Judge keeps alive FTC pyramid scheme lawsuit

The effect of a U.S. Supreme Court decision on the power of the Federal Trade Commission was highlighted in a fight involving a multilevel marketer (MLM) of supplements and skin creams.

Since 2019, Neora LLC has been defending itself against FTC allegations that it’s a pyramid scheme, with a focus on recruiting new distributors or “brand partners.”

The company recently scored a partial victory in the U.S. District Court for the Northern District of Texas. On Aug. 2, Chief Federal District Judge Barbara Lynn granted a request by Neora and its CEO, Jeffrey Olson, to dismiss FTC’s claim for monetary relief against the defendants.

In her decision, Lynn cited the U.S. Supreme Court’s April 22 opinion in AMG Capital Management LLV v. Federal Trade Commission. The high court held FTC can no longer rely on Section 13(b) of the Federal Trade Commission Act to obtain monetary relief.

But the FTC lawsuit remains alive against Neora and its chief executive.

In a motion for judgment on the pleadings, attorneys representing Neora and Olson asked Lynn to dismiss the entire lawsuit. They argued their adversary failed to first commence administrative enforcement proceedings.

The judge rejected the argument that FTC needed to first obtain a preliminary injunction or temporary restraining order through an administrative proceeding before seeking a permanent injunction under Section 13(b) of the FTC Act.

Related:FTC and MLM Neora butt heads in court over pyramid scheme allegations

Lynn found the defendants were relying on “dictum” in AMG Capital, which legal dictionaries basically define as a statement in a court opinion not necessary for the decision, or so-called holding.

“The Supreme Court in AMG Capital made no definitive statement regarding the availability of permanent injunctions vis-a-vis administrative enforcement proceedings, nor any pronouncement as to what constitutes a ‘proper’ case under [Section] 13(b), in which a permanent injunction could be available,” the judge wrote.

Lynn added, “Instead, AMG Capital’s holding is narrow, limited to the question of whether [Section] 13(b) authorizes the FTC to seek and be awarded equitable monetary relief such as restitution or disgorgement. Accordingly, any statement as to the availability of permanent injunctions in AMG Capital is not necessary to the ultimate holding, and therefore, constitutes dictum.”

Neora and Olson further argued the complaint for a permanent injunction must be dismissed because FTC can only obtain relief under Section 13(b) if the agency has reason to believe someone is violating or about to violate the FTC Act. The defendants cited several allegations in the complaint based on past conduct.

Lynn, however, concluded “FTC’s allegations support a reasonable inference of present or future violations by defendants.”

Impact of ruling

Three attorneys with Winston & Strawn LLP weighed in on the significance of Lynn’s ruling.

“The FTC agreed with Neora that AMG Capital foreclosed its ability to seek equitable monetary relief under Section 13(b), and the court had no trouble dismissing the FTC’s requests for consumer redress, including recission or reformation of contracts, restitution, the refund of monies paid, and disgorgement of ill-gotten monies,” Katrina Eash, John Sanders and Chase Cooper wrote in an Aug. 4 blog. “But the court rejected Neora’s other arguments, leaving the FTC with several tools to use against direct sellers in future litigation.”

FTC would have suffered a “major blow” to its enforcement authority—had Neora convinced the judge the agency needed to use the administrative process before requesting a permanent injunction, the attorneys remarked.

Despite the U.S. Supreme Court’s ruling in AMG Capital, they added, “FTC can still make life very difficult for direct sellers, exposing them to expensive and protracted litigation, or worse, injunctions that could fundamentally alter the way the company does business (if it is permitted to continue operating at all).”

Neither FTC nor attorneys representing the defendants provided a comment on Lynn’s order in response to requests for this article.