While Neora’s win was a decided victory, there was still question as to whether the FTC would choose to appeal the ruling. As of this week, the deadline for submitting a notice of appeal has now passed, solidifying Neora’s victory and the new legal precedent their case now presents.  

“This is the first time that a direct selling company has ever defeated the FTC’s pyramid scheme claims in a court trial.” declared Ed Burbach, Chair of Foley & Lardner’s State Attorneys General Practice.

“Neora’s resounding victory against the FTC is an important, preliminary win for the industry that rejects many of the FTC’s theories for attacking legitimate direct selling companies,” said Katrina Eash, Partner at the Winston and Strawn Law Firm.  “Neora fought the battle for direct sellers everywhere, proving that when you build an ethical company and you’re willing to give everything you’ve got to defend that company and its distributors, you can do direct selling right.” 

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In a ruling that will surely be referred to as the new legal precedent, Neora has emerged victorious from its lengthy battle with the Federal Trade Commission (FTC).

After seven years of investigation, four years of litigation and three years of negotiations, during which the FTC insisted on a nearly complete erasure of the company’s multilevel marketing structure, the court has rejected all of the FTC’s claims against Neora.

“This is the first time that a direct selling company has ever defeated the FTC’s pyramid scheme claims in a court trial.”

–Ed Burbach, Chair of Foley & Lardner’s State Attorneys General Practice

“The FTC had a pre-conceived notion of who Neora was, and despite undisputed data proving they were wrong, they decided to proceed with an unfounded narrative,” said Deborah Heisz, Neora Co-CEO. “Their entire case revolved around one thing: their opinion that paying multiple levels of people commission on a product sale to a customer is paying for recruiting and not for product sales. That is simply not true and not the law.”

The New Precedent

For more than four decades, the FTC has adopted the Koscot Test, which identifies pyramid schemes as those who reward recruiting alone by paying commissions unrelated to the sale of a product to ultimate users. But the laws surrounding direct selling can be vague and the FTC leaned into this during the trial, with their expert witness stating under oath that “there is no test, mathematical or otherwise” to apply to determine an “overemphasis” on recruiting in direct selling.

With this lack of clarity, even direct selling companies who design their infrastructure to prioritize product sales, like Neora did from the very beginning, are not immune from FTC scrutiny.

“Neora’s resounding victory against the FTC is an important, preliminary win for the industry that rejects many of the FTC’s theories for attacking legitimate direct selling companies.”

–Katrina Eash, Partner at the Winston and Strawn Law Firm

“Direct sellers have been operating under a shroud of uncertainty for decades, wondering if they were going to be the next target of the FTC’s ever-changing interpretation of what it means to be a pyramid scheme under Koscot and the rules governing improper claims,” said Katrina Eash, Partner at the Winston and Strawn Law Firm. “Neora’s resounding victory against the FTC is an important, preliminary win for the industry that rejects many of the FTC’s theories for attacking legitimate direct selling companies. It’s unclear what the FTC will do next, whether the FTC may choose other jurisdictions it deems more favorable for future suits, or whether the FTC will continue to experiment with other weapons in its arsenal, such as its rule making authority. But one thing is for certain, Neora fought the battle for direct sellers everywhere, proving that when you build an ethical company and you’re willing to give everything you’ve got to defend that company and its distributors, you can do direct selling right.“

Just as the Koscot test and Amway’s win against the FTC more than 40 years ago shaped the legal landscape for the direct selling industry, so too will Neora’s hard-fought win determine how the FTC can legally pursue companies in the future.

“This is the first time that a direct selling company has ever defeated the FTC’s pyramid scheme claims in a court trial,” said Ed Burbach, Chair of Foley & Lardner’s State Attorneys General Practice and Lead Counsel for the trial. “It is also the first significant victory of its kind since Amway’s 1979 administrative law defeat of the FTC.”

The Future of the Industry in the Balance

The words “no evidence” consistently appeared in response to the FTC’s allegations, but the FTC’s bottom line during the trial was this: Any distributor who purchases product but does not earn commission is being harmed. What’s more, in the FTC’s eyes, those product purchases were considered a business expense, or net loss, regardless of whether the individual behaved as a customer. But this assertion does not take into account the number of reasons people choose to sign on as a distributor, like product discounts or early access to sales.

“We really had no choice but to fight.”

