How to Navigate the Federal Trade Commission in 2024

Speaker A: I'm Louis La. Oh, I'm a partner at Foley and Lardner in Silicon, uh, Valley. And I'm delighted to uh, bring this group of folks to talk to you about a topic that is really top of mind for me as I try and get business done, uh, for our clients here at Foley and Lardner. Uh, with me is, uh, my partner Ed Burbach, uh, and Ben Dryden. And um, we're really honored to have uh, our client and who's someone who's become our dear friend Deb Heitz, who has, um, really, really walk the walk, um, in this discussion about responding to the Federal Trade Commission and the Department of Justice in this era and in fact um, in several now. Um, so without further ado, I'm just going to ask, uh, Ed, Ben and Deb, just to say a quick, um, 30 seconds introduction, ah, of themselves.

Speaker B: Ed.

Speaker C: Right. So I'm at Burbach, I'm in Foley Larder's Austin, Texas office. Uh, I've been practicing law for about 35 years, I hate to say, but I chair our Government Assistance Practice Group, co chair our State Attorneys General practice. And most relevant for this group, I used to run the litigation for the state of Texas when our current Governor Greg Abbott, was Attorney General. So I've been handling consumer protection matters Both before state AGs and the FTC now and private practice since I left the AG's office 20 years ago.

Speaker A: Thank you, Ed. Ben, over to you.

Speaker B: Hi everyone. I'm Ben Dryden. I'm a partner in Foley's Washington D.C. office. I'm the Vice chair of our National Antitrust and Competition Practice group. My personal practice focuses on antitrust issues that arise in mergers and acquisitions as well as counseling with a focus on health care and labor employment issues. Because we're seeing an increasing confluence between antitrust and labor employment.

Speaker A: Thank you, Ben and Deb, um, tell us about yourself.

Speaker D: I'm, um, Deborah Heiss. I'm co CEO of a, uh, multinational direct selling company named Neora, based here in Dallas, uh, area of Texas. And I think I'm on this call, actually. I know I'm on this call because we just ended an eight year fight with the ftc, um, where we defeated uh, them and emerged victorious, um, on all counts.

Speaker A: And we're just so grateful to have you here. Deb. Thank you so much for joining. Um, for everybody who's joined us, uh, through nacd, we'd be really grateful if you kept your cameras on and we want to make this a conversation and so please use the chat feature or the Q and A feature, I'm not sure which, uh, to jump in with your questions and to the extent that it's directly relevant to what we're talking about, um, I'm going to interrupt people and uh, jump in with the questions and then to the extent that it's not directly related, we'll hope to have a few minutes at the end. So the way we're going to do this is we're going to start with Ed and Deborah and really tell the story of Neora. Ah, um, which I think is really relevant to you know, everyone's ability to get business done. Uh, and then in the latter half of the program we're going to explore a little bit, um, the FTC's current um, views on mergers and acquisitions and how we get transactions done. Um, there are some new pre merger guidelines that are really important for directors to understand but because the game has changed, uh, and that's really um, why we're here today. Um, Ed, do you want to kick us off with uh, setting the stage for what happened with Neora?

Speaker C: Yeah, pleasure to do that. So June 2016, uh, one of our fine clients out of the Dallas area, Neora, uh, uh, I had done a presentation for them a few months previously. Basically we do a little workshop what to expect if the FTC or state agencies come knocking at your door. And it wasn't but eight months later that I had a call from the client that said we received a civil investigative demand which is a civil subpoena, ah, subpoena from the FTC. And the extent of the CID was probably about 50 pages long and without going to great detail is basically turn over every single document you have and we're going to do a, uh, complete as you are referred to as open the kimono review of your company. And so we spent three and a half years producing documents to the ftc. Uh, the case was run out of their Chicago office originally. Um, and that process was interesting. Once you learn very quickly the FTC has a policy, and I'll tell you why I can call it a policy, um, that if they've decided that you've done something wrong, they are not going to show you the evidence. They consider that pre suit discovery. So they'll come to you and say you owe us x hundred million dollars. They may show you a draft complaint saying if you do not settle with us we are going to file this. And if for many companies, especially those in retail, that's a death knell to have a major federal agency claiming you're cheating your consumers. Um, and if you don't settle in the next few weeks, we're going to file this. Uh, and the reason why I can say that's their policy. I literally. And the reason I'm wearing a tie today. I just got off a hour long call with the head of the FTC's Consumer Protection Bureau. His name is Sam Levine. Uh, different company than you are, but another company, different industry, somewhat similar investigation. And they flatly refused once again an hour ago to give us the alleged evidence they have. And they said if you don't settle in a week, we're referring you up to commissioners for a suit. And, and you need to pay us an enormous amount of money. And, and that's the reality of what the FTC does. Very different than most state AGs. Certainly when I was in the Texas AG's office, we would have never done that. Um, so that's what happened with Neora. And in a minute Deb will give you the great details. But basically they came to the aura and they said you must pay this huge amount of money. And by the way, you got to stop being the type of company you are and if not, we're going to sue you. And most companies can't afford to fight them. And so what happens is, um, you have a Hobson's Choice. You can either capitulate and pay them a huge amount of money and then sign a stipulated order that's filed in court where you, they do not allow you to deny the claims. If you settle with the FTC Consumer Protection Bureau, they require you to use their stock language which says we will neither admit or deny these claims. And then there's some language that says but for purposes, enforcement, we admit we did all these terrible things. They refuse to do anything but that language. So you're basically admitting, despite the facts, that you did awful things very publicly. So, Neora, uh, and we'll get in.

Speaker A: Let Deb, let's zoom out a second. Ed, just in a, in a sentence, why is the FTC even there? Why are they knocking on your door? Maybe, maybe you and Deb should take that together.

