Nerium Int'l, LLC v. Fed. Trade Comm'n

NERIUM INTERNATIONAL, LLC N/K/A NEORA,LLC and JEFFREY OLSON, Plaintiffs, v. FEDERAL TRADE COMMISSION, Defendant.

No. 19 C 7189

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION

August 31, 2020

Judge Sara L. Ellis

OPINION AND ORDER

Following the Federal Trade Commission's ("FTC") investigation and subsequent threats to file an enforcement action, Plaintiff Nerium International, LLC n/k/a Neora, LLC and its owner and CEO, Plaintiff Jeffrey Olson (collectively "Plaintiffs") filed this lawsuit against the FTC seeking declaratory relief. The FTC filed an enforcement action in the District of New Jersey on the same day and later moved to dismiss the action in this district for lack of subject matter jurisdiction. Because the claims presented are not ripe for judicial resolution and Plaintiffs can defend themselves in the enforcement action,¹ the Court grants the FTC's motion to dismiss [18].

BACKGROUND²

Nerium is a multi-level marketing company ("MLM") that "use[s] network marketing to recruit and build out independent representative sales teams." Doc. 1 ¶ 9. The FTC is anindependent agency of the United States government created by statute. The Federal Trade Commission Act ("FTCA"), 15 U.S.C. §§ 41 et seq., prohibits "[u]nfair methods of competition" and "unfair or deceptive acts or practices" in or affecting commerce. 15 U.S.C. § 45(a)(1). The FTCA empowers the FTC to enforce its provisions by filing either an administrative or civil complaint. Id. §§ 45(a) & (b), 53(b).

On June 21, 2016, the FTC initiated an investigation of Nerium by issuing a civil investigation demand. Its stated purpose was to investigate whether Nerium "engaged or [is] engaging in unfair or deceptive acts or practices or in the making of false advertisements" in violation of sections 5 and 12 of the FTCA. Doc. 1 ¶ 19. Nerium produced documents in response, including copies of its internal databases through 2017 and a corresponding economic analysis. Nerium claims that the FTC's allegations are legally and factually flawed. Nerium alleges that by investigating Nerium, the FTC "seeks to preclude Nerium, and seemingly numerous other entities, from being able to operate as an MLM and indeed improperly threaten Nerium's existence as a company." Id. ¶ 20. Beginning in July 2018, the FTC threatened to sue Plaintiffs in this district under Section 13(b) of the FTCA. The FTC claimed that it had an economic analysis establishing that Nerium has been or currently is an illegal pyramid scheme under the FTCA. However, the FTC refused to share this analysis.

Plaintiffs' complaint primarily centers on what it describes as the FTC's "fencing in" tactic. Plaintiffs allege that the FTC has advocated for the increased use of threatening lawsuits based on a new interpretation of its guidance if a target of an investigation does not agree to the FTC's demand that it be "fenced in" by agreeing to business practices beyond what the law requires. That is, the FTC targets a company for investigation, insists that the investigation confirmed the company is operating as an illegal pyramid scheme, and threatens the company byindicating it will seek an enormous monetary judgment if the company does not change its business practices. Plaintiffs claim that the FTC's "fencing in" tactic is not legal because it is based on a guidance document, and President Trump has issued two executive orders prohibiting government agencies from using guidance to change the law. Id. at ¶ 51. In summary, Plaintiffs claim that the FTC is attempting to outlaw MLMs by: (1) refusing to share economic analysis that demonstrates the target is a pyramid scheme; (2) "demanding the elimination of paying of compensation to those in the up line of the person actually making the sale and perhaps only one person above the seller; and (3) demanding the prohibition of consideration of a business participant's own purchases as end use consumption." Id. ¶ 55. Plaintiffs claim that the FTC publicly announced its new interpretation of how MLMs are considered pyramid schemes through a web page on October 2, 2019. Plaintiffs dispute the FTC's changed interpretation of a "pyramid scheme" and the informal method by which the FTC developed this interpretation.

Plaintiffs seek a judgment construing the provisions of the FTCA, as well as declaring and clarifying the rights and obligations of the parties under the FTCA. Plaintiffs make ten specific requests for declarations, including that the FTC may only obtain temporary, preliminary, and/or permanent injunctive relief when a target is violating or about to violate a provision enforced by the FTC. Id. ¶ 97(1-2). Plaintiffs further seek declarations as to what the FTC must consider when reviewing MLMs for possible illegal pyramid activities. Id. ¶ 97(4-5). Plaintiffs also ask the Court to enjoin the FTC from attempting to enforce its current interpretation of the FTCA regarding pyramid schemes. More specific to this case, Plaintiffs request declarations that Nerium is not and has not been a pyramid scheme. Id. ¶ 101(3-4). Plaintiffs filed an action in this Court on November 1, 2019. Later that day, the FTC filed an enforcement action in the District of New Jersey (the "enforcement action") pursuant to 15U.S.C. § 53(b). See FTC v. Neora, No. 19-19699 (D.N.J. Nov. 1, 2019). In that complaint, the FTC named Plaintiffs, as well as Signum Biosciences and Signum Nutralogix, as the defendants.

