Success By Health preliminary injunction granted, FTC wins
A court has granted the FTC’s request for a preliminary injunction against Success By Health and owner Jay Noland.
The order was made following a damning assessment by the Success By Health Receiver, which concluded that just 5% of company-wide revenue was attributable to retail sales.
An MLM company not making at least 50% of company-wide revenue via retail sales is considered a pyramid scheme.
The court’s decision to grant a preliminary injunction against Success By Health was based on review of submitted evidence and arguments by both parties.
We’ve already covered the facts as presented by the FTC in their original complaint.
In their defense, Success By Health offered up
declarations from SBH Affiliates concerning their satisfaction with SBH, declarations from SBH Affiliates concerning the earnings they had derived from, a photograph of an online poll posted on the SBH Facebook page and an index that supplied additional “context” surrounding some of the statements the FTC had proffered (in the Rottner affidavit) as evidence of false statements.
The FTC addressed Success By Health’s affiliate testimonials at trial. The regulator revealed that
the Affiliates who submitted declarations on Success By Health’s behalf paid a total of around $572,000 to SBH but received a total of around only $207,000 in commissions.
This is in line with the FTC’s claim that, despite Jay Noland’s representations of financial freedom, the overwhelming majority of Success By Health affiliates lost money.
As to false statements, Success By Health attempted to downplay misrepresentations by stating they were
merely “puffery” and “empty superlatives” that were “designed to be motivational and inspiring.”
The court rejected this argument.
Analysis by the court raised questions as to
whether retail sales can and do serve as a legitimate pathway to profits for (Success By Health) Affiliates.
The profits an SBH Affiliate might earn through retail sales (which is “phase one” of SBH’s six-phase plan) are trivial and that the commission plan is actually “driven” by the potential profits to be earned by qualifying for the BAM bonus (which is “phase six” and requires, in its highest form, the recruitment of over 100,000 people).
There is ample evidence that SBH … offer(s) rewards that are “largely” based on recruitment, not sales to ultimate users (retail customers).
The court also found there was no evidence to support Success By Health affiliates weren’t inventory loading to qualify for commissions.
SBH does not even attempt to track Affiliates’ retail sales or track how much inventory a particular Affiliate possesses.
SBH also adheres to a “no refund” policy. And during his deposition in this case, Noland couldn’t identify any compliance-related SBH policies, procedures, or guidance.
The court stated Success By Health’s conduct made it worse than Vemma, which settled similar pyramid allegations for $226 million in 2016.
Despite criticizing the FTC for not taking into account resale retail sales figures, at no point during proceedings did Success By Health offer up any figures themselves.
During closing arguments, Success By Health’s lawyer conceded presented evidence regarding retail sales “was anecdotal”.
As part of their defense, Success By Health attempted to characterize the FTC’s expert witness, Dr. Bosley, as having “a bias against the MLM industry”.
The court rejected this argument, citing Dr. Bosley as “credible, careful in her opinions and helpful”.
The Receiver, whose credibility was not questioned by Success By Health, arriving at the same conclusion as Dr. Bosley was also taken into account.
One aspect of the court’s decision I personally disagree with, is the apparent failure to take into consideration preferred customers.
Affiliates aren’t encouraged to continue making repeat retail sales to third parties who enjoy SBH products—instead, they are encouraged to make a retail sale only once, then persuade the purchaser to start buying wholesale quantities directly through the SBH website (conduct that would result in recruitment commissions for the Affiliate, not profits from retail sales).
I took the above as suggesting preferred customers as opposed to recruitment, although I suppose the lack of retail sales company-wide suggests either the above script didn’t work, or those who opted for wholesale prices were indeed recruited as opposed to signed up as preferred customers.
Still, I felt it was a statement the court could have perhaps better clarified.
That aside, ultimately the court concluded that “there is ample evidence that SBH operates a pyramid scheme”.
The bottom line is that SBH allows non-Affiliates to purchase goods through its website at wholesale prices, doesn’t even bother to track whether Affiliates are engaging in retail sales, affirmatively encourages inventory loading, doesn’t have any compliance policies, and adheres to a strict no-refunds policy.
Thus, even if profitable retail sales are possible and sometimes do occur despite these policies, such sales cannot and do not serve as SBH’s “primary” source of financial rewards to Affiliates.
Dr. Bosley put it succinctly: “SBH and its promoters are marketing a pyramid scheme and are misrepresenting to consumers the amount of money consumers are likely to make by joining SBH . . . The anticipated result of SBH’s program is an endless recruitment chain.”
In deciding the scope of a preliminary injunction, the court dismissed Success By Health’s suggestion that a monitor be appointed in place of the Receiver.
A receiver is necessary, and Success By Health’s alternative request to insert a monitor but allow them to reassume control is inadequate, because the FTC has presented evidence that Noland has used the company as a personal piggy bank, using corporate funds to pay for homes in the United States and Uruguay as well as a fleet of flashy and expensive cars, including a $145,000 Range Rover and a pair of motorcycles worth a total of $50,000.
Additionally, SBM doesn’t follow corporate formalities and allows several different “verticals,” such as “Success By Coaching” and “Success by Networking,” to commingle funds in the same bank account as SBH.
The illusion of these businesses operating separately from SBH falls away in light of the fact that 95% of payments made to SBM (the umbrella for all of the businesses at issue here) came from SBH Affiliates.
These considerations heighten the Court’s concern that, if Defendants were given access to the bank accounts and company, assets would be depleted.
Jay Noland committing FTC Act violations whilst subject to a previously granted injunction was also a deciding factor.
The Court’s finding of a likelihood of success on the merits as to SBH suggests that Noland likely violated that injunction.
It would be folly to reinsert a recidivist pyramid scheme operator into management and hope the third time will be the charm.
Success By Health’s suggestions that Noland step aside and/or Success By Coaching and Success By Networking be permitted to continue independent operation, were also rejected.
The granted preliminary injunction preserves the Success By Health asset freeze, as well as the Receivership’s control of the company.
Previous TRO exemptions granted to defendant Thomas Sacca were also revoked.
Looking forward, first to settle will likely be Success By Health. Noland and the rest will likely follow suit, and that’ll probably be the last we ever hear of them.
Stay tuned for updates as we receive them.