Speaker C: Deb, why don't you tell them why

Speaker D: we found out why we did find out. Um, so ostensibly what brought them to our door is we had launched a product that um, we had a scientist talk about the product at a convention with several thousand people and he said some things he shouldn't have said even though we told him not to. And of course you had a couple thousand people in a convention hall, they start tweeting what was said and next thing you know you're cleaning up social media for the next six months by the way, which we did. And it largely cleaned up for the FTC knock. So ostensibly that's why they knocked on our door. But the reality is there's an organization out there called the Truth in Advertising Organization that has a uh, bee in its bonnet for direct selling companies and just believes our entire business model and business practice is bad. And they search and comb the Internet for anything they can see that might be uh, a claim. And they, they, um, the director of that organization and Sam Levine are very good friends and uh, they, they delivered the evidence and they knocked on our door with the presumption that because we were in the direct selling industry that we were automatically a pyramid scheme. Um, and this is without really doing any detail, really having any analysis whatsoever so that, you know, that's why they showed up. But the reality is, and this is a niche, and I know this doesn't apply to the majority of you on the call, so I want to be really brief. Um, there is, there was, there is a plan. There was a plan within the FTC to change direct selling speaking. Um, basically to eliminate um, the idea that you can have a company where somebody recruits another seller and gets paid on their sales. And they'd gotten another very large company to agree to that. That they were trying to force that down our throat. And their goal is to make our business model, which is where you make sales, you get paid and you recruit people and they get paid on their sales to be uh, de facto impairment scheme. And it's been very clear that that's their goal. They've actually not hidden that from us, but that's just simply not the law. I don't know if Ed, if there's anything else you'd want to.

Speaker C: I would add one thing. The question is how did they get on Tina's webinar? Uh, uh, Radar. They actually won an award.

Speaker D: Uh, yeah, we won an award.

Speaker C: Yeah, from a leading, the leading trade association in the country, honored several companies and they happened to be honored. So therefore the consumer advocacy group started investigation of them because they won an award.

Speaker A: Amazing. So pro tip for directors out there, companies will be responsible for what is said about them by consultants that are hired to, or that are on the payroll to talk about uh, the quality of the company's products. Uh, and pro tip number two, uh, to, to, to resolve that. Really. What is your compliance program to make sure, uh, that, that um, that things like that don't happen and if they do, um, to Deb's point, how do you clean it up and how do you, how do you have evidence of that? Um, Deb, I'm just curious. Did you consider self reporting or, you know, was that just the furthest thing from your, your thoughts at that point that you would be, um, you know, in front of the ftc? Were there, looking back in time, were there things that could have been done or that, you know, if it was to happen now, you would do to avoid the FTC knocking on your door and coming after you in the way they did?

Speaker D: There's been some, some developments that would change that pathway in our industry. We've developed a self reporting agency and a, uh, it's called the direct selling self regulatory Agency that did not exist, um, prior. So now we would probably let them know, hey, we're aware we have this problem, we're working on cleaning it up. However, um, one point that you said that was really critically important. In fact, the, uh, judge in our case cited it everywhere. We have a robust compliance program. We got on top of the claims that were made immediately. We told people to take them down. Um, she commended our compliance program. It's independent of our executive team. We terminate sellers. We, we do everything we're supposed to do to make sure that we stay within compliance with education and all of that stuff. So one of the reasons we won our case, um, was that we do have robust compliance, that when somebody does make a mistake, we have a method to deal with it that is, um, documented and you know, tracked.

Speaker B: So.

Speaker A: Thank you, Deb. I'm curious to know and I think it would be relevant for directors to know. Um, once an investigation starts, how, how long after it starts do you find out about it? And how long does this investigatory process last?

Speaker D: Well, you know, it depends on how you're being investigated. So we, when the investigation started, I'm sure there was some pre investigation we knew. I mean when they showed up with the cid, we knew. There are other companies that I know of that they found out when their doors were locked. I mean that's just the way the FTC works. And then you end up fighting a receiver to get back control of your company and it's ugly. Um, so the ftc, the FTC will tell you that's egregious violators. But some of those companies have won those cases, so that's not necessarily the case. Um, once you start, once you start the investigation. We did 16 document productions and spent about three and a half years, including meeting with staff in both Washington D.C. and Chicago. The office that filed the complaint.

Speaker A: Wow.

Speaker D: Before we ever met with the commissioners. And when you meet with the commissioners, I have to say it's a rubber stamp. I mean they're taking their staff guidance and they're going forward. Um, based off staff recommendations. I don't feel like even though we met with them, we had any voice at all.

Speaker A: And ah, at what point does the investigation become public?

Speaker D: Um, when they file. Now we're a privately held company so I can say that as a public company that is probably not the case. You're going to have to disclose that you received a CID when you receive the cid and, and because there's a risk associated with that and I don't think as a public company you could keep that private.

Speaker A: So uh, you said something really important that I think might have been lost on, on folks that don't know the Neora story as well as those of us here on this call. Um, and that's that once it's rendered public and either you're a public company and you're disclosing it in your Q or your K, um, or your private company and it's not really being disclosed until there's a public filing, what happens? Um, you know, what does your bank say, what do your suppliers say, what do your creditors say? Um, is that, what do they think about that?

Speaker D: So we're, we're a, we're a global company. At the time we were operating In I think 16 different markets. Um, they sued us. We got ahead. Actually we sued them first. I do need to say that we uh, felt like they were trying to use um, activity, uh, you know, regulatory activity to change the law. So we sued them for that reason. They sued us back, not surprisingly the same day. Um, but once the case became public we let all of our sales rep know why we were fighting. Basically we were fighting to protect their income. Because if we, if we adopted the FTC stance that the only person that can make a commission on the sale of something, and I'm talking about direct selling, but you got to think real estate, you got to think insurance, you know, these commissions tree up, um, that the only person can make a commission was the person selling it, that would have taken our full time sales reps income, you know, to 5% of what they were making or 10% of what they were making.

