Ad Law Access https://www.kelleydrye.com/viewpoints/blogs/ad-law-access Updates on advertising law and privacy law trends, issues, and developments Wed, 24 Jan 2024 13:47:06 -0500 60 hourly 1 Illinois Court Dismisses Neora’s Declaratory Judgment Suit against FTC on Jurisdictional Grounds https://www.kelleydrye.com/viewpoints/blogs/ad-law-access/illinois-court-dismisses-neoras-declaratory-judgment-suit-against-ftc-on-jurisdictional-grounds https://www.kelleydrye.com/viewpoints/blogs/ad-law-access/illinois-court-dismisses-neoras-declaratory-judgment-suit-against-ftc-on-jurisdictional-grounds Tue, 01 Sep 2020 16:59:28 -0400 Turns out the best defense may not be a good offense, at least when litigating against the FTC. The Northern District of Illinois yesterday rejected an attempt by multi-level marketer Neora, LLC (formerly Nerium) to obtain a declaratory judgment that the company did not operate as a pyramid scheme and that the FTC was not authorized to seek restitution or disgorgement under Section 13(b) of the FTC Act.

The court granted the FTC’s motion to dismiss, finding that the “the claims presented are not ripe for judicial resolution and Plaintiffs can defend themselves in the enforcement action” that remains ongoing in the Northern District of Texas.” As we discussed back in November 2019 when the suit was first filed, Neora sought a number of declaratory judgments, including that: (1) the FTC was overstepping its authority under the FTC Act in attempting to regulate multi-level marketing companies by guidance and declining to count certain internal consumption as genuine demand when conducting a pyramid scheme analysis; and (2) the FTC lacks authority under Section 13(b) to seek monetary relief.

The latter issue will be considered by the Supreme Court in the coming term in two consolidated cases, F.T.C. v. Credit Bureau Center and AMG Capital Management, LLC v. F.T.C. Just last week, as discussed here, the Northern District of California granted a stay in the FTC’s pending enforcement action against Lending Club on the grounds that the Supreme Court’s decision on the FTC’s powers under Section 13(b) would “greatly simplif[y]” the case, “as no monetary relief will be at issue.”

For Neora, the battle remains ongoing. The court emphasized that “Plaintiffs undoubtedly have an adequate remedy in the [pending] enforcement action” because they “can raise the same arguments they assert here as defenses in that action.” That case was recently transferred from the District of New Jersey to the Northern District of Texas, where it remains pending.

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Webinar Replay: Product and Earnings Claims in the Time of COVID-19 https://www.kelleydrye.com/viewpoints/blogs/ad-law-access/webinar-replay-product-and-earnings-claims-in-the-time-of-covid-19 https://www.kelleydrye.com/viewpoints/blogs/ad-law-access/webinar-replay-product-and-earnings-claims-in-the-time-of-covid-19 Sat, 11 Jul 2020 17:36:38 -0400 The replay of our recent webinar Product and Earnings Claims in the Time of COVID-19 is available here.

The FTC has recently sent warning letters to hundreds of companies for allegedly falsely implying that products can be used to treat, cure, mitigate, or prevent COVID-19. The FTC has also issued warning letters for implied earnings claims connected to the pandemic, alleging that some have overpromised on the financial opportunities available and misleadingly tied them to the pandemic. These announcements have made clear that any claim mentioning COVID-19, the pandemic, or even “these times” will be closely scrutinized.

To help ensure your company isn’t next, please watch the replay of our webinar covering the basics of advertising product and earnings claims, and how those should be applied during the pandemic. Discussion topics included:

• Claim Substantiation and Puffery • Express and Implied Product Claims • Express and Implied Earnings Claims • Enforcement Examples and Takeaways • Monitoring Third Parties Making Claims on Your Behalf (Endorsers, Independent Distributors) • What to do if you receive a warning letter or other enforcement action

To view the presentation slides, click here.

To view the webinar recording, click here.

Subscribe to our Ad Law News and Views newsletter to receive information on our next round of webinars and to stay current on advertising and privacy matters.

Visit the Advertising and Privacy Law Resource Center for additional information for additional information, past webinars, and educational materials.

