Operator of functional coffee MLM hit with permanent injunction, $7.3 million fine

The former principal of a multilevel marketing organization selling a mushroom-infused coffee has been permanently banned from operating such a business and has been slapped with a $7.3 million fine.

A federal court brought the contempt of court ruling against James D. ‘Jay’ Noland Jr. on the basis of a complaint by the Federal Trade Commission (FTC).

Noland was found to have illegally owned and operated two pyramid schemes—Success by Health (SBH) and VOZ Travel. He was also judged to have violated a previous court order barring him from operating a pyramid scheme and from misrepresenting the income potential that participants in the scheme could aspire to.

“The court’s order holding these defendants in contempt and barring them from the multilevel marketing business should send a strong message that FTC orders should not be ignored,” said Samuel Levine, director of FTC’s Bureau of Consumer Protection, in a May 25 news release announcing the court ruling by U.S. District Judge Dominic W. Lanza. “The FTC will not hesitate to act with the full force of the law to protect the American public and hold recidivists accountable.”

According to court documents, SBH offered coffee products, other beverages and nutraceuticals, while VOZ promised to offer travel-related benefits.

FTC first sued Noland over the SBH scheme in January of 2020. Also named in that suit were his wife Lina Noland and two other individuals, identified as Scott Harris, and Thomas Sacca.

The charges related to the travel business were added in September of that year.

The quartet were charged with making outlandish claims aimed at “the masses” that suggested participants could quickly earn as much as $1 million a month by following Noland’s “system.”

Most participants lost money

However, the original FTC complaint alleged few participants earned any money from Noland’s scheme and most lost substantial sums. For the fewer than 2% of participants who earned commission checks, the payouts averaged less than $250 a month.

The instant coffee that Noland’s company sold purportedly contained Ganoderma lucidum, a fungus also known by the name lingzhi in Traditional Chinese Medicine. According to the textbook Herbal Medicine: Biomolecular and Clinical Aspects, lingzhi “has a long history of use for promoting health and longevity in China, Japan and other Asian countries.”

However, the FTC complaint alleges that whatever health properties the coffee might yield, that was beside the point. Participants in the scheme, the complaint alleges, were incentivized to recruit new people to the circle, not to sell the product to end users.

How MLMs can avoid FTC enforcement actions

In a highly publicized case against one of the world’s largest MLMs, Herbalife, FTC laid out how network marketing companies can stay on the right side of the law when operating such a business. Herbalife agreed to pay a $200 million fine and to restructure its compensation plan to primarily reward sales of finished products to customers.

Herbalife also agreed to rein in over-the-top earnings claims. Corporate literature once included photos of mega-yachts and mansions when discussing earnings potential. Now the company links to a page that states 50% of experienced distributors earn less than $250 a month.

After the conclusion of the Herbalife suit, FTC issued a guidance for the network marketing industry. It includes specifications on what constitutes an illegal pyramid scheme, how companies can relay earnings potential in a compliant manner and what criteria FTC uses to determine whether a business is a pyramid scheme.

Earlier court order
The judgement against Noland was based on a finding that he had violated a previous court order issued in 2002 to refrain from participating in network marketing companies.

According to the FTC complaint, Noland was quoted in 2017, shortly before launching SBH, as saying, “People ask what … I do. I said, ‘I build pyramids, man.’”

An FTC press release announcing the ruling stated any amount of the $7.3 million judgment recovered by the agency will be used to redress consumers.

However, it’s unclear how much money FTC can actually recover, as its original complaint notes that “[i]n his January 2020 sworn financial statement, Noland reported he had a negative net worth.”