Following legal action against two multilevel marketers in North Texas, one of those companies is fighting back, raising questions as to whether the Federal Trade Commission is operating within its legal bounds.

Addison-based Neora is challenging the FTC in a lawsuit alleging the regulatory agency retroactively changed the definition of what makes a multilevel marketing company a pyramid scheme.

Multilevel marketing is big business in Texas, which sees more direct sales activity than any other state, according to the Direct Selling Association. It’s estimated to be a $5 billion-a-year industry with more than 2 million active sellers in the state, according to the association, whose members are mostly multilevel marketing companies such as Neora.

Neora’s challenge came in response to an FTC lawsuit against the company, previously known as Nerium, that accused it of operating a pyramid scheme by pushing members to recruit others rather than encouraging direct sales to consumers. Neora sells skin care creams, supplements and other wellness products.

In its suit, Neora said the FTC’s current interpretation “would put virtually all MLMs out of business.”

The FTC said that’s incorrect.

“The FTC has not changed its position on multilevel marketing and is not trying to put all MLMs out of business. Multilevel marketing continues to be legal,” Todd Kossow, director of the FTC’s Midwest region office told The Dallas Morning News in a statement.

Neora isn’t alone in its criticism of the federal agency tasked with protecting consumers from deceptive and fraudulent business practices. Its lawsuit mentions another North Texas-based multilevel marketing company, AdvoCare, which also was sued on similar grounds by the FTC.

AdvoCare has also said in public statements that it disagrees with the FTC’s characterization of its multilevel marketing business model as a pyramid scheme. The company did, however, agree to pay a $150 million fine and began revising its business model in May.

Similar to claims made of Neora, a majority of AdvoCare’s members allegedly made little to no money as a result of joining the business, according to the FTC.

Neora is pointing to a pair of executive orders issued in October and described by President Donald Trump as intended to keep “rogue agencies" from subjecting “U.S. citizens and businesses to arbitrary” enforcement actions and "protect Americans from out-of-control bureaucracy.” Neora said the orders specify that “regulated parties must know in advance the rules by which the federal government will judge their actions.”

The FTC is “attempting to enforce an amorphous, vague, undefined, and wholly subjective ‘overemphasis on recruiting’ pyramid scheme test,” Neora argues.

Kevin Thompson, a Nashville attorney who represents multilevel marketing companies in Texas, said the FTC’s efforts to penalize Neora make the agency “look pitiful.”

“This is not about protecting consumers,” Thompson said of the agency’s actions.

Perhaps one of the most well-known brands structured as a multilevel marketing company is Dallas-based Mary Kay. The cosmetics company posted annual revenue of $3.2 billion in 2018, according to the Direct Selling Association.

The difference between what the FTC traditionally regards as a legitimate multilevel marketing company, like Mary Kay, is the way members receive compensation.

The FTC defines multilevel marketing companies as a form of direct sales in which a distributor sells products or services through a network of independent salespeople. These salespeople, often referred to as members, don’t receive wages from the company but can earn income selling the company’s products.

According to the FTC’s guidance, when a multilevel marketing company compensates its members based primarily on the recruitment of others rather than based on product sales, it’s likely to be defined as a pyramid scheme. The agency’s analysis of whether MLMs operate as a pyramid scheme also “usually involves a comprehensive analysis of a variety of factors,” according to the FTC.

If the boundaries that separate MLMs from a pyramid scheme sound complicated, that’s because they can be. Andrew Smith, the FTC’s Bureau of Consumer Protection director, acknowledged that at an industry event in October, saying “there can be many ways to earn even in a legitimate MLM.”

A pyramid scheme is “a very hard thing to prove,” according to Umit Gurun, a professor of finance and accounting at the University of Texas at Dallas.

Gurun, who previously published a study on the effects of the infamous Bernie Madoff Ponzi scheme, said rooting out MLMs that defraud members is important for society no matter how difficult.

“It forces people to lose trust in the financial system,” Gurun said.

However, Thompson said Neora is standing its ground by seizing on the president’s latest executive order.

“It’s good to see [Neora] push back," Thompson said, adding, ”I’m not saying [Neora] is free from sin but, as the expression goes, you don’t play the poker hand you want, you play the hand that you’ve got."

If Neora’s case continues, Thompson said it could challenge the FTC’s ability to "bully companies without a legitimate basis.”

"The FTC would need clear proof of fraud - defined by law - and not by FTC guidance,” he said.