Advertising and Privacy Law Resource Center

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Upcoming Webinars: Product and Earnings Claims in the Time of COVID-19 and Trade Association Antitrust 101 https://www.kelleydrye.com/viewpoints/blogs/ad-law-access/upcoming-webinars-product-and-earnings-claims-in-the-time-of-covid-19-and-trade-association-antitrust-101 https://www.kelleydrye.com/viewpoints/blogs/ad-law-access/upcoming-webinars-product-and-earnings-claims-in-the-time-of-covid-19-and-trade-association-antitrust-101 Mon, 06 Jul 2020 01:14:25 -0400 Product and Earnings Claims in the Time of COVID-19 On Wednesday, July 8, we will be holding a webinar for anyone who is currently making or plans to make product claims or earnings claims, anyone new to claims or in need of a refresher.

The FTC has recently sent warning letters to hundreds of companies for allegedly falsely implying that products can be used to treat, cure, mitigate, or prevent COVID-19. The FTC has also issued warning letters for implied earnings claims connected to the pandemic, alleging that some have overpromised on the financial opportunities available and misleadingly tied them to the pandemic. These announcements have made clear that any claim mentioning COVID-19, the pandemic, or even “these times” will be closely scrutinized.

Please join us for a webinar covering the basics of advertising product and earnings claims, and how those should be applied during the pandemic. Discussion topics include:

  • Claim Substantiation and Puffery
  • Express and Implied Product Claims
  • Express and Implied Earnings Claims
  • Enforcement Examples and Takeaways
  • Monitoring Third Parties Making Claims on Your Behalf (Endorsers, Independent Distributors)
  • What to do if you receive a warning letter or other enforcement action
Register here

Trade Association Antitrust 101 Please join us on July 14 for a webinar geared toward association legal counsel, executives, marketers, staff and members, participants in association activities or attendees to association meetings.

Antitrust issues are a constant concern for trade associations and their members. Competition regulators will have associations and their members under even greater scrutiny as groups work together to address the ongoing challenges presented by COVID-19. Please join us for a webinar covering the basics of antitrust compliance for association legal and compliance counsel, executives, staff and outside advisers. This webinar is designed to help association professionals and those who attend association functions identify potential antitrust issues and provide practical guidance for effective compliance programs and mitigating risk. Finally, we will talk about how to respond to enforcement actions in the event your organization is involved in an investigation.

Discussion topics include:

  • Antitrust law basics
  • Best practices for associations and its membership
  • Effective compliance and training programs
  • Strategies for responding to warning letters or other enforcement actions
Register here

Additional webinars will be announced soon.

Upcoming Webinars: Product and Earnings Claims in the Time of COVID-19 and Trade Association Antitrust 101

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FTC Sends Warning Letters to Ten MLMs about COVID-related Product and Earnings Claims https://www.kelleydrye.com/viewpoints/blogs/ad-law-access/ftc-sends-warning-letters-to-ten-mlms-about-covid-related-product-and-earnings-claims https://www.kelleydrye.com/viewpoints/blogs/ad-law-access/ftc-sends-warning-letters-to-ten-mlms-about-covid-related-product-and-earnings-claims Thu, 30 Apr 2020 18:15:41 -0400 Last week, the FTC sent warning letters to ten multi-level marketing companies alleging that the companies failed to stop their participants from making deceptive product and earnings claims related to COVID-19. The letters request that the companies report within 48 hours what actions they have taken to stop their distributors from claiming their products can treat or prevent COVID-19, that MLM business opportunity participants are likely to earn substantial income, or both.

Six of the letters address both health and earnings claims, three address just earnings claims, and one addresses just health claims. Examples of allegedly deceptive health claims cited in the letters include:

  • “Got the coronavirus heebeegeebees? Boost your immunity with this amazing deal!!!!”
  • “… If interested to learn more or obtain oils or rollers Let me know A little extra protection can help #doterra #NursesCOVID19 #Dialysis #ImmunityBoosters #ImproveRespiratoryFunction”
The cited examples show that the FTC is not looking just at express COVID-19 health claims but also claims that may be implied by any reference to the virus or pandemic, including through hashtags.

Examples of allegedly deceptive earnings claims cited in the letters include:

  • “Need to make extra money? Find it difficult to pay your bills? Were you laid off/ #fired? Be your own Boss w/doTERRA essential oils. Msg me to achieve financial independence #laidoff #unemployed #cantpaymybills #cantpaymyrent #student #sales #sidehustle #makemoney #stayathomemom.”
  • “[E]veryone’s getting stimulus checks right now… There is no better investment you could do… Take that money that you’re about to get back… figure out a way to make this happen tonight.”
The letters underscore the difficult question of how MLMs can promote legitimate business opportunities without overpromising a cure-all for economic uncertainty during a global pandemic. Does a claim that otherwise is substantiated and non-misleading become deceptive by a mere reference to “these uncertain times” or some similar acknowledgment of the economic difficulty that many are facing?

