusions by the court.
My first impression was to lambast the court. Upon further consideration though I have to accept the court can only work with what’s presented to it.
This responsibility lies with the FTC, who unfortunately appear to have rested on their laurels. And here, that position has backfired spectacularly.
Some the FTC’s failings can probably be attributed to the Supreme Court’s AMG decision, which I maintain remains one of the worst anti-consumer decisions by a US court in recent history.
Perhaps had the 13(b) claims been permitted to go ahead (the FTC’s Complaint was crafted prior to the AMG decision), the court would have been able to factor in precedence more heavily based on what the FTC presented to it.
But 13(b) was eventually ruled off the table, leaving the court to assess the FTC’s Complaint purely on the merits of issuing an injunction.
The first identifiable issue is the Court reopening the “distributors are retail customers” loophole.
MLM Distributors are not retail customers. If they are counted as such, regulation of pyramid schemes becomes impossible (every pyramid scheme would point to 100% retail sales revenue).
With respect to Neora on this point, the Court cited FTC witness Dr. Bosley;
Dr. Bosley— and, by extension, the FTC—assumes that purchases by BPs are never ultimate user sales.
Regarding the first issue—that Dr. Bosley’s third assumption that BP purchases are not end user sales is unsupported by the evidence—the Court will use the BP First Order Bonus as an example.
For this bonus, if a newly enrolled BP purchases product at enrollment, a percentage of that product purchase amount is paid to both the enrolling BP and the enrolling BP’s upline.
For Koscot purposes, the relevant inquiry is whether this reward is “unrelated to the sale of the product to [an] ultimate user,” i.e., whether the purchaser of the product (here, the newly enrolled BP) is an ultimate user.
Under Dr. Bosley’s assumption, the newly enrolled BP is assumed not to be an ultimate user; instead, the purchase is assumed to be for the business opportunity and not for personal consumption.
Put differently, the FTC asks the Court to simply assume that an element of the Koscot test is met.
To be clear, this is a ridiculous position for the court to take. The problem however is the FTC relying on assumption based on previous cases, without any supporting evidence specific to Neora.
The assumption the FTC relied on was the argument that whether distributors (BPs) claim they are signing up for products is irrelevant to them signing up for the business opportunity, in light of there being a “preferred customer” retail discount.
Again, this pro-pyramid scheme argument was successfully shot down in both the FTC’s Vemma and Herbalife cases.
The FTC is right to assume the Texas Court would adopt the stance but, as part of that assumption, still failed to provide evidence specific to Neora.
This failing led to this nonsense;
The Court finds that Dr. Bosley’s assumption is not supported by the evidence.
At trial, Defendants presented evidence that some BPs enroll without ever intending to pursue the business opportunity, and are instead “savings seekers”.
At trial, Defendants presented evidence that some BPs enroll without ever intending to pursue the business opportunity, and are instead savings seekers, looking to take advantage of the biggest product discounts that are available only to BPs.
Defendants provided the LRW Survey, which reported that—for the admittedly small number of BPs who responded—the top reason for being a BP is to get discounts on product, either by getting a discount on products for personal use, or to earn free product.
Of course any pyramid scheme is going to be able to produce testimony from “some BPs” claiming they signed up for distributors for the products and not the income opportunity.
In Neora this is particularly problematic, as Neora intentionally offers BPs a larger discount than preferred customers.
BehindMLM, having reviewed Neora, maintains this is indicative of a distributor autoship recruitment scheme.
If Neora’s distributors are signing up because the company’s retail offering is lacking (Neora calls these distributors “Savings Seekers”), the onus is on Neora to remedy that shortfall.
If it doesn’t, that’s evidence of a distributor autoship recruitment scheme (aka a pyramid scheme).
The purpose of an MLM opportunity is to make money. If a consumer just wants products, they don’t participate in the income opportunity, period.
The FTC could have provided supporting evidence from Neora’s compensation plan, but didn’t. Instead they just pointed to FTC v. Vemma.
The FTC asks the Court to follow the district court’s decision in Vemma, which found that there was “no way to unbundle the [distributors’] intent to consume Vemma products as ultimate users from their desire to remain qualified for bonuses,” and adopted an assumption, also from Dr. Bosley, similar to the one presented here.
The Vemma decision was reached based on Vemma’s program design (compensation plan) and training and marketing materials.
The district court further observed that a participant’s “intent in purchasing Vemma products must be viewed in light of Vemma’s program design as well as its training and marketing materials.”
The FTC failed to present this Neora-specific evidence to the court.
The Court agrees with this general premise, but concludes it would be error to disregard or discount other relevant evidence as to BPs’ intent in purchasing Neora product, including their own self-reported motivations for being a BP through the LRW survey, anecdotal reports from Neora employees regarding “savings seekers” and BPs motivated by product discounts, and motivations that can be inferred from the behavior of PCs converting to BPs and their associated spending habits.
This evidence potentially lacks the statistical rigor necessary to speak confidently as to the purchase motivations for all, or even a majority, of Neora BPs, but besides Dr. Bosley’s assumption that all BP purchases are in pursuit of the business opportunity, the FTC provide no tangible evidence to the contrary.
And so the court was left to draw conclusions from Neora’s meaningless testimonies.
As bad as that is, the real kick in the nuts was the court going on to lay out how the FTC could have supported its position with evidence.
