Following the decision, the Commission submits supplemental findings to the Texas court adjudicating the Neora trial
By: David Bland
A federal court in the District of Arizona has sided with the Federal Trade Commission (FTC) in its request to shut down a direct selling company called Success By Health (SBH) for violating the FTC Act by operating as an unlawful pyramid scheme. Led by James “Jay” Noland and three other defendants, SBH, as well as a company called VOZ Travel, marketed coffee, nutraceutical, and travel products through multi-level marketing between 2017 and 2020.
After an 11-day bench trial, the Ninth Circuit Court concluded that, in addition to operating as an illegal pyramid scheme, the defendants made misleading earnings claims while marketing both SBH and VOZ Travel. Furthermore, the court found Noland in contempt for violating a nearly 20-year-old settlement agreement with the FTC stemming from his previous direct selling venture that the Commission targeted as a pyramid scheme.
Case History: ‘A Far Cry from Financial Freedom’
In January 2020, a federal court temporarily shut down Success By Health and froze the assets of the company and its executives via a temporary restraining order (TRO) after the FTC alleged that the company was a pyramid scheme.
According to the Commission, the company had unlawfully taken over $7 million from consumers while less than 2% of participants earned more than they had spent on inventory. The FTC deemed this “a far cry from the defendants’ promises of ‘financial freedom.’”
In the filing, the Commission alleged that Noland and his fellow defendants promised affiliates that commissions exceeding $1 million per month were possible—a claim made even more unreasonable, according to the FTC, by the fact that the company allegedly sold products directly to consumers for the same price paid by affiliates.
Furthermore, the FTC alleged that the company’s “Four Steps to Success” training materials emphasized only affiliate recruitment with no guidance on selling products to consumers.
Preliminary Injunction Granted
The following month, the court granted the Commission’s request for a preliminary injunction against SBH, stating that there is “compelling evidence” that the defendants were operating a pyramid scheme and engaging in deceptive practices in violation of the FTC Act.
In September 2020, the FTC filed an amended complaint with the court requesting a permanent injunction and equitable relief, alleging that the same defendants were operating an additional pyramid scheme known as VOZ Travel.
In the court filing, the Commission alleged that Noland and his fellow defendants were selling travel memberships for at least $1,000 each in exchange for access to a discount travel platform and the ability to earn rewards by recruiting others to purchase memberships. However, the amended complaint alleges that the VOZ booking platform was never launched.
In the September filing, the Commission alleged that the defendants were in violation of two FTC Rules—The Merchandise Rule, which protects consumers who purchase merchandise through mail order or telephone transactions, and the Cooling-Off Rule, which protects consumers making purchases outside of a seller’s regular place of business.
Commission Seeks Summary Judgment
On March 12, 2021, the FTC filed a motion seeking summary judgment as to liability against all of the defendants. In the 35-page motion, the Commission detailed their claims that both SBH and VOZ Travel had violated the FTC Act by operating as a pyramid scheme, making false income claims, and providing affiliates with the means to violate the FTC Act. The Commission also accused the companies of violating the two FTC rules.
On May 18, 2021, FTC Commissioners requested that the Court grant them a preliminary injunction with asset freeze and receivership due to the defendant Jay Noland’s alleged unlawful activity, including his supposed violation of a 2002 settlement order with the FTC.
The order barred him from engaging in future pyramid schemes, making deceptive earnings claims about any future multi-level marketing program and misrepresenting the benefits that a MLM participant could receive.
On June 23, 2021, the FTC filed a motion for summary judgment on monetary relief against the defendants in the amount $1.16 million. The Commission stated in the motion that Section 19 of the FTC Act enabled them to seek monetary relief to redress consumer harm caused by the defendants’ rule violations, namely the Merchandise and Cooling-Off Rule violations.
On Aug. 30, 2021 the Court granted the FTC’s request for sanctions against individual defendants for the intentional spoliation of evidence. After advising Defendant Jay Noland to preserve documents relevant to its investigation, the Commission alleged that the defendants began using encrypted messaging platforms called Signal and Protonmail to communicate with each other. It was further alleged that Noland used these encrypted accounts to provide a script for third-party witnesses.