As a matter of longtime FTC precedent, the answer should be no, and the warning letters don’t go this far. But, the letters do underscore that the FTC is watching closely for any reference to COVID-19 or the pandemic, and MLMs and their participants should take note.

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Section 13(b) at the New Year: Where Things Stand in the Fight Over The FTC’s Enforcement Authority https://www.kelleydrye.com/viewpoints/blogs/ad-law-access/section-13-blog-section-13b-at-the-new-year-where-things-stand-in-the-fight-over-the-ftcs-enforcement-authority https://www.kelleydrye.com/viewpoints/blogs/ad-law-access/section-13-blog-section-13b-at-the-new-year-where-things-stand-in-the-fight-over-the-ftcs-enforcement-authority Mon, 06 Jan 2020 22:20:46 -0500 The year ended with a flurry of activity related to the FTC’s ability to obtain permanent injunctions and restitution under Section 13(b) of the FTC Act. As we head into 2020, a level-set is in order.

To File or Not File is No Longer the Question

On December 19, 2019, the FTC filed a petition for writ of certiorari following the 7th Circuit decision in FTC v. Credit Bureau Center. The Solicitor General (who had first dibs) chose not to file. By our count, this FTC filing marks only the fourth time that the agency has represented itself before the Supreme Court over the past 45 years.

That makes three petitions for review on this issue presently before the Supreme Court. In addition to the FTC’s petition in Credit Bureau Center, petitions are pending in two 9th Circuit cases: Publishers Business Services v. FTC and AMG Captial Management v. FTC. Whether the Supreme Court will grant certiorari in any of these cases remains to be seen. While the Circuit split certainly appears to justify review, the numbers are the numbers: the Court hears only 100-150 of the 7,000 to 8,000 cases that it is asked to review each year.

As expected, the FTC petition argued that the 7th Circuit’s ruling upset long-standing and well-grounded precedent: “a district court’s authority to grant a permanent injunction under Section 13(b) includes the authority to require wrongdoers to return money that they illegally obtained.” The petition focused on the plain meaning of the word “injunction,” as well as other authority in support of its contention that Section 13(b) should be understood to include restitution and other forms of monetary relief.

The FTC also argued that its position is consistent with legislative intent, asserting that Congress understood how the Supreme Court interpreted the law under Porter v. Warner Holding Co. and Mitchell v. Robert DeMario Jewelry, Inc. when Section 13(b) became law. Finally, the FTC argued Congress has since reviewed Section 13(b) more than once, without revision, after several circuits ordered defendants in FTC cases to repay consumers.

Where was Solicitor General Noel Francisco in all of this and why did his office decide to sit this one out? The answer lies with another case that will be heard by the Supreme Court this term: Liu v. SEC. In Liu, the petitioners have asked the Court to consider “whether the Securities and Exchange Commission may seek and obtain disgorgement from a court as ‘equitable relief’ for a securities law violation even though [the Supreme] Court has determined that such disgorgement is a penalty.”

The petitioners in Liu rely on the Supreme Court’s decision in Kokesh v. SEC, and more specifically, a footnote in the opinion where the Court stated that it was not addressing “whether courts have properly applied disgorgement principles in this context” or “whether courts possess authority to order disgorgement in SEC enforcement proceedings.” The opinion in Liu, which is expected in June, will answer these questions. As the Liu petitioners have pointed out, following Kokesh, a number of Courts of Appeals have considered whether disgorgement is a legally permissible equitable remedy in SEC cases, and have concluded that it was not. For example, Justice Kavanaugh, while on the D.C. Circuit, noted in a concurrence (Saad v. SEC) that Kokesh “overturned a line of cases from [the D.C. Circuit] . . . that had concluded that disgorgement was remedial and not punitive.”

The importance of the outcome in Liu extends beyond the SEC to the FTC. Like the SEC, the FTC has relied on disgorgement of ill-gotten gains as one of its primary remedial tools. If the Court rules in favor of the Liu petitioners, and determines that disgorgement is not within the SEC’s statutory authority, the FTC will be forced to distinguish restitution to consumers under 13(b) from “disgorgement” in securities laws or arguably find itself in a position where it will have to rethink its fraud program entirely.

