Not Backing Down

The FTC v. AdvoCare Litigation Continues in a Texas Federal Court as Two Former AdvoCare Distributors Mount Challenge to FTC’s Enforcement Authority.

Largely unnoticed in the publicity surrounding the FTC v. AdvoCare lawsuit in October 2019 was the fact that two former AdvoCare distributors named in FTC’s complaint refused to settle with the FTC. In a filing that could have wide-ranging implications for the MLM industry, former AdvoCare distributors Danny and Diane McDaniel instead challenged FTC’s statutory authority to bring suit in federal court seeking monetary relief.

Shockwaves reverberated through the MLM industry after the October 2019 announcement that former MLM giant AdvoCare and former AdvoCare CEO Bryan Connolly had agreed to a lifetime ban of MLM business activity and payment of $150 million to settle FTC claims that AdvoCare operated as an illegal pyramid scheme and engaged in misleading and deceptive business practices. At the same time, the FTC also announced a settlement with former AdvoCare distributors Carlton and Lisa Hardeman in which the Hardemans received a lifetime ban from MLM activity and were ordered to liquidate their real estate holdings to satisfy a multi-million dollar restitution order.

Could Establish New Precedent

Rather than settle with the FTC, the McDaniels decided to fight back by challenging the FTC’s enforcement authority to sue for monetary relief. A ruling on the McDaniels’ challenge by the U.S. District Court for the Eastern District of Texas is expected later this year. The McDaniels’ challenge to FTC enforcement authority follows two 2019 decisions by federal appellate courts in the 3rd and 7th Circuit Court of Appeals limiting FTC’s authority under Section 13(b) of the FTC Act. If the McDaniels prevail in their challenge, it will likely establish new precedent in the 5th Circuit Court of Appeals, further limiting the FTC’s enforcement authority to pursue overzealous enforcement actions that historically have crippled or wiped out MLM companies.

The McDaniels assert two arguments challenging the statutory authority relied upon by the FTC in seeking monetary damages from AdvoCare and the distributor defendants. First, they argue that the FTC’s authority to file an action in federal court is expressly limited to situations where the FTC “has reason to believe….that a person, partnership or corporation is violating, or is about to violate, any provision of the law…..”

FTC’s lawsuit against AdvoCare, the Hardemans and the McDaniels in October 2019 followed a May 2019 announcement by AdvoCare that it was disbanding its MLM compensation plan because such action was the company’s “only viable option” in the wake of discussions with the FTC. AdvoCare’s decision to drop its MLM business model abruptly ended the independent businesses of thousands of AdvoCare distributors, including long-time distributors like the McDaniels who built large sales organizations over a period of years.

Arguing FTC Lacks Authority

The McDaniels argue that the FTC lacked authority to bring its October 2019 lawsuit because AdvoCare had previously abandoned its MLM compensation structure in June 2019 and the FTC has plead no facts showing that the McDaniels are continuing to engage in or are about to engage in the MLM business activity that the FTC alleges in its complaint is not in compliance with the law. In support of their argument, the McDaniels cite a 2019 decision by the 3rd Circuit Court of Appeals in FTC v. Shire Viropharma, in which the federal appellate court held that Section 13(b) does not permit the FTC to bring a claim based on past conduct without some evidence that the defendant “is” committing or “is about to” commit another violation.

In response to the McDaniel’s challenge, FTC argues that whether the Commission has “reason to believe” a person is violating or about to violate the law to allow FTC to invoke its enforcement authority under Section 13(b) is a determination left to the Commission’s “discretion.” It is hard to fathom how the FTC, in its “discretion” could plausibly allege that the McDaniels “were” committing or “about to commit” a violation of the law given that that AdvoCare had previously ended its MLM compensation structure and the McDaniels had not engaged in any MLM business activity with any other company at the time the FTC filed its lawsuit.

The McDaniels’ second argument challenges FTC’s authority under Section 13(b) to seek large monetary awards similar to those recovered by the FTC from AdvoCare and in previous enforcement actions against Vemma, Herbalife and other companies and their distributors. The McDaniels contend that the plain language of Section 13(b) does not authorize the FTC to obtain monetary relief but rather it only authorizes FTC to seek injunctive relief against a defendant who is violating or is about to violate the law. In support of this argument, the McDaniels cite an August 2019 decision by the 7th Circuit Court of Appeals in FTC v. Credit Bureau. In that case, the 7th Circuit overruled thirty years of its own precedent in holding that Section 13(b) does not provide FTC the authority to seek recovery of monetary relief in regulatory enforcement lawsuits.

If the McDaniels’ challenge is successful, the issue will almost certainly be appealed to the 5th Circuit Court of Appeals, providing a third federal appellate circuit court the opportunity to rule on whether the FTC has overstepped its authority in filing enforcement lawsuits against companies based on past conduct and in seeking large monetary awards when its statutory authority is expressly limited to seeking injunctive relief. Given the FTC’s recent enforcement activity against MLM companies, the ramifications of the McDaniel’s challenge to the FTC’s enforcement authority promises to have wide-ranging and lasting implications for MLM companies, both present and future.

Brent Kugler is a partner with Scheef & Stone in Dallas, Texas. Brent is a prominent attorney is a direct selling industry with extensive experience in representing direct sales, multilevel and network marketing companies in lawsuits, arbitrations regularities matter across the untied states.