FTC granted liability summary judgment against SBH
The FTC has been granted summary judgment as to liability against the Success by Health defendants.
The FTC filed for liability summary judgment back in March.
Citing numerous instances of alleged fraud, the FTC sought liability judgment pertaining to, among other things, Success by Health and the subsequently launched VOZ Travel were pyramid schemes.
As recapped by the court, here are the six counts at issue;
The FTC asserts six counts in its complaint. In Count One, the FTC alleges that SBH and VOZ Travel each constituted illegal pyramid schemes, in violation of § 5(a) of the FTC Act.
In Count Two, the FTC alleges that the Individual Defendants made misleading representations about the likelihood of earning substantial income in SBH and VOZ Travel, in violation of § 5(a) of the FTC Act.
In Count Three, the FTC alleges that the Individual Defendants furnished SBH Affiliates and VOZ Travel participants with materials containing false or misleading representations, thereby providing the means and instrumentalities for the commission of deceptive acts or practices, in violation of § 5(a) of the FTC Act.
In Counts Four and Five, the FTC alleges that the Individual Defendants violated the FTC’s Merchandise Rule, 16 C.F.R. § 435.2(b)-(c), by failing to offer customers the ability to consent to a delay in shipping or to cancel delayed orders (Count Four) and by not canceling or providing a refund for delayed orders or complying with buyers’ requests to cancel orders (Count Five).
In Count Six, the FTC alleges that the Individual Defendants violated the FTC’s Cooling-Off Rule, 16 C.F.R. § 435.1, by failing to give buyers written or oral notice of the buyers’ right to cancel orders.
In ruling against Success by Health, the court observed
the Individual Defendants failed to address (let alone dispute) many of the facts submitted by the FTC in support of its motion.
Citing the AMG Capital decision from earlier this year, the Success by Health defendants argued
there is no rule or cease and desist order that has been violated.
The legal test applied by the Ninth Circuit to determine whether an enterprise is an illegal pyramid scheme is no longer relevant because of AMG Capital.
The FTC’s response to this was that the AMG decision didn’t stop them from seeking non-monetary relief, as sought through liability summary judgment.
The court ruled that the Success by Health defendant’s defenses were “without merit”.
The Court also disagrees with the Individual Defendants’ passing contention that the two-prong pyramid-scheme test applied in the Ninth Circuit (known as the Koscot test) is “now irrelevant” in light of AMG Capital.
AMG Capital did not address the applicability of this test or the legality or characteristics of pyramid schemes more generally.
In sum, AMG Capital does not disturb the FTC’s ability to seek a permanent injunction pursuant to § 13(b) in this case or to prevail on the theory that a business is being operated as a pyramid scheme.
With respect to the individual companies Success by Health and VOZ Travel being pyramid schemes, the court found;
Success by Health
There is no genuine dispute of material fact regarding the satisfaction of prong one of the Koscot test with respect to SBH.
When an MLM designs its promotional materials and incentives to make new Affiliates buy certain products as a practical condition of membership, prong one is satisfied.
The Individual Defendants seem to suggest that sales of product and product packs to downline SBH Affiliates constituted sales to ultimate users for purposes of prong two.
The Court does not necessarily agree.
In BurnLounge, the Ninth Circuit rejected the argument that internal sales to other members automatically constitute sales to ultimate users while also rejecting the argument that such transactions
can never constitute sales to ultimate users.
In practice, the court found, rewards were paid for recruiting
new members, as evidenced “by the necessity of recruiting to earn cash rewards and . . . that the scheme was set up to motivate Moguls through the opportunity to earn cash. . . . BurnLounge incentivized recruiting participants, not product sales.”
Here, the FTC has submitted a significant amount of evidence demonstrating that, in practice, SBH emphasized recruiting new Affiliates rather than sales to ultimate users.
In particular, there is evidence that retail sales of coffee would not and could not provide a significant source of income for Affiliates; that SBH lacked safeguards to prevent inventory loading or to encourage retail sales; and that myriad statements from the Individual Defendants and other senior SBH personnel consistently stressed the need for Affiliates to “get ten” recruits and to redouble their recruiting efforts.
There is also the simple fact that, although SBH closely tracked Affiliates’ recruiting efforts, there was no comparably systematic tracking of revenues generated by offline retail sales.
As for the first prong of the Koscot test, the FTC has submitted
undisputed evidence that consumers had to pay at least one form of upfront fee—in the form of the SBH annual $49 fee, a separate VOZ annual fee, and/or an initial purchase of VOZ Travel packs—in order to participate in the VOZ Travel program.
As for the second prong of the Koscot test, the FTC has submitted undisputed evidence that the VOZ Travel packs were sold solely to provide VOZ Travel participants with the right to recruit other participants and were unrelated to the sale of product to ultimate users.