Speaker A: Wow.

Speaker D: Yeah. They knew why we were fighting so that helped us. But once it became public within 30 days we received a letter from um, bank Of America, which was our worldwide treasury bank, and did probably 80% of our credit card processing, saying we had 60 days to get out.

Speaker A: Oh, my gosh.

Speaker D: The owner got the same letter. So imagine you have an FTC case in hand, and you've got to go find new banking and new merchant processing in 60 days. We were able to negotiate that to a whopping 90 days.

Speaker A: And what were the conversations that you had with other banks and where did you land?

Speaker D: Well, the conversation we had. Let me start with bank of America itself.

Speaker B: The.

Speaker D: The entire rationale was it was a reputational risk for the bank. I'm certain they have no banking relationships with any other company that's involved with the federal government. Right. So we were suddenly, suddenly a reputational risk. Um, and as a direct selling company, uh, we will acknowledge that there are. There have been bad players in our industry. We're not one of them, um, or anywhere close to one of them. And there are many that are very good, but there's already a bit of a reputational taint when you walk in the door. It was very difficult for us to get banking, especially in the United States. Um, our law firm, uh, Mr. Burbach, spent a lot of time on calls with banks and merchant processors and explaining our case and all. We thought we would win, and we eventually landed at a bank that handles cannabis companies in the United States. So our fees went up, our merchant processing fees went up. Our return rates are less than 1%. So we are not a credit card risk. Um, but everything got vastly more expensive. Suppliers, uh, change terms. You know, the assumption is net 30 isn't very good if you're out of business 30 days later. So we suddenly lost lines of credit with suppliers. We, uh, our terms got changed. We had to put a lot of cash up front. Situations. In addition to the overall legal costs, it was extraordinarily expensive, and it was really kind of down to the wire whether or not we'd be able to continue processing sales for a period of time. But we managed to do that.

Speaker A: Um, Deb, tell us about what happened to the company's business after this got announced. And specifically revenues, if you can comment on that.

Speaker D: Uh, absolutely. Um, our revenues from the time it was announced till the time, uh, we got the verdict. And we just got the verdict in September of this year or last year. Um, dropped me to do some quick math in my head. I should know this off top of my head. It's, uh, too painful to think about. Um, but let's say 60%.

Speaker C: Okay.

Speaker A: So, um, attracting one of these, uh, publicly disclosed FTC investigations can be fatal to your business, is. Is really what I'm hearing. But Deb, kudos to you that you. You kept it. You kept it alive and, and tell us where you are today.

Speaker D: I'm at the office.

Speaker A: Oh, sorry. I meant that was a softball to say we're thriving.

Speaker D: No, I know. We're doing fine. We're. We're doing fine. Um, you know, there's other economic pressure. The pandemic. Keep in mind, all this is going on during the pandemic and everything else. Everybody was suffering. I do want to. I do want to point out one other thing. As a, um, company whose bread and butter is selling products through distributors, and the distributors are, are voluntary salespeople, they. They pay a whopping $20 for the privilege of being a salesperson. It's not like, you know, whatever you have in your vision you have in your head. I pay $20, I can now post this product on my Instagram and receive 20% commission every time somebody buys it. It's that simple. And then if I get somebody else to do that, I can receive 3% of what they sell. Just think along those terms. But for a company whose bread and butter is recruiting salespeople to ultimately expand our sales force so that we can sell more product to end users on Facebook, so many people see it on my account. So many people see it on somebody else's account. So that's the methodology with which we sell. They first thing you saw when you searched Neora on Google was FTC accuses Neora of being a pyramid scheme because the government's Google rights and Google, when they. Google places priority priority on articles. The government far exceeds anything you can do. So one of our business causes of sales decline, our customer base stayed around. We had natural attrition. We know a customer last X number of months and that didn't really change was the ability to get new customers because we couldn't get new salespeople, uh, during that time frame. Because when somebody signed up to sell and then their mom searched Neora, they say, oh, you just joined a pyramid scheme. They never made that post on Facebook to sell those three bottles of product or three lash extenders or whatever it is they were going to buy.

Speaker A: Right. Um, so there was some evidence that they thought that they had and they weren't going to tell you. And did you eventually find out what this evidence was?

Speaker D: No, no. Um, no. We sat in, ah a. We sat in with, with the commissioners and they started reading something saying this and this and the facts were wrong. To us by the way, what they're reading, the facts are wrong. And we're like can we see that? And their answer was no, you will see it when we file the case. They filed the case, we said, uh, can we see it now? They said no, it is part of our deliberative process. So whatever evidence they used to make their decision that they presented to the commissioners, to this day we have not seen it.

Speaker A: This is like a Kafka novel. It sounds like the accused.

Speaker C: Um, well Louie, as I said literally an hour ago, the head of the CF, uh, the FTC's consumer bureau repeated that to me literally an hour ago. Completely different industry, so not direct selling at all. But he literally said we will not show you this evidence. We uh, have now in the litigation in the aura. We uh, had a fight over that as you can imagine. And we eventually got a federal court order because our case was in federal court in Dallas.

Speaker B: Mhm.

Speaker C: Uh, for them to be required to produce two people, they refused to produce anybody to testify on behalf of the FTC at all. We won that battle. And then secondly their in house economists who had been doing this alleged analysis, they fought us tooth and nail. We got a court order and when we were able to get a court to order him to turn over his computer code within his uh, own. This is economist at the FTC who apparently came up with this great analysis initially before they handed out to the testifying expert, within that computer, uh, code were his notes. And I know a lot of people here from California probably more adept than I had programming. He actually included his notes that would include such statements as I don't understand these 1.8 million records so I'm just going to throw them out. That was literally in his computer codes, in his notes and it was that outrageous. And they literally knew. And we had a phenomenal expert, uh, Dr. Walter Vandella, where he had shared his entire economic analysis as early as 2018 with the FTC. He used to work at the FTC and they couldn't poke any holes in it. But even knowing based on our data that this company was not a pyramid scheme, they still filed it, they just didn't care.