The Solicitor General, in his request for an extension of time to petition for a writ of certiorari, questioned whether the Court might benefit if it decided Liu before it considered the 13(b) issue: “The additional time sought in this application is needed to complete consultation with interested agencies and components of the government and to assess the legal and practical impact of the court of appeals’ ruling, including the relationship between the question presented here and the question presented in Liu v. SEC.” Those consultations apparently led the Solicitor General to conclude that Liu would have an impact on the 13(b) issue, which could not have been welcome news to the FTC.

In its petition, the FTC disagrees with the Solicitor General, arguing that these cases do not pose overlapping questions (a position also advanced by the FTC’s 9th Circuit adversaries in filings by petitioners in Publishers Business Services and AMG Capital Management). All of this explains why FTC General Counsel Alden Abbott is counsel of record on the FTC petition and not the Solicitor General.

Needless to say, eyes are on Liu. Twelve amici curiae briefs have been filed since December 16, 2019, with the general sentiment that Congress has not expressly authorized the SEC to obtain monetary relief through disgorgement.

Interested parties are also lining up on the 13(b) issue. Cause of Action Institute and Washington Legal Foundation filed amici curiae briefs in support of both the AMG and Publishers Business Services petition. These amici briefs argue that (1) the plain meaning of 13(b) does not allow for courts to order monetary relief, (2) an expansive interpretation of 13(b) violates the separation of powers and constitutional rights, and (3) district courts should not be allowed to continue using “equity of the statute” (judicial discretion/judicial rulemaking) to order monetary relief.

Meanwhile, the Battles Rage On

The continuing questions over the extent of the FTC’s enforcement authority to obtain monetary relief under Section 13(b) did not stop the Commission from filing a lawsuit on November 1, 2019 against multi-level marketer Neora, LLC and its CEO Jeffrey Olson for purportedly operating an illegal pyramid scheme that used deceptive marketing to sell supplements, skin creams, and other products. All indications are that it is business as usual at the FTC.

Pursuant to Section 13(b), the FTC seeks an injunction to stop Neora’s alleged pyramid scheme and an award of restitution to return money to consumers. The lawsuit, filed in the District of New Jersey, alleges that Neora (formerly known as Nerium International) and its CEO offered false promises that potential distributors could earn financial independence if they joined the company’s pyramid scheme – while, in reality, most recruits would end up losing money.

Believing that the best defense is a good offense, Neora beat the FTC to the punch and filed a lawsuit in the Northern District of Illinois against the FTC, asking the court to declare that the company did not operate a pyramid scheme. The company’s complaint also asserted that the FTC is not authorized to seek restitution or disgorgement under Section 13(b).

The FTC will appear in the Northern District of Illinois on January 7, 2020 to present its Motion to Dismiss or, in the Alternative, Failure to State a Claim. The FTC will argue that Neora filed this suit in an attempt to preempt the FTC’s enforcement action in New Jersey, which seems obvious, particularly when you consider timing and Neora’s forum choice (7th Circuit). The FTC will further argue that Neora has only one possible cause of action under the Administrative Procedure Act but fails the requirements for judicial review. As a result, the claims are not ripe for judicial consideration or, alternatively, the court should decline to exercise its discretionary jurisdiction to hear the case.

December also saw the 10th Circuit joining the 13(b) debate with its holding in FTC v. Nudge. There, the FTC alleged that the defendants engaged in a real-estate investment seminar fraud. The court found that because one of the named parties, Buy PD, was part of a common enterprise and continued to provide services to further the fraud, it is “about to violate” the law. Buy PD argued it had stopped marketing real-estate investment seminars directly to consumers in 2016. In an opinion that must have provided a measure of relief to the FTC, Judge Robert J. Shelby concluded that, because Buy PD continued to provide services related to the fraud and was a part of the common enterprise, it was enough for liability under Shire (“the Complaint alleges facts sufficient to reasonably infer the common enterprise is violating or is about to violate the law.”).

As predicted, the dispute over the scope of the FTC’s 13(b) authority has resulted in a steady flow of motions in federal court. These include, among many others, FTC v. Hoyal & Assocs., FTC v. Abbvie, Inc., FTC v. Dorfman, and Complete Merchant Solutions v. FTC. Indeed, given the Circuit split, one might argue that it would almost be malpractice not to raise the issue in litigation at this point.

