By Riëtte van Laack –
Last week, FTC announced a settlement agreement with Herbalife International of America Inc., Herbalife International, Inc. and Herbalife Ltd. (Herbalife) under which Herbalife is to pay 200 million dollars and restructure its business (see FTC press release here).
In the Complaint filed on the same day, FTC asserts that Herbalife deceived consumers into believing that they could earn substantial amounts of money selling Herbalife products. FTC claims that Herbalife was presented as a multilevel marketing (MLM) business opportunity. The advertising represented the opportunity as one in which participants could earn money through sale of dietary supplements and personal care products and recruiting new participants. However, according to FTC, Herbalife’s compensation structure was based primarily on participants recruiting others to join and purchase product, rather than on sale of products. Allegedly, Herbalife misrepresented the business opportunity as an opportunity to get substantial income. Yet, the FTC claimed that, in reality, the business was not about selling product; allegedly profit from retail sale of product was negligible. According to FTC, the small number of participants that made significant amounts of money did so not by retail sale of product but by recruiting large numbers of new members. Those new members would pay a fee, purchase training materials, and goods at wholesale price. Although led to believe otherwise, most of the distributors/members made little to no money through sale of product.
FTC claimed that the compensation structure incentivized distributors to purchase (not sell) product and to recruit new participants apparently resulting in overrecruitment of participants and an oversupply of product, making it even more difficult for participants to sell product. According to FTC, there was no or limited possibility to make money from retail sales of the product.
FTC obtained a permanent injunction that includes reorganization of Herbalife’s marketing structure (and associated contractual relationships), restitution, disgorgement etc. Herbalife settled for $200 million.
In particular, Herbalife must restructure its marketing system to comply with certain parameters laid out in the consent decree. The new marketing system may no longer primarily reward participants for recruiting distributors, but only for sale of products. The consent decree details the requirements for the new MLM program and compensation structure. In addition, it specifies that Herbalife is enjoined from making misrepresentations regarding business opportunities, such as the likelihood of earning substantial income and the amount that can be earned. Herbalife is also enjoined from advertising the business opportunity as likely to result in “lavish lifestyle.” For example, claims that participants can ‘quit [their] job,’ are ‘set for life,’ can ‘earn millions of dollars,’ and images showing expensive cars and other indicators of wealth are prohibited.
A third party compliance auditor will be appointed. For seven years, this compliance auditor has the “duty and responsibility to diligently and competently review, assess, and evaluate Defendants’ compliance with [various] provisions” of the consent decree and report its findings to FTC. In addition, Herbalife is subject to certain compliance reporting requirements.
Multilevel marketing is a popular business model in the dietary supplement industry. Any company involved in this type of business should review the complaint and consent decree and consider the structure of its own MLM business.