Herbalife – The Scam That Just Keeps Going
In July of 2016 it was official, Multi-level marketer (pyramid schemer) Herbalife was ordered to pay $200 million back to people who were taken in by what the FTC alleges were misleading moneymaking claims. But when it comes to protecting consumers, that may not be the most important part of the just-announced settlement.
Advertising in English and Spanish, Herbalife pitched its business opportunity as a way for people to quit their jobs and make the big bucks. Other ads promoted Herbalife as a means for already hard-working people to provide a little more for their families: “When we worked in factories our earnings could only pay for basic needs, but now we can take our 12 grandkids on vacations.”
Sccording to the FTC, it’s virtually impossible to make money selling Herbalife products. As explained in the complaint, our analysis shows that half of Herbalife “Sales Leaders” earned on average less than $5 a month from product sales. For folks who invested the most to build an actual retail business – a brick-and-mortar store that Herbalife called a Nutrition Club – the majority made nothing or even lost money.
Which brings us to the inconvenient little secret about Herbalife that the FTC’s complaint alleges: The small number of distributors who actually made money made it not by selling products to people who wanted the company’s powders, pills, and potions, but rather by recruiting others to serve as distributors – and encouraging them to buy Herbalife products.
The lawsuit alleges that Herbalife deceived consumers into believing they could earn substantial income from the business opportunity or big money from the retail sale of the company’s products. In addition, the complaint charges that one of the fundamental principles of Herbalife’s business model – incentivizing distributors to buy products and to recruit others to join and buy products so they could advance in the company’s marketing program, rather than in response to actual consumer demand – is an unfair practice in violation of the FTC Act.
Under the settlement, that all has to change. The order requires Herbalife to drop its current system of rewarding distributors primarily for recruiting a “downline” of people who will buy the product at wholesale, without regard to whether there are customers out there who really want the merchandise. Under the new compensation structure, success in the Herbalife marketing program must depend on whether participants sell products, not on whether they can recruit additional distributors to buy products.
You’ll want to read the order for the detailed dos and don’ts, but they’re all closely tied to the law violations alleged in the complaint. Here’s just one example: The order requires a clear differentiation between people who join just to buy discounted products for their own use and those who join the business opportunity. For people in the bizopp, 2/3 of rewards must be based on verifiable retail sales, with no more than 1/3 coming from product designated as “personal consumption.”
And it’s not a “we’ll take your word for it” thing. The order includes teeth that will put a financial bite on non-compliance. To make sure everyone at Herbalife is on board with the new set-up, 80% of the company’s net sales will have to be real sales to real buyers. If that doesn’t happen, the rewards that high-level distributors pocket will be cut. What’s more, for the next seven years, Herbalife has to hire an Independent Compliance Auditor to monitor what the company is doing to comply with the new compensation plan. The Auditor will report to the FTC, who will have the authority to replace that person should it become necessary.
We’re glad to be returning $200 million to consumers. (Details about the refund program will be available soon.) But another key goal is to dismantle the alleged deception and unfairness built into how Herbalife does business. As the company rewrites its advertising claims and restructures its compensation system, we’ll be watching. The Auditor will be watching. And consumers should be watching, too.
What Happens From Here ?
In short, Herbalife was violating the law and must drastically revamp its business moving forward.
Under the FTC-imposed changes, Herbalife can only pay distributors based on verifiable retail sales. Herbalife can only pay its distributors at current levels if at least 80% of the company’s sales are to real customers.
This change reflects the FTC’s conclusion that profitable sales of Herbalife products are a fiction.
Herbalife distributors will be required to collect and maintain Retail Sales information.
In the past, Herbalife claimed that collecting such information would be unduly burdensome and would violate customer privacy.
Herbalife distributors can’t be required to make minimum qualifying purchases.
Before, distributors often purchased large volumes of products to advance in the marketing plan regardless of retail demand.
Distributors won’t be able to make misleading income and lifestyle claims.
The days of distributors promising recruits mansions, yachts and planes are over.
Herbalife would like you to ignore the truth above. The company’s spin machine has been working overtime. Here are some misleading claims about the settlement that have been floating around:
Claim: CEO Michael Johnson: “The FTC is an acknowledgment that our Herbalife’s business model is sound.”
Truth: The FTC settlement requires a “top to bottom” restructuring of Herbalife’s business model to “dismantle the alleged deception” and “start complying with the law” https://www.ftc.gov/news-events/blogs/business-blog/2016/07/its-no-longer-business-usual-herbalife-inside-look-200
Truth: FTC Chairwoman Edith Ramirez in fact stated that Herbalife operates a “multi-level marketing” business model. http://https://www.youtube.com/watch?v=64SQJcN9WD8
Truth: If Herbalife had not settled, they would have been involved in litigation with the FTC for years and would have been labeled a pyramid scheme.
Truth: The FTC works with more than 100 foreign competition and consumer protection authorities around the world. We intend to work with regulators around the world to enforce similar requirements.