When the Supreme Court ruled unanimously against the FTC in AMG Capital back in April of this year, many flagged this decision as a watershed moment in FTC enforcement. But this is the law we are talking about, and nothing is ever black and white. If it were, there would be fewer lawyers and that would be horrible, right? On the one hand, the AMG Capital decision was touted as supporting scammers who seek to defraud unwitting consumers. On the other, it was initially received as delivering a lifeline to industries and entities that have been wrongfully ensnared in the FTC’s ever-expanding spiderweb. Since the decision, we have had clients approach us thinking that this sent the all clear message. The reality is far from so simplistic.
Here at Thompson Burton, we believe the best way to set our clients up for success is to make it abundantly clear that the law in the network marketing industry is far from an exact science, even more so than one may imagine when they think of the law in general. Cases exist but because the FTC brings these cases on a case-by-case basis, a cookie-cutter approach is not an appropriate starting point. Regulatory agencies provide guidance, but such guidance has not been entirely helpful throughout the years, from ambiguous to outright contradictory. As a result, we seek to analyze every angle the FTC and its sister agencies approach an issue. This enables us to provide the greatest advice for a particular issue when assessing a client’s organizational structure to help them avoid even the appearance of impropriety that may incentivize a regulator to come knocking. For this reason, we seek to analyze all the different angles the FTC and its sister agencies approach an issue to assess a client’s organizational structure to avoid even the appearance of impropriety that may incentivize a regulator to come knocking. It may not seem to be common sense but in the world of politics, it is much easier to walk backward than forwards.
The Supreme Court presented the essence of the AMG Capital decision within the decision’s first paragraph in writing the following: “The question presented is whether [Section 13(b)] authorizes the [FTC] to seek, and a court to award, equitable monetary relief such as restitution or disgorgement. We conclude that it does not.” This conclusory and facially unambiguous statement was celebrated by many as the Supreme Court’s clear denouncement of how the FTC has been putting to use this particular provisional power found nowhere within the text of the law.
However, the buck does not stop here with many defendants attempting to test their luck to see how far they can expand the scope of the AMG Capital decision to their own benefit. Unfortunately for them, courts across the country are narrowing the decision’s scope. The establishment of 13(b)’s limitations only narrowed the method by which the FTC may attack, it did not completely eliminate their options. This distinction is imperative and something we immediately bring to the attention of current and prospective clients. We do not make these statements as a way to support those who wish to defraud consumers or other violative conduct. The fact of the matter is that the mere appearance of violative conduct can be to a company’s detriment. The cost of proving otherwise and taking the risk of extended litigation puts the onus on the company whether they are innocent or not. The time it takes to prove it can result in insolvency or reputational harm, among other results. If you think you have the funds to outlast the federal government, just look to the Advocares, Vemmas, and Herbalifes.
To illustrate this point with a real-world example, look no further than to the ongoing litigation between the FTC and Neora as we have discussed this particular case and continued to follow it for some time. In light of AMG Capital, Neora made three arguments before the district court in an attempt to put a complete end to the FTC’s case against them: (1) the FTC did not first initiate administrative proceedings before filing for an injunction; (2) the FTC did not allege that Neora is or is about to violate the law but rather that they did in the past; and (3) AMG Capital’s limitations of 13(b) requires the dismissal of the FTC’s requests for forms of equitable monetary relief. The district court agreed with Neora as to (3) as it related directly to the Supreme Court’s ultimate conclusion. But the court found dismissal of (1) and (2) improper when diving into the specifics of AMG Capital and providing it with a narrower interpretation.
The main decision that may catch some by surprise would be (1) where an administrative proceeding is not necessarily required in order to proceed for a preliminary injunction as multiple courts have reached this same conclusion. In a nutshell, the FTC still has the ability to litigate a company to nonexistence and request an injunction to either completely alter the company’s operations, i.e., Herbalife and Vemma retail sales requirements, or completely freeze the company from operating all together. The 13(b) provision, as applied, was never found in the text of the law, yet the FTC used it for decades. It would be naïve to think similar theatrics are merely in the past.
The less important and less surprising conclusion from this particular case against Neora would be the court’s dismissal of (2). Without going into the specifics, the manner in which the FTC addressed the past conduct, in conjunction with the reasonable conclusion that misleading and deceptive income and health claims still exist, was sufficient to keep the allegations alive for another day. This is why strong compliance measures should be implemented from the start and not piecemealed together as issues may arise. These are simple fixes, so why not invest in yourself from the start? In the precarious instance that a regulator comes knocking, the compliance is there and you’ll be ready to fight for the legitimacy of the company you worked so hard to create.
Whether a startup or an established entity, investing in your company to set yourself up for success is undeniably a wise decision. A small investment now has the potential to pay massively in the future. Our firm is here to provide sound legal advice as to the nuances within this industry as we continue to pull from our experiences to assist our clients in establishing a strong compliance framework to withstand the test of time within this constantly evolving field.