FTC Settlement with Herbalife – OMG!!!!

Network marketing is in the midst of a rapidly advancing Orwellian era.


Network marketing is in the midst of a rapidly advancing Orwellian era. It’s been slow to develop, starting in 1996 when the Ninth Circuit Court of Appeals issued its decision in Webster v. Omnitrition, but it’s snowballed in the past two years.  Today the snowball grew exponentially with the announcement that the Federal Trade Commission and Herbalife have reached a settlement agreement.

Watch for detailed updates and analysis on the settlement. We’ll break it down into many little pieces to determine how it will impact your business. But today we just have time for a broad sweep so I’m just going to address some critical topics.

The obvious first question is: “Does this settlement affect my business?” It’s certainly an important question. After all, the FTC was investigating Herbalife and analyzing Herbalife’s program, so why should it apply to any other company? The answer is two-fold. There’s the technically correct answer, and the real-world practical answer. The technically correct answer is that the FTC settlement with Herbalife has no binding impact on any other network marketing business. The real-world answer is quite different.  The changes that Herbalife must implement offer a clear roadmap to the standards that the FTC expects all direct sellers to conform, and those are the standards that it will pursue in future cases against direct sellers.

There’s no law that requires direct selling companies to adhere to all of requirements in the Herbalife settlement. But those who stick their head in the sand and ignore the messages in the Herbalife settlement agreement do so at great peril. By now you’re certainly wondering what the settlement agreement requires. Here’s a high level summary of the most critical issues that will impact every network marketing program:

  1. The FTC has asserted a new basis upon which to attack MLMs under Section 5 of the FTC Act. They claim that Herbalife was “promoting participation in a multi-level marketing program with a compensation structure that causes or is likely to cause harm to participants.”

This is a groundbreaking position. Historically, the FTC has attacked MLM programs as pyramid schemes, but in the Herbalife settlement there’s no assertion that Herbalife is an illegal pyramid (that’s great news for Herbalife!). Rather, the settlement agreement asserts “the compensation structure is likely to cause harm.” This is a new angle of attack that requires a new analysis of compensation plans and programs. The legal standard of what constitutes a harmful compensation plan is not defined in any case law. The Herbalife settlement is the first glimpse we’ve had into what is a “harmful compensation structure.”

  1. Sales to non-participants in the business opportunity remain foremost in the FTC’s consideration of what constitutes a legitimate multilevel opportunity. The FTC acknowledges that some personal consumption of products by Herbalife distributors is appropriate. What’s critically important is that the settlement agreement specifies that no more than one-third of multilevel compensation may be paid from sales to distributors. Conversely, the FTC expects at least two-thirds of product sales to be to customers (i.e., those who are NOT distributors). Also of critical importance is that the settlement agreement very clearly delineates distributors from customers. The argument that distributors who don’t earn anything but who to buy products are “discount buyers” and not distributors will not hold water.
  1. To the extent that the program required distributors to meet minimum quotas to qualify for compensation, the minimum quotas MUST be met through sales to customers who are not distributors. This is a CRITICAL takeaway from the settlement because it stabs directly at the heart of the very common element of multilevel compensation plans that set minimum personal volume quotas necessary to be “active,” which is a prerequisite to being eligible for compensation.
  1. Distributors are PROHIBITED from participating in an auto-ship program. Yes, you read that correctly. Stop and take a deep breath. Now read it again. I don’t need to expound on that one.

There are A LOT of other elements to the settlement that are incredibly significant, and much further analysis needed on the points addressed in this blog. We’ll focus on the many facets of the settlement agreement in the very near future. But the above are such foundational concerns that every company using a multilevel compensation structure must be thinking about how to deal with this NOW. If these are the standards that the FTC will seek to impose on all multilevel marketers (and I fully expect that they are), it will impact EVERY direct seller and the structure of the overwhelming majority of direct selling businesses.


Herbalife to Restructure Operations, Pay $200 Million to Settle FTC Charges

Herbalife States USA Revenues Only 20% Of Total Company Revenues!

Angle Of Justice

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.


How Much Does a Network Marketer Earn?

Data Shows Part-Time & Full-Time Networkers Earnings Still A Good Business Model


Depending on who you are talking to, you can get various responses to this question. Some would say a fortune is possible, while some others would tell that one can make a pocket money at most.

There are also others who take their stands on extremes, of course. Those on one end claim that a fortune is guaranteed and people on the other extreme say it is not possible to earn literally anything with network marketing.

But we have data from companies disclosing how much they pay to their representatives. Let’s check a few of them.


The Wisdom of Jerry Garcia

What Does The Greatful Dead Have To Do With Network Marketing?


I went to a Grateful Dead concert in 1976. The band was at the height of cool at the time as they represented the counter-culture movement from the Haight-Ashbury district of San Francisco. Although I had been to a number of concerts before seeing the Dead, this concert was different because it was the first (and to this day the only) concert where I witnessed security personnel hauling stoned audience members out throughout the show like it was a revolving door, and I saw medical personnel take at least six overdosed people out on stretchers.