–Jeff Olson, Neora Founder and CEO

To support its claim, the FTC called on an expert behavioral economist who stated that Brand Partner purchases could never be considered ultimate user sales. The court fully rejected the testimony, saying it consisted of “rigid theoretical assumptions” that were not “borne out in reality” and stated that “it cannot be simply assumed that the 70 percent of Neora Brand Partners who never made a sale or earned a commission are disappointed victims of an illegal pyramid scheme simply because they never made a sale, recruited another Brand Partner, or earned a commission.”

“The fact that the vast majority of Neora’s product sales are to satisfy genuine consumer demand, and not as part of a business opportunity, fatally undermined the FTC’s pyramid scheme claim,” said Maureen Ohlhausen, Chair of the Global Antitrust & Competition practice for Baker & Botts law firm, and a former FTC Commissioner who advised Neora during mediation discussions with the FTC. “The court looked to the FTC’s own previous guidance about pyramid schemes, which distinguished between purchases made to satisfy personal demand and those that are simply incidental to the business opportunity and recruitment plan. Because 90 percent of Neora’s revenues come from ultimate user sales, the court determined that Neora does not operate like a pyramid scheme because it does not focus on recruiting as opposed to sales and does not depend on the continual recruitment of new members for its continued existence.”

Neora’s executive team now believes the agency’s commitment to these allegations wasn’t just an attempt to topple their company, but rather a way to target the entire channel and maybe even the independent contractor status as a whole.

“We didn’t just protect our employees and Brand Partners; we protected other industries,” said Jeff Olson, Neora Founder and CEO. “We really had no choice but to fight. I have been in direct selling for nearly 40 years, and my goal when we started Neora 12 years ago was to design a business around high-quality products and provide an opportunity to our Brand Partners without any of the ‘gotchas’ that can show up in the direct selling business. And that is exactly what we did. This was a hard-fought victory for our Brand Partners, employees and direct selling overall.”

“Before we made our first sale 12 years ago, we spent a lot of intentional time defining our core values,” said Amber Olson Rourke, Neora Co-Founder and Chief Sales & Marketing Officer. “A company’s core values are words on a paper until life presents you with hard choices. It is in those moments where you prove if you are going to live out your core values at all costs. We never wavered in making this decision to fight because any other decision would mean walking away from our core values, and the Brand Partners who helped build this company.”

Protect through Preparation

How can we protect our company from scrutiny? That question is at the top of direct selling executives’ minds right now. For Neora, a foundation of transparency and what the court described in its ruling as a “rigorous” and “robust” compliance program, as well as “proactive efforts” to prevent misleading representations about potential income or product claims, made a significant difference in the outcome of their trial.

“I am privileged and proud to have been a part of fighting the FTC on behalf of Neora, our Brand Partners and ultimately the direct selling channel, which I love.”

–Deborah Heisz, Neora Co-CEO

But this multiyear battle is a reminder, Neora’s executive team says, that there is no one tried and true template for staying out of the FTC’s crosshairs. Instead, they advise other executives to build with integrity, implement a strong compliance program and develop true product demand.

Then—be prepared to defend it.

“Every commission we have paid was because of the sale of a product, and almost 80 percent of our total revenue comes from non-distributor customers,” Jeff Olson said. “They had that data for two and a half years before we sued them. We were able to do that because we set the company up right from Day One.”

A Future Worth Fighting For

The collateral damage from a fight with the FTC is high, even when it ends in a landslide win. The looming outcome of the case has been a significant distraction that required immense time and financial resources and created a hefty mental and emotional burden for the executive team. But Neora’s customer base has been loyal, helping the company record some of its highest growth years even amid the years-long trial.

The FTC lost this case but, in many ways, it is still getting what it wants. The channel is much more product focused than it was a decade ago, and the quality of those products is increasing.

Recruitment models are no longer the norm and the industry’s signature multilevel model is being remodeled to include the affiliate and customer acquisition approaches. But for all of these changes, Neora’s victory has sent a clear message to the more than 1,000 direct selling companies in the US: direct selling is a legal and protected path to entrepreneurship.

“I am privileged and proud to have been a part of fighting the FTC on behalf of Neora, our Brand Partners and ultimately the direct selling channel, which I love,” Heisz said. “I am not surprised we won and that the courts upheld existing law. We knew from the start that we could win and that this was a fight worth fighting. We operate a good company that follows all of the FTC guidance and case law that pertains to direct selling. It was clear to us that the FTC was using our lawsuit, and others in our space, to attack the industry. I am so glad we had the facts on our side.”

“We are more excited than ever to share the story of Neora and the impact we have made,” Amber Olson said. “We had a historic launch in this industry, and our next chapter will make an even bigger, lasting impact.”

