Note: See an overview of how this settlement affects network marketers, and watch out blog for detailed analysis and updates.
Herbalife International of America, Inc., Herbalife International, Inc., and Herbalife, Ltd. will restructure their U.S. multi-level marketing business operations and pay $200 million to compensate consumers to settle the FTC complaint that the Herbalife companies deceived consumers into believing they could earn substantial money their products.
The FTC complaint also charged that Herbalife’s compensation structure was unfair because it distributors were rewarded for recruiting others to join and purchase products in order to advance in the MLM program, as opposed to actual retail demand for the product, causing economic injury to many distributors.
According to the complaint, Herbalife claimed that people could earn thousands of dollars a month or even get rich in the program. But the complaint alleged that the majority of distributors earn little or no money, with more than half the distributors known as “sales leaders” receiving less than $300 in rewards for 2014. According to a survey by Herbalife itself, Nutrition Club owners spent an average of about $8,500 to open a club, and 57 percent of club owners reported making no profit or losing money.
Those distributors who do make a lot of money, according to the complaint, are compensated for recruiting new distributors, regardless of whether those recruits can sell the products they buy from Herbalife.
As part of the settlement, Herbalife will change its compensation system so that it eliminates recruiting incentives and rewards retail sales to customers. As examples of the changes, the FTC says:
- Herbalife will differentiate between participants who join simply to buy products at a discount and those who join the business opportunity.
- At least two-thirds of rewards paid to distributors must be based on tracked and verified retail sales of Herbalife products. No more than one-third of rewards can be based on other distributors’ limited personal consumption.
- I order to pay compensation to distributors at current levels, at least 80 percent of Herbalife’s product sales must be to legitimate end-users. Otherwise, rewards to distributors must be reduced.
- Herbalife is prohibited from allowing participants to incur the expenses associated with leasing or purchasing premises for “Nutrition Clubs” or other business locations before completing their first year as a distributor and completing a business training program.
In addition, Herbalife will pay a $200 million for consumer redress, including money for consumers, such as Nutrition Club owners, who purchased large quantities of Herbalife products.