Of note, even after the contract with Advantage Services fell through and no product was foreseeably available, the undisputed evidence shows that the Individual Defendants continued to push Affiliates to join VOZ Travel, purchase VOZ Travel packs, and recruit others to do so.
The Individual Defendants make no arguments and cite no evidence to demonstrate that there is a genuine dispute of material fact regarding VOZ Travel.
The Individual Defendants’ failure to make any effort to defend the legality and legitimacy of VOZ Travel is telling.
Based on the evidence in the record, no reasonable factfinder could find in favor of the Individual Defendants with respect to the VOZ Travel pyramid-scheme claim.
Personally I’m not a fan of the term “ultimate user” as, like here, pyramid scheme proponents all too often fall back on “our affiliates are using the products they purchase (to qualify for commissions)”.
I am glad to see the court, in line with the BurnLounge and Vemma cases, emphasize the need for retail sales.
Despite evidence demonstrating a lack of retail sales within Success by Health (retail sales made up just 5% of SBH sales volume), executives had affiliates submit declarations to the contrary.
These declarants largely testified that they purchased SBH product packs not for recruitment bonuses but because (1) they enjoyed using the products for themselves and (2) they wanted to buy the products at a discount in order to be able to retail them at a greater profit margin.
Additionally, these declarants generally testified that they focused on sales to ultimate consumers and generally denied that they ever loaded up on SBH product purchases in order to reach higher commission tiers.
The court acknowledged that the “conflicting evidence” issue would typically need to be resolved at trial. Issues of credibility, with respect to how the declarations were solicited were raised.
Because the VOZ Travel prong was so clear-cut however, the court ruled;
The FTC has established, and the Individual Defendants do not seriously dispute, that VOZ Travel operated as a pyramid scheme.
Accordingly, the FTC is entitled to summary judgment as to liability on Count One, irrespective of the presence of any disputes of fact as to whether SBH also operated as a pyramid scheme.
Summary judgement on count two was awarded to the FTC, because
the Individual Defendants do not even attempt to defend some of the categories of misrepresentations identified in the FTC’s motion.
The FTC contends these representations were, due to their falsity, likely to mislead consumers and material.
The Individual Defendants make no effort to argue otherwise and the Court agrees.
The court specifically called out Jay Noland’s representations of personal wealth.
The FTC has presented evidence that, although Noland made statements during presentations in 2018 and 2019 boasting of his
massive wealth (i.e., he is wealthy enough to give away millions of dollars each year, has been “financially free” since 2005, and is so wealthy that his children, grandchildren, and great-grandchildren will never have to work), Noland was actually living on credit cards during stretches of the alleged period of financial freedom, currently has a negative net worth, can’t remember when he ever had a positive net worth, owes hundreds of thousands of dollars in back taxes, and sustained significant financial losses from his previous MLM.
The Individual Defendants conspicuously fail to address this topic in their response brief.
Thus, on this record, the FTC has established that Noland made false representations about his personal wealth.
The court did find the FTC hadn’t cleared the summary judgment bar for “misrepresentations concerning the income potential associated with SBH”.
Once again though, because the VOZ Travel pyramid scheme was clear-cut, that tipped the balance in favor of the FTC.
Count three was awarded to the FTC, again due to lack of defense.
The FTC is entitled to summary judgment on Count Three.
As the FTC correctly notes, liability on this claim flows from the finding of liability on Count Two, and the Individual Defendants make no effort to address this claim in their response.
Owing to the Success by Health defendants admitting violations alleged in counts four, five and six, those too went to the FTC.
The FTC is entitled to summary judgment on Counts Four and Five.
As an initial matter, the Individual Defendants’ answer admits that Merchandise Rule violations occurred, objecting only to the assertion that such violations were “numerous.”
This admission, standing alone, compels the entry of summary judgment in the FTC’s favor on the issue of liability.
There is no genuine dispute of material fact as to Count Six—the Individual Defendants admit they violated the Cooling-Off Rule.
Ergo, on September 9th the court granted the FTC’s motion for summary judgment on liability.
As per the granted judgment, the individual defendants, namely owner Jay Noland, will be held accountable for Success by Health’s and VOZ Travel’s fraud.
The FTC argues that both the injunctive and monetary relief standards are satisfied because of the ample evidence of the Individual Defendants’ direct participation and central involvement in the unlawful acts, their status as corporate officers in the small, closely-held corporations, and the Individual Defendants’ admission that they had control over and knowledge of the acts and practices of the Corporate Defendants.
The Individual Defendants played a direct role in the unlawful acts.
The FTC has therefore carried its burden of production on the Individual Defendants’ individual liability.
And because the Individual Defendants wholly failed to respond to the FTC’s evidence or arguments on this point, it follows that the FTC is entitled to summary judgment.
Stay tuned for updates as we continue to track the case.
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