Judgement Summary

The Court confirmed Neora’s business model is legitimate

• 90 percent of total product sales in 2021 went to customers estimated for personal use
• There is a legitimate and substantial customer demand for Neora’s products
• 75-80 percent of sales are made to customers who have no incentives tied to the compensation plan
• Neora’s profits do not hinge on recruitment of new participants

The Court acknowledged the value of being a distributor—even without earning commission

• In light of discounts, Brand Partners may recoup their enrollment cost
• Receiving valuable goods in return for money does not characterize an expense as a loss

The Court deemed Neora’s compliance program effective

• Neora showed evidence of a “rigorous compliance program”
• Neora made “proactive efforts” to stop problematic Brand Partner claims
• There was no evidence of “defects” or “blind spots” in Neora’s compliance program

The post Victory for Neora first appeared on Direct Selling News.

Neora’s ultimate landmark victory, during which the courts rejected all of the FTC’s claims, is a reminder of the importance of clear legal standards. 

“We hope yesterday’s decision in the Neora case will help provide clarity about the direct selling business model to regulators, consumers, and the public,” said Joseph N. Mariano, DSA President and CEO. “The court cited the company’s robust inventory repurchase agreement and strong compliance efforts that all DSA members abide by. The decision reinforces the importance of these principles as core tenets of consumer protection and Neora’s adherence to them as part of their membership in the association.” 

The post DSA Applauds Neora’s Compliance Efforts  first appeared on Direct Selling News.

“We are thrilled with the judge’s ruling, which affirms what we have known all along – that Neora is an ethical company,” said Deborah Heisz, Neora’s Co-CEO. “Our brand partners have worked diligently to build their businesses and this ruling is a testament to their hard work and dedication. We are proud to be part of an industry that empowers entrepreneurs – especially women – and creates real opportunities for success.”

Heisz continued, “Throughout this experience the FTC tried to strong-arm us into agreeing to impact the livelihood of tens of thousands of our brand partners. They didn’t want us to pay any commission to anyone other than the person making the sale, preventing us from rewarding our sales leaders in any way. There is no case law, rules or regulations that support the FTC’s demands. We would not acquiesce and instead chose to fight for the rights of our brand partners and became the first and only direct sales company to take this issue all the way through federal court with a favorable ruling.”

A Powerful Precedent

Neora’s executive team believes this government overreach poses a considerable threat to American entrepreneurs, but that this landmark victory will set a powerful precedent for protecting the rights of legitimate direct selling companies, as well as small business owners in other industries.

“When we proactively filed suit against the FTC on November 1, 2019, challenging the overreach of the FTC, we knew we would have a battle on our hands, but we were supremely confident that the facts and data would show the truth,” said Jeff Olson, Neora’s Founder & CEO. “Living out our mission statement of making people better sometimes means taking the road less traveled, making the hard choice to defend what is right at all costs. This isn’t just a win for our industry, it’s a win for American entrepreneurship.”

Olson continued, “Because Neora has always been built on a solid foundation with science-based products that bring true value to the market; a massive non-distributor customer base that represents nearly 80 percent of the company’s total revenue; and a modern ecommerce sales system that removes the needs for brand partners to carry inventory or incur unnecessary extra costs, we were able to take on and win this important fight.”

This multiyear effort has been a tangible illustration of Neora’s commitment to defending its brand partners through integrity, and the company remains dedicated to continuing and expanding its already robust approach to accountability and transparency.

Staying the Course. Growing Forward.

Heisz shared that the vast majority of its field leaders stayed with the company throughout the course of this trial and have even experienced some of their highest growth periods. All the while building an even stronger customer base because of its strong product portfolio. In the wake of a landmark win, she is even more optimistic about the future of Neora.

The post Neora Wins Landmark Case Against FTC first appeared on Direct Selling News.

This proposed rule would prohibit the sale of fake consumer testimonials, review hijacking, purchasing positive or negative reviews, company-controlled review websites, the sale of fake social media markers like views or followers, and illegally preventing negative reviews through threats or intimidation. 

“Our proposed rule on fake reviews shows that we’re using all available means to attack deceptive advertising in the digital age,” said Samuel Levine, FTC Director of the Bureau of Consumer Protection. “The rule would trigger civil penalties for violators and should help level the playing field for honest companies.” 

The post FTC Cracks Down on Fake Reviews and Testimonials with Proposed Rule  first appeared on Direct Selling News.