LEGAL STANDARD

A motion to dismiss under Federal Rule of Civil Procedure 12(b)(1) challenges the Court's subject matter jurisdiction. Fed. R. Civ. P. 12(b)(1). The party asserting jurisdiction has the burden of proof. United Phosphorus, Ltd. v. Angus Chem. Co., 322 F.3d 942, 946 (7th Cir. 2003), overruled on other grounds by Minn-Chem, Inc. v. Agrium, Inc., 683 F.3d 845 (7th Cir. 2012). The standard of review for a Rule 12(b)(1) motion to dismiss depends on the purpose of the motion. Apex Digital, Inc. v. Sears, Roebuck & Co., 572 F.3d 440, 443-44 (7th Cir. 2009). If a defendant challenges the sufficiency of the allegations regarding subject matter jurisdiction (a facial challenge), the Court must accept all well-pleaded factual allegations as true and draw all reasonable inferences in the plaintiff's favor. See id.; United Phosphorus, 322 F.3d at 946. If, however, the defendant denies or controverts the truth of the jurisdictional allegations (a factual challenge), the Court may look beyond the pleadings and view any competent proof submitted by the parties to determine if the plaintiff has established jurisdiction by a preponderance of the evidence. See Apex Digital, 572 F.3d at 443-44; Meridian Sec. Ins. Co. v. Sadowski, 441 F.3d 536, 543 (7th Cir. 2006).

A motion to dismiss under Rule 12(b)(6) challenges the sufficiency of the complaint, not its merits. Fed. R. Civ. P. 12(b)(6); Gibson v. City of Chicago, 910 F.2d 1510, 1520 (7th Cir. 1990). In considering a Rule 12(b)(6) motion to dismiss, the Court accepts as true all well-pleaded facts in the plaintiff's complaint and draws all reasonable inferences from those facts in the plaintiff's favor. AnchorBank, FSB v. Hofer, 649 F.3d 610, 614 (7th Cir. 2011). To survive a Rule 12(b)(6) motion, the complaint must not only provide the defendant with fair notice of aclaim's basis but must also be facially plausible. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009); see also Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Iqbal, 556 U.S. at 678.

ANALYSIS

The FTC advances two arguments in support of its motion to dismiss. First, the FTC contends that dismissal is proper because the only possible source of a cause of action for Plaintiffs is the Administrative Procedure Act ("APA"), 5 U.S.C. § 701 et seq., and Plaintiffs cannot satisfy the APA's requirements. Second, the FTC argues that the Court should dismiss this action because Plaintiffs' claims are not ripe for consideration and therefore the Declaratory Judgment Act ("DJA"), 28 U.S.C. § 2201, provides no basis for jurisdiction.

"Federal courts are courts of limited jurisdiction," Healy v. Metro. Pier & Exposition Auth., 804 F.3d 836, 845 (7th Cir. 2015), and "possess only that power authorized by Constitution and statute," Evergreen Square of Cudahy v. Wis. Hous. & Econ. Dev. Auth., 776 F.3d 463, 468 (7th Cir. 2015). "It is to be presumed that a cause lies outside this limited jurisdiction, and the burden of establishing the contrary rests upon the party asserting jurisdiction." Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 377 (1994) (internal citations omitted). Here, Plaintiffs invoke jurisdiction pursuant to the DJA and the general federal question statute, 28 U.S.C. § 1331. However, the DJA does not provide an independent basis for jurisdiction. See Manley v. Law, 889 F.3d 885, 893 (7th Cir. 2018) ("The [DJA] provides no independent source of federal subject-matter jurisdiction." (citing Skelly Oil Co. v. Phillips Petroleum Co., 339 U.S. 667, 671 (1950))), reh'g denied (June 8, 2018). The FTC argues that the APA provides the only possible basis for federal jurisdiction, whereas Plaintiffssuggest that because the FTC threatened litigation under the FTCA, they can "borrow" this federal cause of action. See Doc. 25 at 6; Doc. 1 ¶ 41. Therefore, the Court will proceed to evaluate whether Plaintiffs state a claim under the APA and whether the Court can exercise jurisdiction under the DJA if the FTCA provides a federal basis for jurisdiction.

I. The APA

"A person suffering legal wrong because of agency action, or adversely affected or aggrieved by agency action within the meaning of a relevant statute, is entitled to judicial review thereof." 5 U.S.C. § 702. General federal question jurisdiction exists over such claims. See Dhakal v. Sessions, 895 F.3d 532, 538 (...