The Direct Selling Association’s (DSA) Legal & Government Relations Team yesterday issued a memorandum related to last Friday’s Federal Trade Commission (FTC) action against member company Neora.
The memorandum, sent to the DSA Board and executive committees, notes three areas in which FTC criteria or guidance used in the complaint have not been used in previous cases. The introduction of these new areas—unauthorized sales, high attrition rates and independent contractor status—highlights the continuing need for clarity on the FTC’s interpretation of the law and vision of best practices for the direct selling channel.
On November 1, the FTC filed a lawsuit against Neora (formerly known as Nerium), its owner Jeffrey Olson, Signum Biosciences and Signum Nutralogix.
The FTC alleges that Neora and Olson have been operating a pyramid scheme using the Koscot test in which participants pay money to the company in return for which they receive (1) the right to sell products, and (2) in return for recruiting other participants into the program, the right to receive rewards which are unrelated to the sale of products to ultimate users.
The allegations and complaint of unlawful compensation structures are similar to the remarks made by Bureau of Consumer Protection Director Andrew Smith at last month’s DSA Legal & Regulatory Seminar.
Prioritization of Recruitment
The FTC claims the primary basis of earning compensation as a Neora salesperson is through recruitment rather than product sales.
The complaint alleges that minimal income can be made through product sales because there is minimal profit between the prices consumers pay the Brand Partner (BP) and the amount the BP pays to purchase products from the company. The FTC also claims that according to the company’s data, less than 1 percent of rewards are paid on the sales of products to consumers and the retail opportunity is difficult because consumers can purchase products at lower prices on Amazon or other platforms.
DSA has discussed the issue of unauthorized sales as a significant issue for direct selling companies over the past five years. It believes this is the first time the FTC has mentioned unauthorized sales in a complaint.
High Attrition Rates
The complaint alleges that according to the company’s data, Neora had a 92 percent attrition rate between 2012 and 2017. The FTC says that high attrition motivates recruits to make significant upfront purchases before the recruits leave the company or stop making purchases. The complaint states that purchases by BPs in their first three months regularly comprise one-third to one-half of all purchasing volume.
The complaint sets forth that half of BPs discontinue buying products within six months, and only one third buy products after one year. It is the FTC’s view that high attrition means that building and maintaining a downline of any desired size requires a perpetual focus on recruiting and replenishing.
It is DSA’s understanding that the FTC’s use of high attrition rates has not previously been used as evidence for an unlawful compensation structure in recent actions.
Income Representations and Fees
The complaint alleges misrepresentations about substantial income opportunities and the ability to achieve financial independence with Neora. Specifically, these include company brochures and social media posts from Mr. Olson regarding those who have attained millionaire status. The complaint also contains averments regarding the disconnect between the purported opportunity to earn income and the company’s data, which showed that less than 10 percent of BPs made more than they paid in fees and product purchases.
Additionally, since the BPs are not classified as employees, but as independent contractors, they must undertake additional expenses to remit self-employment taxes for health insurance and typical “job-related benefits.”
DSA believes this is the first time the FTC has included the obligations or independent contractor status in a lawsuit.
DSA Potential Engagement
DSA will host a webinar on November 12, updating membership on current conversations with the FTC. The DSA Executive Committee and Board of Directors will be discussing a public statement and potential engagement in the lawsuit including, but not limited to, filing an amicus brief.
DSA’s Code of Ethics Administrator has been alerted to this action and will review the FTC’s allegations regarding Neora.
To read the full DSA memorandum, click here.