The Ninth Circuit Court of Appeals has upheld a decision in favor of the Federal Trade Commission (FTC) to issue a permanent injunction and over $7 million in civil sanctions against people engaged in an illegal multi-level marketing (MLM) scheme. According to an article from JD Supra:
“The court’s opinion in Federal Trade Commission (FTC) v. Noland sheds light on the scope of the agency’s power to obtain monetary relief after the Supreme Court restricted the FTC’s authority under Section 13(b) of the FTC Act in a 2021 case, AMG Capital Management v. FTC.
In Noland, the defendants attempted to use the AMG Capital decision to challenge the court’s ability to award compensatory sanctions for contempt and redress under Section 19 for a rule violation. The Ninth Circuit affirmed the district court’s rejection of those arguments.
FTC Sues Individuals Operating Illegal Pyramid Schemes
In 2020, the FTC sued four people who operated two multilevel marketing businesses: Success by Health and VOZ Travel. Both companies encouraged customers to make person-to-person sales by promising “financial freedom” and misrepresenting sellers’ earning potential. Success by Health sold nutraceuticals, and VOZ Travel purported to offer online vacation services. Despite never creating the advertised products, VOZ Travel earned over $1.1 million in revenue.
One of the defendants, James Noland, had settled a similar lawsuit with the FTC in 2002. That settlement prohibited Noland and those acting “in active concert” with him from operating any illegal marketing scheme.
After a bench trial, the district court held that the defendants operated an illegal pyramid scheme in violation of the FTC Act, the 2002 settlement agreement, and two FTC regulations: the Merchandise Rule, which requires sellers to offer refunds for delayed goods, and the Cooling-Off Rule, which requires door-to-door sellers to offer buyers a three-day cancellation window.
The district court imposed an asset freeze, issued a $7 million sanction for contempt and $6,829 in damages for the rule violations, and barred the defendants from participating in any future multilevel marketing business.
On appeal, the defendants did not dispute their liability. They instead argued that the FTC lacked authority under AMG Capital to sue for money damages without first exhausting the administrative process. The defendants asserted that the $7 million contempt sanction and lifetime bar on multilevel marketing were unduly punitive and an abuse of the district court’s discretion.
Ninth Circuit Upholds the FTC’s Remedial Authority
The Ninth Circuit rejected the defendants’ characterization of the contempt sanctions and reaffirmed the district court’s authority to issue civil sanctions that “coerce compliance” with a court order. First, the $7.3 million figure equals the defendants’ net revenue gained in violation of the 2002 settlement. The defendants had the opportunity to provide evidence to support a lower figure and failed to do so. Moreover, the FTC must return any excess funds to the defendants after consumers are compensated, preventing an alleged “windfall” to the FTC.”