Defendants Found Liable
On May 11, 2023, in a detailed and meticulously reasoned 131-page order, a bench trial in the U.S. District Court of Arizona found the defendants liable for several violations. Although the FTC originally sought monetary damages of $8 million at the outset of the case, the April 2021 Supreme Court decision on the AMG Capital Management case ended the FTC’s powers to seek equitable monetary relief such as disgorgement or restitution. Therefore, the Commission clarified its monetary remedies-related requests to only seek remedy for SBH’s Rule violations and not the unlawful pyramid motions and earnings claims.
The Court identified several outstanding issues to be resolved by the bench trial.
The first issue was establishing whether or not SBH acted as a pyramid scheme. The court established that SBH’s “six-phase” compensation plan required only recruiting, and not sales to ultimate users, in order to earn “any meaningful amount of money.”
Citing both the Koscot test (based on FTC v. Koscot Interplanetary, 1975) and BurnLounge case (2007), the Court concluded that “…the FTC met its burden of establishing that ‘the rewards [SBH] participants received in return were largely for recruitment, not for product sales.’”
A second issue was to establish that the defendants made misleading earnings claims for both SBH and VOZ Travel. Although the Court had previously issued a summary judgment in the FTC’s favor with respect to VOZ, it did not grant a summary judgment for SBH at the time. This judgment was passed by the Court after the bench trial.
Referencing SBH’s claims that affiliates would earn substantial, life-changing money and financial freedom, the Court cited FTC
v. Cyberspace.com (2006) and determined
that despite the defendants’ use of
“disclaimers,” the net impression was that affiliates could reasonably expect to earn these substantial commissions.
Court Awards Minimal Damages for Rules Violations
The FTC requested over $1.1 million in monetary remedies for SBH’s violations of the Merchandise and Cooling-Off Rules. However, the court found that, while the defendants did violate the rules, the Commission failed to justify the full damage amount for the Merchandise Rule violation due to its failure to adequately assess the value of delayed or missing product shipments. The Court awarded damages of only $6,829 for the Merchandise Rule violation.
The Court declined to award any damages at all for the “blatant” violations of the Cooling-Off Rule, as the FTC failed to explicitly show that the Rule violation was directly related to the consumers’ financial loss.
Defendants Ordered to Pay Millions for Contempt Violation
In what turned out to be the most financially impactful part of the ruling, the bench trial determined the extent to which the defendants violated a 2002 permanent injunction stemming from Noland’s internet-based MLM called Bigsmart, which the FTC sued for being an unlawful pyramid scheme.
In the resulting settlement, Noland and his associates were barred from engaging in future pyramid schemes and from making misleading earnings claims while participating in multi-level marketing ventures.
By making false representations while operating SBH and VOZ Travel as a pyramid scheme, the Court determined that the FTC successfully proved the underlying contempt violations with “clear and convincing evidence.”
The Court granted the Commission’s request for the imposition of a $7.3 million compensatory civil sanction that will be jointly owed by the defendants.
Commission Submits Findings for Neora Case
At the conclusion of the bench trial, the FTC submitted a Notice of Supplemental Authority to the U.S. District Court of Texas that is adjudicating the ongoing FTC case against Neora, a direct selling company headquartered in Dallas, Texas, that the FTC is suing as an alleged pyramid scheme.
The purpose of this submission is to bring to the attention of the Texas court the relevant legal authorities and information that was established in the Noland decision.
In the filing, the Commission noted four components from the Noland decision that it believes should have a bearing on the ongoing Neora case.
- The credibility and persuasiveness of two FTC witnesses, which the Arizona Court found to be credible and relevant to its liability findings.
- The proper test to apply for determining if an MLM is a pyramid scheme. The FTC points out that in the Noland decision, the Court evaluated whether participants in the business could succeed through recruitment only, without customer sales. The Court also noted the MLM’s emphasis on a lack of safeguard policies, the use of false product demand, and the high percentage of affiliate incentives to “buy rank” through the purchase of products.
- The proper test to apply and evidence to consider when evaluating whether an MLM has made misleading income claims. The Commission’s Notice referenced the Arizona Court’s findings that the “Defendants’ income claims were false in theory and in practice.”
- Marketing and training materials were used to spread the defendants’ false income claims, which violates the FTC Act for furnishing the means and instrumentalities to mislead others.
Whether or not the FTC’s Supplemental Notice to the District Court of Texas will make a difference in the Neora case remains to be seen. Regardless, the Commission appears intent on continuing its targeting of direct selling companies that it believes are placing a higher priority on recruitment over customer sales.
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