CHICAGO — The Federal Trade Commission has responded to a lawsuit from “multi-level marketing” operation Nerium International, arguing Nerium's lawsuit simply seeks to use the courts to sidestep a federal regulatory action against the company for allegedly being a potential pyramid scheme.
In November, Neora LLC, formerly known as Nerium, and its founder, Jeffrey Olson, filed suit in Chicago federal court, seeking a declaration the business isn’t a “pyramid scheme” and barring the FTC from pursuing a “civil administrative enforcement proceeding” against companies like Neora/Nerium it says are considered legal under state laws.
In a memorandum filed Dec. 23, the FTC asked U.S. District Judge Sara Ellis to dismiss Neora's lawsuit. In that filing, the FTC said it also filed an enforcement action in New Jersey and accused Nerium of preemptively suing. The FTC said Neora asked the judge “to short-circuit the ordinary enforcement process and declare that their practices do not violate the law.”
The FTC said although Nerium invoked the Declaratory Judgment Act, it actually can only obtain judicial review through the Administrative Procedure Act. The FTC said Nerium’s complaint fails to meet both of that law’s prerequisites because there isn’t a final agency action to challenge and the company still has a possible remedy in New Jersey. The FTC also said the issue of whether Nerium is or has been a pyramid scheme are factual matters “unfit for a separate declaratory ruling.”
Nerium “can make all their arguments and secure the same ultimate relief they seek in the New Jersey proceeding,” the FTC alleged. “There is simply no need for duplicate litigation. Worse, this case would not resolve the entire controversy because the FTC’s enforcement suit alleges misconduct not raised here, including false advertising and other deceptive conduct. Moreover, plaintiffs admit that they filed this suit to avoid the FTC’s chosen forum of New Jersey — the very type of ‘procedural fencing’ that abuses the Declaratory Judgment Act.”
Under both MLMs and pyramid schemes, recruiters typically target people who respond to claims concerning the ability to earn income by selling products to family and friends, and by seeking other sales consultants to work beneath them in a top-down chain. But under pyramid schemes, the FTC said, those sales consultants primarily earn money from recruiting other sales consultants, not from selling products.
The FTC said Nerium can’t invoke the Declaratory Judgment Act because that law only applies when a complaint is predicated on a different statute. That leaves the Administrative Procedure Act, and since the “complaint is more a general manifesto against the FTC than an attack on any specific — much less final — agency action,” according to the filing, proper protocol is for Ellis to dismiss Nerium’s complaint.
“If filing an enforcement lawsuit could trigger judicial review, every company investigated and sued by the FTC could file its own preemptive suit against the agency,” the FTC said.
Resolving the issue of whether Nerium is a pyramid scheme “necessarily involves examining facts that have not yet been fully developed.”
The FTC also argued Nerium wouldn’t suffer any hardship if its complaint is dismissed because it can still raise defenses to the FTC’s enforcement action in New Jersey. Declaratory relief wouldn’t resolve everything because the FTC’s lawsuit alleges misconduct outside Nerium’s motion to dismiss, such as allegations of false earnings claims and false health and false establishment claims.
Neora/Nerium is represented in the action by attorneys Frank E. Pasquesi, Jena Levin, Ed Burbach, Robert F. Johnson, Jay Varon and Christopher M. Kise, of the firm of Foley & Lardner, with offices in Chicago; Austin, Texas; Washington, D.C.; and Tallahassee, Fla.
Representing the FTC are general counsel attorneys from offices in Chicago and Washington, D.C.