The Court notes that there is evidence the FTC could have provided, but did not, which could have supported its position.
For example, the court in Vemma observed that “evidence that distributors purchase and consume product for the purpose of qualifying for recruitment incentives is evidence of a pyramid scheme.”
The FTC speculated that Neora BPs could be making such purchases, but provided no evidence to suggest that is the case for the majority of BPs so as to support Dr. Bosley’s assumption.
Instead, the FTC provided no evidence from actual BPs or participants, and made no effort to show that Dr. Bosley’s rigid theoretical opinions regarding BP purchasing motivations based on the Compensation Plan are borne out in reality.
There is nobody but the FTC to blame for this shortcoming.
This same shortcoming played out again, with respect to the FTC failing to provide evidence that MLM companies are responsible for the conduct of their distributors.
Although the FTC points to numerous cases finding an agency relationship in circumstances partially resembling these, the issue is a question of fact, and the FTC cannot sidestep its evidentiary burden simply by asking the Court to follow other cases.
MLM companies being held legally responsible for conduct by their distributors is established law. We see it frequently from the FTC with respect to illegal medical claims.
Because the FTC failed to clear the low bar of establishing Neora is responsible for the conduct of its distributors, the court came to this ridiculous conclusion;
The FTC contends that Defendants claim EHT is scientifically proven to prevent and treat concussions, CTE, Alzheimer’s disease, and Parkinson’s disease.
As evidence of recent violations, the FTC relies exclusively on statements posted on social media by Neora BPs, associating EHT with CTE, Alzheimer’s, and other diseases.
However, as discussed, the FTC has not established that Defendants are liable for BPs’ misrepresentations.
The FTC seeks an order preventing Defendants from claiming that their products cure, treat, or prevent human disease. There is no evidence before the Court that Defendants are currently making such claims, or are likely to do so in the future.
Outright dangerous conduct that is absolutely occuring and Neora should absolutely be held accountable for. But won’t be, because the FTC was too lazy to establish agency relationship.
In addition to the FTC’s evidentiary failings, Neora also got away with this;
Evidence was presented that Neora does not control and has no right to control how much BPs work (if at all), how much they spend on their pursuit of the business opportunity, or how they exercise their choice of work activities.
Neora absolutely controls what its distributors can and can’t do through its Policies and Procedures. Failing to adhere to the P&P can and should result in termination.
This is nothing new and is well-established. But again, due to the FTC failing to file any evidence to the contrary…
Neora has no ability to enforce performance, let alone mandate how and when BPs conduct sales.
Thus, although Neora provides guidelines and instructions to BPs on how to conduct their businesses in a legally compliant manner, it cannot control whether, how, or when BPs choose to conduct business, weighing against a finding of control.
Absolute hogwash, which Neora again got away with because
the FTC does not discuss the consent element, and thus has not established that Defendants consented to BPs acting as their agents, or vice versa; the P&Ps specify that a BP is not an agent of Neora and has no authority to bind Neora to any obligation.
Admittedly all of this is moot in light of Neora having 76% to 81% retail sales. But I was nonetheless astonished to see these positions adopted by the court.
With respect to Neora’s quoted retail sales, we now come to the important question I mentioned earlier;
In support of its claim that Neora operates as a pyramid scheme, the FTC points to Dr. Bosley’s calculation that 96% of Neora BPs lose money and “walk away poorer than they started, having paid more into the company than they ever got out.”
How is it that, in an MLM company with 76% to 81% in retail sales volume, 96% of distributors are losing money.
This I feel is the FTC’s greatest failing in dropping the ball in this case. Consumers are clearly being harmed with respect to Neora as an MLM opportunity – but that will now go unregulated due to the FTC’s legal negligence.
The court did indirectly address the question, but in doing so blessed MLM companies operating as distributor autoship recruitment schemes.
However, that (96%) statistic becomes less significant if one acknowledges that many BPs enroll in Neora without any intention of pursuing the business opportunity, and instead are only purchasing product for personal consumption at discount.
Evidence was presented that, given the discounts, a BP may recoup the cost of the initial $20 Enrollment Kit after ordering at least $300 worth of product; for savings-seeker BPs, who would be purchasing the product regardless of the business opportunity, they recouped their payments through discounts, and thus suffered no loss.
- We’ve already addressed by testimony from participants in a pyramid scheme is unreliable.
- Discounting consumer losses in a pyramid scheme because “distributors are retail customers” reopens the MLM pyramid scheme loophole, already closed in FTC v. Vemma and FTC v. Herbalife.
In light of Neora being first and foremost an MLM income opportunity, if 96% of Neora distributors have lost and are losing money, I think the correct thing to do here would be to have either
- direct Neora to make its retail discount on par with its distributor discount (this kills the “Savings Seekers” pyramid loophole); or
- close up Neora’s MLM operations in the interest of consumer protection, and allow it to continue retail operations.
MLM related FTC cases are far and few between. It is extremely disappointing to see a high-profile case mismanaged to this extent.
Some of that can be offloaded to the AMG decision coming out of nowhere, but there’s no excuse for all of the evidentiary failings.
With respect to BehindMLM’s determination of an MLM pyramid scheme in our reviews, given Neora cleared the bar at 76% to 81% retail sales volume, I don’t anticipate any changes.