Speaker A: Um, Ed, when you were Deputy Attorney General for litigation, would you have brought a case like this? I mean what's changed in the law? What's changed in, in the tactics?

Speaker C: It's, it's just a different tactic. So the FTC and confirmed an hour ago, this is their internal policy. They will not show you the CFPB the same thing you may know, uh, Commissioner Chopra used to be the ftc. Now he's in charge of the CFPB within the state attorneys general. I can speak obviously for Texas and many others that I know very well. They would show you. Right. And here, let me give you a scenario. And this is literally from an hour ago. So it's very hot off the press. One of the arguments you can make is, listen, if you sell to consumers, for example, you say you have all this great evidence that we've been harming all these consumers, but you won't give it to us. What you're saying is, and you've got such a high demand that nobody with fiduciary duties can recommend to a board, and this is a publicly traded company to settle this amount. So you are ensuring that we're going to have to fight you and that fight will take at least four years. So all these terribly harmed consumers for four years because you refuse to tell us who they even are and we could refund their money if we did anything wrong. Mhm. You choose to not disclose that. So for four years, you know for a fact they're going to continue being harmed for four years. I literally just had that commute court uh, conversation with that. He said, yes, we're going to just push forward. And so that's one thing that most people outside of the Beltway and DC don't understand on the consumer side, that they are not going to in the short term help those consumers at all. Even if they think they have fabulous evidence, they're not going to give it to you.

Speaker A: So you sued the ftc. How long did this. And they sued you back. How long did this case survive, uh, in court and did it settle? Did it go to a jury trial or bench trial? What happened?

Speaker D: It was a bench trial. Um, we spent about six to eight months arguing about venue. So the Chicago office came after us. Uh, was the office that filed, we're in Dallas. Um, we sued them in Chicago, they sued us in New Jersey. They were forum shopping and then they accused us of forum shopping. So it took a while to get it settled in Dallas and it went to a, uh, bench trial. A fabulous judge here locally. Um, and uh, she was very, very considerate, looked at all the evidence, very detailed. Understood it was very much understood the case. Um, and so between November 1st of uh, 2019 through September 28th of 2023 is how long it was public. The trial itself took two weeks.

Speaker A: Wow. And, and it was September of 23 then that you Got the, you got the final verdict in your favor?

Speaker D: Yes, we actually went to trial in November of or October, 2020.

Speaker C: October, yeah.

Speaker D: Yeah.

Speaker C: Took 11 months. Uh, Judge, Judge Barbara Lynn is brilliant. She was the chief judge of the Northern District of Texas Federal Court, but she certainly was not a conservative judge. She was a Clinton appointee and, uh, so certainly not some right wing judge that just didn't like the federal government at all.

Speaker A: Yeah, yeah. Well, you know, those of us here in Northern California are, um, not always very right wing at all.

Speaker D: So neither is she.

Speaker A: Um, and I, I wanted to kind of check you out a little bit on, on our comments about the FTC and the judges and so forth. What is their explanation? And this is a good question from Amy Schenken in the chat. What is their explanation for their approach and why they don't have to provide evidence and why they don't have to tell you what they're doing and why they can essentially kill your business, um, without any due process?

Speaker C: Well, I will tell you what they've literally told us. So you don't even have to take it from me. So just an hour ago, uh, the Commissioner, the Director of Consumer Protection Bureau told us that we don't share information because that would be pre suit discovery. So therefore we're not going to tell you what you did wrong. And since you have all the information, you know what you did wrong. Uh, I will tell you one of the. Currently there are five commissioners of the ftc, which they're supposed to have. Five. Up until two weeks ago, there were three. Two just added. Uh, one of them is Commissioner Slaughter. She used to be Chuck Schumer's chief of staff. I, I took her comments being the most honest of anybody. When we met with the commissioners, with Neora, before they filed suit, she literally said to us, we have a moral duty to bring lawsuits even though we know we will lose. And of course I said, I'm just a lawyer, I've got a moral duty to follow the law. But that, I thought that was very useful because they see the role at the FTC as if they don't have a statute that they can rely upon that says what the law is. The FTC act intentionally, especially section 5, is written very vaguely. And so they want to push the limits and they call it fencing in. And so what they'll do is they'll be very, very aggressive because they want to move an industry. So what they'll say is, and they've told us this, that if they get companies to settle with injunctive terms that aren't required by the law. But if they get them to settle, then they show them to the industry and say, see, this is what your competitors are doing. You better move to what they're doing. Or maybe looking at you also, I, I think it's, it's a tactic, it's a strategy. And, and they're very open about it, frankly.

Speaker A: Um, what was the final results of the trial, Deb?

Speaker D: Uh, we won on all, we won on all accounts. Um, it was about as complete. Well, not about as complete. It was as complete a victory as you could expect.

Speaker A: Well, did they give you the lost revenue back? Did they give you your customers back? Did they give you. No, no.

Speaker D: In fact, we are in a, uh, we filed another lawsuit. Um, there's a statute under which you can reclaim some of your attorney's fees. Um, but you have to prove that they had no cause to bring the action, which is a little bit dicey. Um, but uh, if we were to prevail, we could recover about a little less than a fourth of what we spent. And that's just out of pocket expenses. The revenue is gone, as you would expect. I mean, we probably cost hundreds of millions in revenue and um, it's just gone.

