via Nutritional supplements company agrees to shape up, clarionledger.com
A group of companies affiliated with the iconic Herbalife brand have reached a settlement with federal regulators over alleged deceptive practices, and will pay $200 million to compensate consumers and former associates. The action was announced Friday by the Federal Trade Commission and culminates a years-long saga in which the FTC and other agencies accused the multi-level marketing company of incentivizing representatives to recruit others, rather than encouraging product sales.
“This settlement will require Herbalife to fundamentally restructure its business so that participants are rewarded for what they sell, not how many people they recruit,” FTC Chairwoman Edith Ramirez said. “Herbalife is going to have to start operating legitimately, making only truthful claims about how much money its members are likely to make, and it will have to compensate consumers for the losses they have suffered as a result of what we charge are unfair and deceptive practices.”
The settlement between the FTC and Herbalife International of America Inc., Herbalife International Inc. and Herbalife Ltd. requires the companies to “fully restructure their U.S. business operations,” in addition to paying the $200 million fine to provide “redress” to customers and, in some cases, to reimburse former associates for their losses. In addition, Herbalife is settling a $3 million case with the Illinois attorney general.
Herbalife, while denying any wrongdoing, noted that it’s ready to move on. “While the company believes that many of the allegations made by the FTC are factually incorrect,” the company said in a press release, “the company believes settlement is in its best interest because the financial cost and distraction of protracted litigation would have been significant, and after more than two years of cooperating with the FTC’s investigation, the Company simply wanted to move forward. Moreover, the company’s management can now focus all of its energies on continuing to build the business and exploring strategic business opportunities.”
In its complaint, the FTC also charged the multi-level marketing company’s compensation structure was unfair because it rewards distributors for recruiting others to join and purchase products in order to advance in the marketing program, rather than in response to actual retail demand for the product, causing “substantial economic injury” to many of its distributors.
In its announcement, the FTC alleged the company had lured in people with claims they could quit their day jobs, earn good money and even get rich by signing up to sell Herbalife products. “But the truth, as alleged in the FTC complaint, is that the overwhelming majority of distributors who pursue the business opportunity earn little or no money.”
As evidence, the agency pointed out that, in 2014, Herbalife paid more than half of its “sales leaders” an average of less than $300. And, citing the company’s own survey results, the FTC alleged that owners of Herbalife “Nutrition Clubs” spent an average of about $8,500 to open a club, and 57 percent of club owners reported making no profit or losing money.
And, for those who did succeed in making large amounts of cash, the FTC noted those representatives are “compensated for recruiting new distributors, regardless of whether those recruits can sell the products they are encouraged to buy from Herbalife.” Many distributors, the agency concluded, “abandon Herbalife in large numbers. The majority of them stop ordering products within their first year, and nearly half of the entire Herbalife distributor base quits in any given year.”
The settlement requires Herbalife to revamp its compensation system so it rewards retail sales to customers and eliminates incentives that reward distributors primarily for recruiting. In addition, the company must create a new compensation structure in which success depends on whether participants sell Herbalife products, not on whether they buy products.
“This scheme preyed on people looking to make a better life for themselves and their families,” said Illinois Attorney General Lisa Madigan. “Herbalife created an incentive structure that made it easy for people to invest, but impossible for most people to make any money.”