And one can only wonder how this is all playing out during the investigational phase, under Part 2 of the FTC’s Rules of Practice, as respondents become more emboldened during settlement discussions related to redress. After all, there is a very real prospect that litigation might lead to a payment of $0. It is not hard to understand why respondents might stand their ground in negotiations and prefer to roll the dice in litigation, as opposed to agreeing to voluntarily pay tens or hundreds of millions of dollars to the U.S. Government.

Eyes on Congress

With the judicial outcome uncertain, the FTC has turned to Congress, floating proposed legislation that seeks (1) clear authority to seek permanent injunctions without the requirement that a defendant “is violating, or is about to violate” the law, (2) express permission to seek monetary relief, including restitution and disgorgement, and (3) a 10-year statute of limitations.

This effort mirrors the effort in Congress to minimize the impact of any decision in Liu. In March 2019, Senator Mark Warner (D-VA) introduced the Securities Fraud Enforcement and Investor Compensation Act, which would authorize the SEC to seek and courts to award disgorgement and restitution (Senator Warner has included similar language in a bipartisan anti-money laundering bill, S. 2563, the ILLICIT CASH Act). Related legislation also has been introduced: the Investor Protection and Capital Markets Fairness Act (H.R. 4344), the Stronger Enforcement of Civil Penalties Act of 2019 (S. 1854 / H.R. 3641), and the Strengthening Fraud Protection Provisions for SEC Enforcement Act of 2019 (H.R. 3701).

Of these bills, H.R. 4344 is furthest along. On November 18, 2019, by a vote of 314-95, the House passed H.R. 4344, authored by Reps. Ben McAdams (D-UT) and Bill Huizenga (R-MI). The legislation – endorsed by SEC Chairman Clayton – would authorize disgorgement as a remedy that the SEC can seek. It would also establish a 14-year statute of limitations.

In remarks on the House floor, Rep. McAdams stated: “The SEC estimates that, in the two years since the Kokesh decision, they have had to forgo over $1.1 billion of ill-gotten gains that bad actors can now keep that don’t get returned to investors. . . . In addition to $1.1 billion in forgone funds, the SEC is increasingly spending time and staff resources fighting new legal challenges from bad actors claiming that the SEC shouldn’t be able to seek disgorgement at all.”

The strong (and unusual, in this day and age) bi-partisan support for the bill suggests that prospects in the Senate are probably pretty good. If this legislation becomes law, the Court’s holding in Liu would be a non-issue and prospects for legislation on the Section 13(b) issue would improve.

To date, we have not seen a stand-alone bill that would expressly provide the authorization that the FTC contends it already possesses, but one is likely in the making and there are other ways to achieve the same result. Revisions to Section 13(b) could be included in an appropriations bill or as part of comprehensive privacy legislation. We will have to wait and see.

When it comes to this issue, it is going to be an eventful year.

Stay tuned for more installments of the “Section 13 (b)log.”

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Section 13 (b)log: Direct Seller Stands Its Ground: Neora Seeks Declaratory Judgment Against the FTC, Challenging the Agency’s Section 13(b) Authority https://www.kelleydrye.com/viewpoints/blogs/ad-law-access/direct-seller-stands-its-ground-neora-seeks-declaratory-judgment-against-the-ftc-challenging-the-agencys-section-13b-authority https://www.kelleydrye.com/viewpoints/blogs/ad-law-access/direct-seller-stands-its-ground-neora-seeks-declaratory-judgment-against-the-ftc-challenging-the-agencys-section-13b-authority Tue, 05 Nov 2019 16:15:50 -0500 The continuing questions over the extent of the FTC’s enforcement authority to obtain monetary relief under Section 13(b) did not stop the Commission from filing a lawsuit on November 1 against multi-level marketer Neora, LLC and its CEO Jeffrey Olson for purportedly operating an illegal pyramid scheme that used deceptive marketing to sell supplements, skin creams and other products.

Pursuant to Section 13(b), the FTC seeks an injunction to stop Neora’s alleged pyramid scheme and an award of restitution to return money to consumers. The lawsuit, filed in the District of New Jersey, alleges that Neora (formerly known as Nerium International) and its CEO offered false promises that potential distributors could earn financial independence if they joined the company’s pyramid scheme – while, in reality, most recruits would end up losing money.

The lawsuit comes as part of the Commission’s larger efforts to crack down on multi-level marketing pyramid schemes. But interestingly, when it saw the lawsuit against it coming, Neora opted to lodge an aggressive attack of its own against the FTC.