Soon after the 2021 ruling, the FTC embarked on a blanket letter campaign, issuing notices to more than 700 companies, including a large number of direct selling brands, saying it would “be ready to hold them responsible with every tool at its disposal” for their alleged use of deceptive endorsements, specifically income and earnings claims. Last month, the agency also announced it was proposing changes to impose stricter regulations around auto-renewal programs. 

These rapid changes are believed by some legal experts to be an effort on the FTC’s part to expedite rulemaking around its own enforcement authority and the broadening of Section 5(a), as well as to bring its cases before an FTC-appointed judge. 

In a unanimous ruling last week, the Supreme Court stated that the FTC has limited powers. In Axon v. FTC and SEC v. Cochran, the highest court looked at the constitutionality of both the prosecutorial and judicial functions residing within the same agency. MLM Attorney Brent Kugler wrote in an online post: “Both defendants challenged the constitutionality of having their cases decided by administrative law judges employed by the agencies bringing the enforcement actions against them. In its decision, the Supreme Court held that people and businesses subjected to administrative proceedings at the FTC (or SEC) can seek to enjoin those proceedings by suing in District Court without first having to exhaust appeals in the administrative tribunal run by the agencies bringing the enforcement action.” 

The post Supreme Court Rules to Limit FTC Powers  first appeared on Direct Selling News.

“I have failed repeatedly to persuade Ms. Khan and her enablers to do the right thing, and I refuse to give their endeavor any further hint of legitimacy by remaining,” Wilson wrote in her opinion essay. “Accordingly, I will soon resign as an FTC commissioner.” 

Wilson, who was appointed by President Trump in 2018, has publicly criticized Khan, who was appointed by President Biden, for leading the agency to block a merger proposed by Meta as well as the proposal to ban noncompete clauses in employment contracts. Khan has pushed back saying the agency has long been too permissive with mergers, allowing companies like Google and Amazon to become goliaths who swallow competition. 

The post FTC Commissioner Resigns, Citing Chairman’s “Disregard for the Rule of Law”  first appeared on Direct Selling News.

“Overlapping rulemakings are untenable for the millions of direct selling micro-entrepreneurs in the United States,” said DSA President Joseph N. Mariano. “Over a decade ago, when the FTC considered broadly sweeping direct sellers into the Business Opportunity Rule, over 17,000 direct sellers wrote the commission and said the proposed rule would be bad for their small businesses. Those concerns remain the same over a decade later. The requirements under the current rule remain burdensome or superfluous with the rise of technology and the internet. In fact, direct sellers have instituted new industry-wide measures to provide even more confidence to customers and salespeople based on the suggestions of senior FTC officials.”

The post DSA Submits Comments Regarding the FTC’s Proposal to Update the Business Opportunity Rule  first appeared on Direct Selling News.

Noncompete clauses, as described by the commission, can be a “widespread and often exploitative practice that suppresses wages, hampers innovation, and blocks entrepreneurs from starting new businesses.” The commission estimates that stopping the practice of noncompete clauses could increase wages by almost $300 billion per year and create new career opportunities for 30 million Americans. 

Under this proposed rule, it would be illegal for employers to enter into or attempt to enter into a noncompete with a worker; maintain a noncompete with a worker; or represent to a worker, under certain circumstances, that the worker is subject to a noncompete. 

“The freedom to change jobs is core to economic liberty and to a competitive, thriving economy,” said FTC Chair Lina M. Khan. “Noncompetes block workers from freely switching jobs, depriving them of higher wages and better working conditions, and depriving businesses of a talent pool that they need to build and expand. By ending this practice, the FTC’s proposed rule would promote greater dynamism, innovation, and healthy competition.” 

For direct selling companies, this ban would mean corporate leaders would have to give their blessing to independent distributors who want to represent more than one company at a time—an already common practice that is not always company sanctioned. 

The post FTC Proposes Ban of Noncompete Clauses  first appeared on Direct Selling News.

The new maximum civil penalty has increased from $46,517 to $50,120 for violations of Sections 5(l), 5(m)(1)(A), and 5(m)(1)(B) of the FTC Act, Section 7A(g)(l) of the Clayton Act, and Section 525(b) of the Energy Policy and Conservation Act. 

For violations of Section 10 of the FTC Act, the maximum penalty has risen from $612 to $659. 

Maximum penalties for violations of Section 814(a) of the Energy Independence and Security Act of 2007 increased from $1,323,791 to $1,426,319. 

The post FTC Raises 2023 Civil Penalty Amounts  first appeared on Direct Selling News.