In a seven-year battle of David and Goliath proportions, Neora wins its landmark case against the FTC.
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.”
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