In a lawsuit filed in the Northern District of Illinois (Seventh Circuit) against the FTC, Neora and Olson asked the court to declare that its company did not operate as a pyramid scheme. The company’s complaint also asserted that the FTC is not authorized to seek restitution or disgorgement under Section 13(b) – effectively contending that the FTC’s attempt to punish Neora by seeking restitution is not available as a remedy.

So what happens next? As an initial matter, the Department of Justice will have first crack at the case, given that Neora is seeking a declaratory judgment. Regardless of whether DOJ or the FTC leads the government’s response, we would expect a motion for a change of venue from Illinois to New Jersey, with argument that it is not possible to litigate the motion for declaratory judgment without litigating the facts of the underlying case. If the court agrees, the case would be moved to New Jersey where there is binding precedent that is more favorable to the Commission’s position.

Section 13(b) Questioned in the Seventh Circuit

The company’s choice of forum was no doubt driven by the Seventh Circuit’s landmark decision earlier this year in FTC v. Credit Bureau Center LLC. In that case, the Seventh Circuit held that the FTC could not obtain monetary relief in the form of restitution under Section 13(b). The court reasoned that Section 13(b)’s text cites injunctions as the FTC’s exclusive remedy, thus foreclosing the FTC from seeking restitution. As we have reported previously, the Seventh Circuit’s decision overturned three decades of its own precedent and broke with eight other federal appellate courts.

The FTC has stated that the opinion will not change its enforcement behavior. In a recent panel discussion, FTC Chief Litigation Counsel Bikram Bandy remarked that Credit Bureau Center would not alter the Commission’s approach to deterring fraud by seeking restitution. In ongoing litigation where the FTC is seeking monetary relief from defendants, according to Mr. Bandy, the FTC has prevailed (so far) on all motions raised by opposing counsel that have attempted to assert the legal theories advanced in Credit Bureau Center as a means of blocking a restitution award.

However, Mr. Bandy also noted that the FTC’s desire to remain aggressive would continue in all circuits that have not adopted the Credit Bureau Center holding – which is to say, all circuits other than Seventh. Neora’s decision to file against the FTC in the Northern District of Illinois means that the court will not be able to ignore Credit Bureau Center’s holding relating to Section 13(b).

In a different development that also could have far-reaching implications for the FTC’s ability to obtain civil monetary penalties, the U.S. Supreme Court granted certiorari on November 1 in Liu v. SEC. The Supreme Court will consider whether the SEC may obtain disgorgement under the Securities Act, which only mentions “equitable relief.” The SEC has obtained disgorgement in many instances by asserting that it is a form of equitable relief, but Liu has asserted that disgorgement is a penalty – not an equitable remedy – and therefore is not permitted under a plain reading of the Securities Act. The Court’s interpretation in Liu could prompt courts to reevaluate whether Section 13(b) of the FTC Act allows for restitution.

The FTC’s Campaign Against Multi-Level Marketers

Why was Neora determined to go on the offensive? According to Neora’s complaint, the FTC has been “improperly” reinterpreting the law on pyramid schemes without proper legislation or rulemaking in an attempt to effectively outlaw multi-level marketing (MLMs.) Neora alleges that the FTC assumes that no incentives can be paid for recruitment of participating distributors, even when the MLM makes robust sales to satisfied consumers.

In a statement, Andrew Smith, the Director of the FTC’s Bureau of Consumer Protection, distinguished between legitimate MLMs and pyramid schemes, in alleging that Neora’s business model functions as part of the latter: “Participants in legitimate multi-level marketing companies earn money based on actual sales to real customers, rather than recruitment. But pyramid schemes depend on recruitment of new participants to pay out to existing participants, meaning that the vast majority of participants will ultimately lose money.”

In alleging that Neora directs its distributors to focus on recruiting instead of selling its product, the FTC cited a 2015 promotional video, where one of the company’s top earners remarked that distributors must take three steps to “explode” their business: “Number one. Recruit. Number two: Recruit. Number three: Recruit.” Beyond the recruitment-related allegations, the FTC also contended that Neora and its CEO deceptively promoted certain supplements as a means of curing concussions, chronic traumatic encephalopathy caused by brain trauma and Alzheimer’s disease.