Speaker A: I, um, I just, my heart goes out to you. Um, you know, for those of us on the call here, we're, we're the national association of Corporate Directors and we're looking to learn, um, you know, how, how to be better directors. I believe NIOR is a closely held company. I'm not sure that you had a board of directors as this was all going on. I suppose it's the owner, yes. Um, and so for purposes of, um, you know, our discussion, I'll say that the owner is the board of directors. Um, how did you manage, um, you know, this, this whole process for the owner? I mean you're the CEO and I'm, I'm assuming the owner is not doing the day to day business here. And, and you know, how often are you getting them together and keeping them apprised, these owners? And, and um, you know, how, how, how much were they involved?

Speaker D: Well, our owner was named in the lawsuit, so he was, he was named as a co defendant in the lawsuit. So he was extraordinarily involved in, uh, in all these aspects. We did not involve him in directly interfacing with the FTC at any point. Um, we felt like particularly being a named, um, a name defendant. That was a bad idea. Uh, by the way, his bank accounts also got shut down by bank Of America. And he got kicked out and his brokerage account got frozen.

Speaker A: And how about yours?

Speaker D: All sorts of things happened.

Speaker A: Did they. They hit yours, too?

Speaker D: They did not. Because I wasn't named.

Speaker A: They.

Speaker D: They confined the people that were named. And, yes, I do bank with bank of America, so I was holding my breath a little bit there, but, uh, they. They hit his. I think in, uh, many of these cases, they do go after. I know in a similar case, the CEO was named.

Speaker A: Yeah.

Speaker D: Lawsuit. Um, I was fortunate. Well, I came on board two months after. Two months before it was filed. So I was not visible to them at the time.

Speaker A: I have to ask you, Deb, what was the effect on your life?

Speaker D: You know, it's extraordinarily stressful. Uh, I don't think you realize how stressful it is till you're done.

Speaker A: Yeah.

Speaker D: Um, because it's not just you. It's all your employees, all your salespeople, everything, you know, livelihood of a lot of people are involved in this. It, uh. Uh, you know, I think Jeff, our owner, probably didn't sleep for three years. And his. His, uh, his personal livelihood, all. All that he's built. This is not his first company. Everything he built was at risk, um, as a result of this. Uh, the whole company was at risk. And so knowing that every day you have to go in and do it and, uh, do what you need to do and keep moving forward, but you also have to recognize you're trying to run a business, and there's a lot of other things and decisions you have to make. Um, we had to run the most conservative business possible because the last thing you want to do is show up in court with new evidence. Um, it was a bit crazy. Um, I would like to answer two of the questions that are in the site that are in the chat, if you don't mind, real quick.

Speaker A: Oh, yeah, sure, please.

Speaker D: Um, one is just anecdotal. Somebody, uh, asked, what's Truth and Advertising done? Well, recently, Truth in Advertising put, um, up an article saying that they found illegal claims from every member of the Direct Selling association, except for one, I think, on their website. Um, these illegal claims. When we looked at what they supposedly allegedly found for us, it's along the same lines of what they were claiming was illegal before. It's that we provide a supplemental income opportunity. That is the illegal claim that they are saying is illegal. And it's because most people don't make money. What they mean by that is most people are actually customers, but that. So, um, they are just as aggressive. They are Just as aligned with the ftc. This is in line with what the FTC wants to change about our industry. They don't really don't want us to provide a business opportunity within our structures. Um, so they are extremely aggressive after us. Um, and then the other one, what changes, approach behavior do we expect from the FTC after this loss? Well, the, uh, person who is over the division or the part that works for Sam Lavine, her name is Lois Griseman, just rescinded, um, some staff advisory letters that were used to defend us in court. And she is uh, full of uh, vitriol and out there saying that the judge got it wrong and that we are still harming people even though they lost the case, did not appeal. Um, I do not see any changes at least towards our industry of the ftc, other than trying to make sure that they've got a little less, uh, you know, a little more opinion in, uh, in their favor. She issued a new letter saying that what the old letter said was good is now not good. Um, so I do think that they are trying to recast what their interpretation of the law is. Of course, They've got what, 70 years of law fighting against them. Ed on that one.

Speaker C: Yeah. And it's interesting that staff advisory opinion was from 2004. That's a 20 year old advisory that they are running from now. The other thing I will say that, uh, with regard to truth in advertising, I had the pleasure of taking the deposition of the executive director. Her name's Bonnie Patton. And I spent a day with her. And her strategy is to literally attack companies. And what they'll do is if, if you're having a major meeting and, and it's for any industry, I mean they look at all kinds of advertising. They will use social media tools to tweet out or use other social media tools criticizing your company while you are either issuing big press or a big meeting as a tactic to come after you. Uh, that is literally what they do. And they are now, I think, the number two referral source to the FTC. So if you ever go on their website, it's tina.org you can see many, many different industries that they're attacking with regard to advertising. And they don't consider state laws at all. They only have three lawyers in their entire organization and they interpret what FTC law means. And my favorite was, I asked her one of the main, uh, terms that was at issue in the law. I asked her, can you define that for me? And she said, it's a mosaic. So it's whatever they think it is basically. So it's, it's a little frightening. But no, they haven't lessened their behavior. And on the FTC side, Sam Levine came out and said just because we lost to Neora, uh, we are still going to aggressively go after and file lawsuits. He said that again as recently as an hour ago.

Speaker A: Wow. Well, you know, I've got to ask you Ed, what advice do you have for boards of directors to make sure that their management is doing the right things to stay out of the FTC's focus? Thank you Samesh, for your question.

Speaker C: It's very interesting to me. It obviously depends on your industry and it depends upon what you're.

Speaker A: We had 23andMe got shut down by the FTC a few years ago.

Speaker B: Right.

Speaker A: So, and so a foreign thing to Silicon Valley, this has happened here.

