ADventures in Law

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If we look at recent Supreme Court decisions, the Federal Trade Commission (FTC) has a pretty dismal record, with well-publicized losses in <em>AMG</em> and <em>Axon</em>. At the district court level, however, things are quite different; we come across very few FTC losses. Although there are some recent litigations that are raising questions about the bounds of the FTC Act and other laws that the agency enforces, we are generally seeing courts being at least receptive to many of the theories raised by the agency. (It remains to be seen whether and how all of this will shake out.)

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But a recent decision from a district court in Texas is a loss that warrants a closer look – particularly on the issue of when a company is responsible for representations made by its distributors.

At the case’s core, the <a href="https://www.ftc.gov/news-events/news/press-releases/2019/11/ftc-sues-multi-level-marketer-neora-formerly-known-nerium-alleging-it-operates-illegal-pyramid">FTC alleged</a> that Neora (formerly known as Nerium) – a multilevel marketing company – was operating as a pyramid. Whether and how something is deemed a pyramid is a fairly specialized inquiry – but a simplification of the standard is that the court looks at whether the compensation plan at issue provides compensation to distributors that is “unrelated to sale of the product to ultimate users.” For a variety of reasons, the court held that the FTC had not met its pyramid burden.

Where this gets interesting for folks who aren’t particularly interested in pyramid law, is how the court addressed the earnings claims and product efficacy claims that were made by Neora distributors, who are called “brand partners.” The FTC had alleged that Nerium (and its CEO) was on the hook for statements made by its brand partners, including allegedly unsubstantiated social media posts about the ability to earn a lot of money through Nerium and about the health benefits of the products being marketed.

As you probably know, the FTC has been quite vocal for some time about the need for companies and platforms to closely monitor and control statements that others may be making about their products and services. In this case, before delving into the substance of the statements made by the distributors, the court asked whether Neora was necessarily responsible for the claims made by its distributors. The court asked: Are the distributors Neora’s agents such that the company would be liable for their representations? And in answer to that question, the court said that no, they are not.

Now before you get excited and decide that you can happily start to ignore what your distributors (or influencers or others) are saying about your products – please don’t do that. This is just one case – with a particular set of facts that is ultimately decided based on what the FTC presented (and didn’t present) at trial; facts in other cases will vary tremendously. As someone who spent a lot of time at the FTC, I can guarantee that the agency will learn from and compensate to address whatever may have gone wrong in this case. And further, the company’s robust compliance programs contributed significantly to the court’s findings.

So how did the court reach the conclusion that the distributor representations here should not be attributed to Neora? It examined whether the law would find that there was in fact an agency relationship between the company and its distributors. The question becomes: Did the distributors have actual or apparent authority to act on behalf of the company? The court says that there was not sufficient evidence showing that such authority existed. “Whether a reasonable third party would believe the agent had authority to do a particular act, and whether the belief is traceable to a manifestation of the principal, are questions of fact.”

The court found insufficient evidence of an agency relationship – whether actual or apparent – and therefore Neora was not responsible for the challenged distributor statements. The FTC argued that Neora controlled and restricted many aspects of what distributors would say and how they could conduct their business. But the court found that although Neora provided guidelines and instructions, “it cannot control whether, how or when [distributors] choose to conduct business, weighing against a finding of control.” The court also dismissed the FTC argument that the company held out the distributors as its sales force and required consumers to make purchases through them. The failing here, according to the court, was that the argument was based on attorney argument and not record evidence, which of course leaves open the question of what the result would have been had the FTC proffered relevant evidence on this point.

The decision also contains a pretty strong plug for engaging in robust compliance programs. The court took notice of Neora’s “rigorous compliance program and proactive efforts Defendants take to curb problematic statements ... through training efforts, approved marketing materials, and enforcement of the relevant policies.” Further, there is a recognition that no compliance program is perfect, and the FTC failed to identify “specific defects and blind spots” in the compliance program.

So what happens next? Well, this is a pretty significant loss, and on multiple priority FTC issues. The first question to be pondered by the agency is: Do they appeal this or perhaps move to reconsider? One might assume an appeal is in order, but an appeal to the Fifth Circuit Court of Appeals may not be what the agency wants here given that circuit’s reputation. Sometimes it is better to accept an unfavorable district court decision than to trade it in for what might be lurking behind door number two.

District Court Decision Digs Deep into the FTC and Agency Law