Neora was not the only company targeted in the FTC’s investigation: the Commission also brought lawsuits against Signum Bioscienes and Signum Nutralogix. Unlike Neora, both Signum entities agreed to settle with the FTC. As per the terms of the settlement agreement, both entities will stop making certain claims relating to specific supplements at issue.

On a similar note, last month, the FTC announced it had entered into a $150 million settlement order with AdvoCare International, L.P. and its former chief executive officer. The settlement bans AdvoCare from the multi-level marketing business to resolve the FTC’s charges that the company operated an illegal pyramid scheme that deceived consumers into believing that they could earn considerable income as distributors of health and wellness products. In announcing the settlement, the FTC’s Smith stated: “The FTC is committed to shutting down illegal pyramid schemes like this and getting money back for consumers whenever possible.”

Firing Back at the FTC

But will the FTC be permitted to continue seeking such restitution awards? In Neora’s complaint against the FTC, the company alleges that the FTC had threatened to sue Neora in the Northern District of Illinois since July 2018 under Section 13(b). Neora claims that the FTC only threatened to sue in the District of New Jersey – where it eventually brought the lawsuit – as a result of the Seventh Circuit’s contrary opinion in Credit Bureau Center.

In a detailed “factual background” section in its complaint, Neora covers the “string of federal court losses” suffered by the FTC relating to the extent of its authority to file lawsuits without first exhausting its own administrative process, regarding its authority to recover monetary relief and relating to its authority to seek injunctive relief. Neora’s complaint predicts that “other Circuit Courts” will follow the Seventh Circuit’s lead in limiting the FTC’s enforcement powers to only restraining orders and injunctions under Section 13(b).

Thus, Neora seeks a declaration from the Northern District of Illinois that Section 13(b) does not authorize the FTC to seek “rescission or reformation of contracts, restitution, the refund of monies paid, disgorgement of ill-gotten monies, and other equitable relief” and instead only authorizes the Commission to seek injunctive relief for ongoing conduct.

If Neora succeeds, the FTC’s goal of “getting money back for consumers” would no longer be on the table – at least within courts in the Seventh Circuit. Neora’s hard-hitting approach to challenging the FTC’s claims against it – especially by invoking the ongoing debate over Section 13(b) – certainly bears watching.

Stay tuned for more installments of the “Section 13 (b)log.”

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A Potential New Fight Over FTC's 13(b) Authority https://www.kelleydrye.com/viewpoints/blogs/ad-law-access/a-potential-new-fight-over-ftcs-13b-authority https://www.kelleydrye.com/viewpoints/blogs/ad-law-access/a-potential-new-fight-over-ftcs-13b-authority Sun, 19 May 2019 15:39:06 -0400
On May 17, AdvoCare International LP, marketer of “innovative nutritional, weight-management and sports performance products,” made the extraordinary announcement that it was abandoning its business model. It would no longer engage in multilevel marketing; all sales from here on in would be direct-to-consumer, a single-level marketing compensation plan.

In making this announcement, AdvoCare disclosed that it “has been in confidential talks with the Federal Trade Commission (FTC) about the AdvoCare business model and how AdvoCare compensates its Distributors.” AdvoCare further stated that “[b]ased on more recent discussions, it became clear that this change is the only viable option.”[1] This “change,” effective July 17, will reportedly affect approximately 100,000 distributors.

Wait, what?

Today Law360 published the article “A Potential New Fight Over FTC's 13(b) Authority.” The article provides an analysis of the “existential threat” to the FTC fraud enforcement program.

To read the article, please click here.

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What The FTC Said About Direct Selling In 2018 https://www.kelleydrye.com/viewpoints/blogs/ad-law-access/what-the-ftc-said-about-direct-selling-in-2018 https://www.kelleydrye.com/viewpoints/blogs/ad-law-access/what-the-ftc-said-about-direct-selling-in-2018 Sun, 09 Dec 2018 08:23:58 -0500 Earlier this year, the Federal Trade Commission released new business guidance for direct sellers and multilevel marketers describing the legal principles that it will apply when evaluating practices under the FTC Act. Law360 published the article “What The FTC Said About Direct Selling In 2018,” co-authored by partner John Villafranco and senior associate Donnelly McDowell. The article discusses the FTC guidance along with recent enforcement actions and staff comments, and poses seven questions direct sellers and multilevel marketers should consider as we close out 2018 and look toward the future. To read the article, please click here.