This was obviously a common occurrence at Dead concerts. I vividly recall that right after their first number (Truckin’), Jerry Garcia (lead singer for those of you not old enough to have a touch of grey) announced “Hey people, have a great time, but don’t do any stupid sh**!” Such profound wisdom in such a simple statement!

I don’t think Jerry Garcia’s admonition resonated with the audience that night (shocking, right?), but it should resonate loudly with direct sellers. I look back on the FTC’s last four pyramid actions, Vemma, Fortune Hi-Tech, Burnlounge and Trek Alliance, and in each case we can point to stupid things that that landed the defendants in the FTC’s cross-hairs. We can (and will) closely analyze compensation plans, compliance and marketing nuances that the FTC charges render MLMs pyramid schemes. But there’s a place for analysis, and a place for common sense. Let’s put common sense first, because it’s unquestionably the first and best defense against finding your business in the line of regulatory fire.

Let’s start with Equinox and Trek. In both cases distributors (with corporate knowledge) placed ads in the “Help Wanted” sections of newspapers. The ads led readers to believe that Equinox and Trek were seeking to fill employment positions. People applied for the “jobs” and showed up for “job interviews.” In egregious cases the job applicant would purchase an airplane ticket to fly to the city in which the “job interview” was scheduled. When people arrived for their job interviews, they were pitched on the MLM opportunity, sold a starter kit and a large amount of merchandise. This proved an effective recruiting technique, but it doesn’t take a rocket scientist to figure out that it was based on deception and would inevitably elicit complaints to regulators. You guessed it – STUPID MOVE!!!

Fortune Hi-Tech’s compensation plan had built-in stupidity. While FHTM sold some real products and services, FHTM also sold a $199 “training program” to new distributors and paid a multilevel override on the sale. The training program, to the surprise of … NOBODY, was simply a means of funding compensation for recruiting new distributors. Montana was the first state to investigate FHTM, and frankly, they missed this issue. However, enough money was flowing through FHTM that regulators could not help but notice that the growth was driven by recruiting rather than bona fide consumer sales. Once again, stupid reigned supreme and helped lead to the demise of FHTM.

The Burnlounge case was triggered by the incendiary combination of stupidity and arrogance. Burnlounge management and its top earning distributor conducted meetings rife with income claims. They told audience members they could earn $900,000+ in their first year (not even the top earner was making close to that much). A woman in the audience found the sales pitch interesting, so she brought her husband to the meeting the next night. After the meeting the woman’s husband pressed the presenters for information to support the pie-in-the-sky income claims. The presenters didn’t want to be bothered with him (nor did they have any support for their claims) so they told the man to mind his own business. It turned out he was the assistant attorney general for the State of South Carolina. The next day an investigation file was opened on Burnlounge. Ooops! Ring the stupid bell!!!

Most recently Vemma was shut down by the FTC. We don’t have to look very hard to see where dumb came into play. Several highly visible Vemma distributors built their businesses on college campuses. They would aggressively pitch the Vemma business to college students, telling themn that they didn’t need a college education or that they should use their tuition money to build a Vemma business. Could anyone have foreseen how that might lead irate parents to ignite a firestorm of complaints? Ummm … yeah …

Whenever an MLM is attacked by law enforcement, other MLMs want to scrutinize the defendant company’s policies and compensation plan and parse every phrase in court filings, orders and opinions and quickly make changes so that the same fate does not befall their company. But it’s a COLLOSSAL MISTAKE to assume that the critical flaws all reside in the compensation plan or policies. The first step should be to identify every element of STUPID (and arrogant) in your business and fix it. The company may have turned a blind eye to the stupid practice for years or thought because a practice is not specifically illegal, it’s okay. Most commonly, the stupid practice is effective at growing the business, so they try to rationalize that it’s acceptable. But guess what? Even if it’s not illegal, it’s still stupid! And it’s STUPID that most often brings MLMs into regulatory crosshairs.

So the first rule in avoiding legal problems; heed the advice of Jerry Garcia and don’t do stupid sh… stuff!


Understanding Compensation Plans: Pros And Cons Of The Matrix Compensation Structure By Daren Falter


In this video Network Marketing consultant, co-founder and compensation expert Daren Falter continued his series on compensation plans by explaining the Matrix Compensation Structure.

You can review the first two parts of this series here:

Part 1: Introduction to MLM Compensation Plans

Part 2: Understanding MLM Compensation Plan Terms

You can read more that Daren Falter has written on the Matrix comp plan be clicking here!

Understanding MLM Compensation Plans: Compensation Plan Terminology By Daren Falter


Understanding network marketing compensation plans is not the easiest things in the world. Although the math is pretty simple on the surface, it helps to know what the terminology really means. Daren Falter breaks down the terminology so all of us can understand. you can learn more about Daren Falter or buy his book at the Network Marketing Book!

Part 1: Introduction to MLM Compensation Plans