Speaker C: Well, one of the things that we think is very useful is to be ready. And obviously if you have robust compliance departments, legal departments, that's important, but it's also just a process people aren't accustomed to. So it's very useful to sit down with your C suite, your staffers, um, uh, your legal department compliance and really go through an exercise of what do we do if we get these a cid, who is responsible for responding to the request. And we've seen many different ones. We actually put together kind of a unreal CID stock and the FTC very, ah, specific questions they have asked numerous times. Who's going to go get these documents? Who is responsible for maintaining these documents? Who's going to put the litigation. Hold on, uh, what happens when the bank cuts, uh, off, uh, your banking accounts, you can't process credit cards. I think that's something that you could do on the front end. Just be ready. And so when it happens, it's not a shock, uh, to your system and you're not running in circles. I think that's really, really important. I think it's very important to control. If you happen to be in retail, look at your BBB rankings. I mean people tell me all the time they think that's silly. But BBB is the number one referral source to the FTC and many state AGs. So if you have a bad rating, you have a lot of consumer complaints. That's usually because companies just don't respond to the bbb. When they reach out to them, it's incredibly important to respond to them, try to get back with them because if not, that very quickly turns into a state AG or FTC investigation.

Speaker A: So I think I Just heard another pro tip, which we'll note here in our follow ups that, um, directors should ask, uh, the general counsel, uh, whether anybody's monitoring complaints with the Better Business Bureau and the rate of response, um, to those, to those comments. That's, um, that's really good. Ah, thank you. Um, I'm going to wrap up, um, this first segment on consumer, uh, protection at the FTC with just a final question for, um. Deb, I can't help myself. What was it like to testify in federal court?

Speaker D: Deb, I think I was well prepared. Our attorneys did a great job. But also, um, I think our entire team did a great job of testifying. I have two, two words of advice to anyone who's faced the ftc. You may be thinking settlement. They're thinking, how do I bully you to get what I want? And what they want may not be your acknowledgment that you did something wrong. We were early on, we were early on willing to say, hey, yeah, uh, we had a product complaint problem. Let's just resolve that. We'll pay a fine on the sales of that product. That was not what they were interested in. Um, the other thing was we, we gave them every piece of evidence and we didn't fight it. I don't think that would have mattered. It might have taken longer if we'd have fought and said, oh, we don't want to. But when we got to federal court, we were. And actually, really from day one, we were convinced that we were right. So testifying was easy. When you think you're right and you have the facts to back it up, you just want to share that story. So it was, it was actually a cathartic and wonderful experience.

Speaker A: Um, anything you would have done differently, Debt,

Speaker D: you know, I, I don't know that we would have. Um, you know, we've contemplated this a lot. Probably the only thing that I would have done a little more aggressively is told our story a little more broadly before it got to the point that the case was filed. But by then it was really. We always thought it was going to go away. We always thought they were going to find nothing. Um, we were naive enough to think that they were looking at the evidence. Uh, Ed referred to a document. It was clear that they never looked at the evidence. They came in with the idea that we were guilty. And everything was built around how do I prove your guilt as opposed to what's really going on here.

Speaker A: And Samash is asking what the FTC was really after. And I think they were just trying to shut you down. Right.

Speaker D: The FTC is really after killing multi level marketing in general, which is what we are. We're multiple marketing company. And that just simply means that when I sign up a salesperson and they make a sale, I get paid. They sign up a salesperson, I get paid on them too. Their goal is to shut down direct selling and multi level marketing. And it's, it's not. I think it was fairly transparent early on to the point that we went to the trade association. Their reaction was that can't be what it is. But like Ed, uh, today I was on a call with the trade association earlier about this rescinding of letters and it's become pretty clear to everybody that that is their goal to not offer a business opportunity to independent contractors. They just, that's their goal. They've got a vision of what they think our industry is in their head. They're wrong. And it's unfortunately a small enough industry that there's only two or three players at the FTC that pay attention to us on a regular basis.

Speaker C: And if I can Lou, I'd add the timing when you're. Now as we sit here in an election year, a presidential election year, and you may know that one of the big disputes in the election is why are consumer prices so high? And so the FTC has an incentive to have an explanation why consumer price is so high. So they are being very aggressive right now. And as I said, I just experienced this an hour ago of trying to at least announce lawsuits and file suits that the theme of the reason the prices are so high is because these companies are cheating. It just is. And that that made very clear on the call we had an hour ago, the facts really didn't matter. Uh, and one thing Deb mentioned, the economist, the in house economist at the ftc, he literally told us the data does not matter. Now how can you be an economist and say that it's because the lawyers are driving, even at the ftc they're driving the decisions and they're telling the economists what to do. That's the reality. And especially in an election year like this year, it's on steroids right now.

Speaker A: Well Julie Kavana Jermick asked a really good question in the chat. Um, is that now that these actions, um, whether they emanate from inside the FTC or from a customer or a shareholder, it's become process rather than ah, the exception. What advice do we have to directors once this is on the foreground? It's the complaint's been made, the investigation has begun, um, what advice would we have them, would we share with them at that point? And I, I think, um, Deb shared a lot of really helpful comments about demonstrating the prowess of the compliance function. Um, but, you know, if, if you don't have one and uh, you're at this point, it might be a little too late to, um, to, to do that. Other advice, um, Deb or Ed, about what directors can do once this, this, uh, the FTC comes knocking.

Speaker C: From my, uh, point of view, it's important to control expectations because I think, and Deb can correct me if I'm wrong or the client I was dealing with today and many clients we've had. If you haven't dealt with the FTC before, you just don't believe this happens. You just don't think that they'll just ignore the evidence and they won't share it with you and they'll try to squeeze money out of you. Most people outside the beltway in D.C. just don't understand that that's the reality. That's what they do. So I think as a director, it's going to be very incumbent upon you to make sure that the folks in your company understand that they have different goals than a normal, normal litigant. They don't pay their lawyers by the hour, they've got a relatively big staff, and if they lose, big deal. At least they tried to protect consumers. I think that is something that most people are involved in private litigation don't understand, and it's a big distinction when you're dealing with the government.

