FTC Settlement with Herbalife – OMG!!!!

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

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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.

#MLMLaws

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.

#MLMLaws

Breaking MLM News: The Verdict Is In – In 2016 Trust Instead Of Just New Cars

Weekly Business News Report For The Small and Home-Based Business Community

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I was reading in the Wall Street Journal this week and ran across a story titled – Teen Sports Faces a Nutritional-Supplement Debate.  I am a huge advocate of a healthy lifestyle and making sure teen athletes have all the nutrients they need, without the dangers of banned or almost banned ingredients. In this article a company out of Florida, P2Life is on a mission to help teens, specifically Michael Andrews, who is setting new records in swimming as he prepares for compete for a spot on the U.S. Olympic Team.

I wrote an article not to long ago (Investigative Perspective The Supplement Danger Zone) on this very subject as I followed a USAToday investigative series.

I also read today where Echinacea is as effective as the prescription Tamiflu at getting rid of colds and flu symptoms… 

BrainStrong Adult Dietary Supplement Makers Settle FTC Complaint

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i-Health, Inc. and Martek Biosciences Corporation have settled Federal Trade Commission charges that they used deceptive advertising in marketing their BrainStrong Adult dietary supplement. The FTC complaint alleged that the supplement makers claimed BrainStrong improves adult memory and prevents cognitive decline, and that they falsely claimed they had clinical proof for the claims.

Television commercials for BrainStrong Adult showed a forgetful woman and a voiceover saying, “Need a memory boost?  Introducing BrainStrong…Clinically shown to improve adult memory.” In addition to television, the product was advertised on Twitter and brainstrongdha.com.

BrainStrong Adult sold for about $30 for a 30-day supply and was available at major retail stores, including CVS Pharmacy, Walmart, Walgreens and Rite Aid, as well as online through DrugStore.com and Amazon.com.

The final order bars i-Health, Inc. and Martek Biosciences from making claims regarding the ability of any promoted dietary supplement, food, drug or product to prevent cognitive decline or improve memory. In addition, they are barred from claiming any product containing DHA can prevent cognitive decline or improve memory in adults, unless the claim is truthful and supported by clinical testing.

It also bars them from making claims about the health benefits, performance, safety, or effectiveness of such products, unless the claims are supported by competent and reliable scientific evidence.  In addition, they cannot claim they have clinical proof when they do not.

#MLMLaws

Injunction Stops Sale and Distribution of BioAnue Supplements

A federal judge has granted the Food & Drug Administration’s request

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A federal judge has granted the Food & Drug Administration’s request for a permanent injunction prohibiting BioAnue from making and distributing its dietary supplement products until they comply with FDA regulations.

While BioAnue sold the products as dietary supplements, the FDA maintained that they were “unapproved new drugs” because they were marketed without FDA approval as treatments for a variety of diseases, including cancer, HIV/AIDS, heart disease and diabetes. In addition, BioAnue failed to follow the FDA’s current good manufacturing practice regulations for dietary supplements.

The products covered by the order include TumoRx Cardio Clean, TumoRx Apoptosis Full Strength, TumoRx Formula CX, BioAnue Diabetic Mender, BioAnue Heart Mender, Stroke Mender, Cardiovascular Mender and Bovine Cartilage. According to the FDA, BioAnue made therapeutic claims for the supplements, thereby establishing them as drugs intended for treating disease.

Claims made for Tumor X Cardio Clean, for example, included “Cardio Clean can …. [C]lean out your arteries and eliminate high cholesterol and triglycerides.” and “Cardio Clean … transforms artery clogging cholesterol into disease fighting substances needed for proper function inside the body.” In addition, the FDA maintained that the product name itself is an implied drug claim.

The FDA first issued a warning letter to BioAnue in February, 2012. A follow-up FDA inspection  the following August showed in addition to not taking action to correct the violations cited in the warning letter, the company also was not complying with the FDA’s current good manufacturing practice requirements for dietary supplements.

#MLMLaws

TriVita to Refund $3.5 Million in Nopalea Settlement with FTC

TriVita Played It Loose And Lost Against The FTC!

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The marketers of the fruit drink Nopalea have agreed to pay $3.5 million in consumer refunds to settle FTC charges that they deceptively marketed the product as scientifically proven to reduce various ailments, including pain. The marketers named in the FTC complaint are dietary supplement maker TriVita, Inc., Ellison Media Company, and Michael R. and Susan R. Ellison, who control both companies.

The FTC’s complaint alleged that TruVita did not have the clinical studies to support the claims they were making about the health benefits of Nopalea, a fruit drink derived the nopal cactus, also know as the prickly pear. Nopalea cost up to $39.99 for a 32-ounce bottle.

According to the FTC complaint, TruVita’s unsupported claimes included that Nopalea improves breathing and relieves sinus infections and other respiratory conditions, provides relief from pain, swelling of the joints and muscles, and provides relief from psoriasis and other skin conditions.

The FTC also alleged that TruVita failed to disclose that “ordinary consumer” endorsers were TriVita sales people who received commissions for selling the defendants’ products.

In addition to the $3.5 million payment, the settlement bars the marketers from making the health claims alleged in the complaint when marketing Nopalea or any food, drug or dietary supplement without  human clinical tests conducted by qualified researchers; making any health claims without competent and reliable scientific evidence; misrepresenting that health benefits are clinically proven when they are not; and failing to disclose any material connection between endorsers of their products and themselves.

#MLMLaws

Marketers Agree to Pay $500,000, Accept Ban from Marketing Weight-Loss Products in FTC Settlement

FTC Wins Case Against False Weight-Loss Company!

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Manon Fernet and the company she controls, which did business as the “Freedom Center Against Obesity,” have agreed to settle an FTC complaint against them that includes paying $500,000 and accepting a ban from manufacturing or marketing weight loss products in the United States.

According to the FTC’s complaint, the Canada-based marketers deceptively advertised their product as being able to cause fast, substantial and permanent weight loss without diet or exercise. Sold as Double Shot, the product was comprised of two capsules. One capsule was claimed to cause weight loss by burning stored fat as if the user had exercised one hour a day. The other capsule was claimed to prevent the absorption of all but 10% of the calories consumed.

The marketing materials used the endorsement of a doctor identified as the Director of Weight Loss Research for the Freedom Center Against Obesity. They also claimed the effectiveness of the product was substantiated by clinical studies. According to the FTC complaint, neither the doctor nor the studies were real.

Under the settlement, the defendants are banned from manufacturing or marketing weight loss products or assisting others in doing so. They also are banned from making any claims about the health benefits or effectiveness of any dietary supplement, food, drug, or device unless the claims are true and they can support those claims with studies that are generally accepted in the profession to have been conducted and evaluated objectively by qualified people.

#MLMLaws