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FTC Releases Business Guidance on Multi-Level Marketing, Memorializing Principles from Prior Settlements on Hot Button Issues https://www.kelleydrye.com/viewpoints/blogs/ad-law-access/ftc-releases-business-guidance-on-multi-level-marketing-memorializing-principles-from-prior-settlements-on-hot-button-issues https://www.kelleydrye.com/viewpoints/blogs/ad-law-access/ftc-releases-business-guidance-on-multi-level-marketing-memorializing-principles-from-prior-settlements-on-hot-button-issues Thu, 04 Jan 2018 22:52:03 -0500 The FTC released today Business Guidance Concerning Multi-Level Marketing, which offers answers to frequently asked questions to assist multi-level marketers in evaluating their business practices for compliance with the FTC Act. The Guidance begins by restating the general standard for pyramid schemes set forth in the FTC’s 1975 Koscot decision and then goes on to address more contentious issues, such as internal consumption, retail sales validation, the importance of refund and buyback policies, and income and business opportunity claims.

The Guidance memorializes and expands on several principles embodied in recent FTC settlements with multi-level marketing companies and makes clear that FTC Staff will look to these principles in assessing whether a company has committed unfair and deceptive acts or practices in violation of the FTC Act. Key points include the following:

  • Internal consumption (i.e., purchases from participants in the business opportunity) may in some cases be permissibly counted as genuine retail sales, but this will be a fact-specific inquiry. The Guidance cites the Herbalife settlement as an example of a marketing plan that appropriately permits payment of compensation based on internal consumption, but “subject to specific limitations and verification requirements.” While emphasizing that the validity of internal consumption will depend on a “comprehensive analysis of a variety of factors,” the Guidance highlights two of the foremost factors FTC Staff will consider: (1) whether the compensation plan incentivizes participants to purchase unrelated to demand (e.g., to qualify for bonuses, advance in the marketing plan or obtain a greater discount); and (2) fact-specific information about a purchase bearing on whether it seems demand-driven (e.g., whether the purchases are within typical consumption habits).
  • Multi-level marketers are not expressly required to retain and validate receipts, but should ensure sufficient documentation to ensure that actual sales are made to real customers. Again, the Commission here emphasizes that there is no single correct way to validate retail sales, and that one approach – or a combination of approaches – may work for one company and not work for another. The Guidance does, however, explain that staff will be most interested in “direct methods” used to verify that retail sales are made to real customers, and that “indirect methods – such as policies requiring participants to attest they have sold a certain amount of product to qualify to receive reward payments – are less likely to be persuasive, with unsupported assertions being even less persuasive.”
  • Buyback provisions are helpful but not dispositive in preventing inventory loading and unlawful conduct. The Guidance affirms that allowing participants to return unsold products can help reduce potential consumer harm by decreasing the risk of losing money for those participants who take advantage of the buyback policy. However, the Guidance cautions that “money-back guarantees and refunds are not defenses for violations of the FTC Act” and that unfair and deceptive acts may still occur notwithstanding the existence of those policies. The section appears intended to address pending congressional legislation, H.R. 3409, which would include a controversial carve-out for multi-level marketing companies with inventory repurchase programs.
  • Claims that convey lifestyles or earnings that are only attained by a small subset of participants are likely to be misleading. The Guidance explains that all business opportunity and earnings claims must be supported by a reasonable basis, and that claims that present atypical earnings as typical will likely be misleading. For example, the Guidance explains that images of expensive houses, luxury automobiles and exotic vacations attained through the multi-level marketing program are likely to be deceptive if those results are not generally achieved by others and properly qualified. Similarly, representations about full-time income and the capacity to “fire your boss” or “become stay-at home parents” are likely to present compliance issues. Even hypothetical scenarios (e.g., you can make $1,000 if you recruit 30 people and sell X products) may pose compliance risks if those hypotheticals make assumptions that are untrue for the typical participant.
  • Developing and implementing a compliance program is important. Finally, the Guidance makes clear that it’s not enough to nominally adopt these policies or even ensure that the company itself complies with the policies. Rather, MLMs should develop and maintain a successful compliance program that includes monitoring of participants to ensure they are also complying with applicable policies and procedures, particularly those related to claims, sales validation, and other consumer protection-oriented policies.
While the principles set forth in the Guidance will not come as a surprise to most MLMs, they serve as an important reminder that MLM compliance inquiries are multi-faceted and full of gray areas. Companies would be well-served to evaluate their business practices and compliance programs in light of the Commission’s new guidance and prior related settlements.

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