Speaker D: I would, I would second that. I think that our mistake early on was thinking that surely they're going to look at the evidence and this is going to go away before we ever get to do the, uh, case being filed. And there was never an indication, even though we believed it was going to happen, they gave us no indication that was ever going to happen. And Ed didn't either, by the way. But right from the start, if they're at your door with the cid, they're going to get their pound of flesh or they're going to try.

Speaker C: Very helpful.

Speaker A: Well, thank you so much. We're going to switch gears now and we're going to talk about the world of M and A, which is also, um, um, vastly impacted by policy and, um, enforcement at the Federal Trade commission in Washington D.C. and with us, who's been very quiet and patient, is my partner, Ben Dryden. And Ben is among a small elite group of partners in our firm that prepare every single merger Acquisition transaction for reporting to the FTC or the doj, and um, shepherds those transactions through the process until they're approved. Um, Ben, um, I don't need to tell you that M and A activity was enormous in 2021 and then kind of has been falling off a cliff, uh, ever since, uh, to yet another cliff and another cliff. Um, yesterday, you know, we had a really positive, um, readout from the FTC that we hope to have three interest rate drops, uh, in the rest of the year, which you know, we hope might have some impact, uh, on M and A activity and helping it pick back up again. But, um, I'm not sure that the FTC thinks that M and A activity is good at all. And I wondered if you could share with us really what's driving the uh, the, the policy over at FTC in terms of tightening, uh, the restrictions and what is their uh, scope of action, if you will, what's their goal? And I always thought about the FTC as protecting competitive markets, making sure that we're all not subject to one monopoly telephone company or one monopoly electric company. And now it seems like the game has changed. I've thrown a lot at you, Ben. I'll let you, uh, start the conversation.

Speaker D: Sure.

Speaker B: Well, I think the way you ended it really helps to explain where the FTC is coming from. This idea that their job is to prevent there from being monopolistic markets. They speak in exactly those terms. Uh, the current FTC leadership uses the word the anti monopoly movement. We are, uh, moving forward. The anti monopoly movement and their perspective, and it's, you know, I don't personally agree with it, but I do see where they're coming from. They look back over the past 40 plus years of antitrust enforcement and what they see is in the glass half full, that we've gone from an economy where there wasn't an Internet 40 years ago to where we are today. What they see is the glass half empty, that there is more consolidation in industry, there's less small business formation. It is harder if you are a small entrepreneur to go from a startup to a, uh, big successful, um, enterprise. That's at least their perspective. And so the people who are leading the FTC and the DOJ today really take that as their mantle. They say that if we enforce the antitrust laws as they were originally intended, we will make it easier and fairer for small businesses and workers and the uh, historically disadvantaged segments to get a fair shake. And so they are firm believers in that. And they are being very, very active in pursuing that agenda. And so there are a number of things they are doing in the merger space. Uh, in the past year I think they've done three really truly game changing things in the area of merger enforcement. The headline was in December they released new merger guidelines, which are the document that lay out how the Federal Trade Commission, the DOJ will review mergers, uh, in an antitrust review.

Speaker D: And

Speaker B: it was a complete rewrite. It was the most thorough rewrite of the merger guidelines of all time. They didn't even use the same model. And uh, I applaud them. There are some smart people at the FTC and they're saying our audience is in courts, our audience is the business community, our audience is the public. So they really wrote the merger guidelines in a more user friendly language. Uh, and they just begin with

Speaker C: uh,

Speaker B: pretty interesting uh, line that a horizontal merger, a merger between competitors, it results in a combined market share above 30%. Presumptively anti competitive is their position. And I've had clients ask, well how can I do that? They just change the law. And well, they can't change the law. But what they did is they point to a Supreme court decision from 1963, very, very early in the age of modern merger enforcement, where The Supreme Court 1963 said that a horizontal merger results in a combined market share above 30% is presumptively anti competitive with. So they're saying that's the law of the land. That has never been overturned. And as a practical matter they're, they're right. That has not been overturned. That is the law of the land. It's just for the past 45 years or so, the agencies have just been more sophisticated than that. They haven't tried to apply that holding of the Supreme Court to ban mergers. So that's how the new merger guidelines begin. But then they take, uh, they go in some interesting places. They say we're not only going to look at what's good for consumers, we're also going to look at what's good for workers. And for the past four decades, if you could show that a merger resulted in cost savings for the merging companies in the form of reducing, uh, expenditure on labor, you would usually say, well that's a synergy. Uh, we're making our combined organization more efficient. We'll be able to pass some or all of those savings along to consumers. That's a good thing. That's making markets more competitive. The new position out of the agencies is no, that's lessening competition in the marketplace for competing for talent. So it's a novel application of the antitrust laws, but they've had some, uh, success in getting courts to accept that, at least as a premise of antitrust enforcement. So that's the biggest development in the past year, these new merger guidelines. But they've done some other things and individual enforcement cases that are really, really important.

Speaker A: Important.

Speaker B: And uh, arguably the biggest one is for the first time since the Jimmy Carter administration, the federal government has won a vertical merger challenge. A litigated vertical merger challenge. It was the Illumina Grail case, where Illumina makes next, uh, generation gene sequencing, um, machines. And Grail is a company that makes the test strip. So I'm picturing test strips that go to the machines that, uh, Illumina makes. And Braille's the only company that makes those things, but there are other companies that are trying to develop them. Well, Illumina used to own Grail. They spun it off a few years ago. They then realized their mistake and said, no, let's buy it, let's buy it back. And so they were trying to buy this company that they had previously owned. And the FTC said, sorry, you spun it off. It's a new company now. And we're concerned that if Illumina, the monopoly manufacturer of these next generation gene sequencing machines, owns the supplier of the test strips, then that's going to make it hard, harder for other companies to develop test strips. And no one else is currently making the test strips. But some people are trying. And it was a fascinating, uh, litigation. And uh, Ed and Deb were talking about the, the rubber stamp that the FTC will rubber stamp. What the uh, uh, what, what their uh, com, uh, staff has said. It's even more pernicious than that. The FTC authorized suing Illumina and Grail. They litigated before an administrative law judge. The administrative law judge ruled for the party, said, no, the FTC is wrong. This deal is not going to lessen competition. And then the FTC sat as a court of appeals above its own administrative law judge and said, no, we agree with ourselves. The complaint that we authorize, we are persuaded by. So we overturn the administrative law judge's decision. And then only at that point do you get to go to an actual independent court. But you're doing so under a deferential standard of review. The Fifth Circuit largely deferred to the factual findings of the Federal Trade Commission. And what we're left with is a opinion of the Fifth Circuit Court of Appeals that found that a vertical merger is lessen Competition, we haven't seen that since the Carter administration. So that's game changing.

Speaker A: Doesn't seem unreasonable though. Um, I get where that comes from. Who's ah, pretty critical of what the FTC has done to M and A markets. And just to put that in perspective, the whole ecosystem here in Silicon Valley really depends on M and A being an exit opportunity for a startup. And as we all know sometimes that's an acqui hire where the buyer of the company just essentially pays back the investors what they put in and hires the team and gets the technology. We call that an aqua hire. And then uh, early 21, I think it was one of Lena Khan's first actions, maybe it was 22, um, where she subpoenaed all the large tech companies on the non reportable transactions below the threshold that are not required to be uh, reported. Uh, and she issued subpoenas to Microsoft and Google and Apple and Amazon. And since then you know, you don't see them doing many acquisitions in the market. And that really has a chilling effect on a venture capitalist appetite to write a check to a startup. Because that vc, you know, can't really have much faith that there is, there is a, maybe a um, a reasonable ah, exit possibility in case the company doesn't hit a home run, um, which we see a lot of that. Then you get um, you know, the, the opportunity to consolidate and you just, you know nobody can get anywhere near a transaction like that nowadays. And then finally you have big companies like am uh, trying to do, you know, trying to develop new technologies and new industries to really go outside. Um, and I'm thinking about iRobot and they were blocked, right? Tell us about that transaction Ben.

Speaker B: So the IROBOT deal, uh, it was blocked out of Europe. The FTC didn't get to the point where it had to go to court. They were prepared to go to court. Um, it, it's a, interesting deal. I mean Amazon did for a moment consider making a home robot but they weren't a serious competitor in the market for robot vacuums. But it's under this lens. Uh, it's the same theory that the, the FTC has developed and that now the fifth circuit is agreed with in the aluminum grail case that if a buyer is going to acquire a target and thereby gain the ability and the incentive to disadvantage that targets rivals, that's the mechanism of harming competition. And there just hasn't been any case law to support that theory for 45 years. And now there is, there's a Fifth Circuit opinion. So it really is a different way of approaching merger analysis. And you're looking much beyond ah, traditional horizontal mergers between competitors. You're thinking more holistically and you know, thinking two and three and four strategic steps ahead. Might this buyer change its business model now that incentives are different?

Speaker A: Um, I think we're, we're running out of time. But I have one last question for you, Ben. And uh, I'm sure folks can follow up with you with their questions if we don't get to them all. But you know, for our audience of directors here, what is really important for them to know if, if they're, if an M and a transaction is even on the horizon? And specifically I'm thinking about a 4C. What do they need to know about 4C documents? And then two, um, what do they need to know about interlocking directorates?

Speaker B: Yeah, it'll be hard to unpack this in a minute, but I'll try. So the FTC is considering a rulemaking that will dramatically, dramatically expand the burden and the requirements to complete a Hartsky Rodino form, which is the form that you make when you submit a deal valued above 119 and a half million dollars. The proposal that's on the table is you'll have to submit not only the documents that talk about competition that were prepared for the deal process, but you'll have to collect some documents that talk about competition that weren't done for the deal process. Ordinary course business plans. You'll also need every single draft of one of those documents. If one of those drafts was shared with an officer or director, which can. It just, it's a homework project. It'll fall on directors to mechanically pull. Yeah, I saw 50 different drafts of this, of this presentation or something. You have to get all of those drafts. It's just, it's a tax on M M and a interlocking is another big issue. And just very, very quickly, there's a law, Section 8 of the Clayton act that says one person cannot simultaneously serve as a director of two competing companies. That makes perfect sense. They're then taking it a step farther and saying, well, if there's one common company that's appointing the two directors, so say a private equity company that has board seats on two different competitors boards, and the same private equity firm can appoint one director to one company and one director to another company's board, even if it's different people, the FTC is saying that's a violation, violation and that, that it's a problem. That's a real problem. I, I think they're wrong on the law, but that's the line they're taking.

Speaker A: So, pro tip for directors that aren't already doing this, uh, filing their emails, uh, per company in, in a, in a folder, because, uh, those emails may need to be, uh, reported in a 4C, uh, investigation for an M and a transaction. Pro tip number two, you've got to be thinking about the different boards you sit on and whether those companies are competing with each other. And who would have thought that Amazon and iRobot would be viewed as competitors? And yet they are. Um, so final tip for the audience. Um, I want to thank my panelists. Uh, Ed and Deb. You are just wonderful. Again, uh, thank you so much for coming to us and sharing your story. It is compelling. And Ben, thank you for, uh, sharing with us what's happening in Washington, D.C. i'm going to thank all of the attendees and, uh, we will follow up with, uh, a blog post on those pro tips.