Breaking Herbalife News: NOT Found To Be Pyramid Scheme!

Herbalife Will Restructure Its Multi-level Marketing Operations


Multi-level marketer Herbalife will 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. What could matter more than $200 million? An order that requires Herbalife to restructure its business from top to bottom – and to start complying with the law.

“This settlement will require Herbalife to fundamentally restructure its business so that participants are rewarded for what they sell, not how many people they recruit,” FTC Chairwoman Ramirez said. “Herbalife is going to have to start operating legitimately, making only truthful claims about how much money its members are likely to make, and it will have to compensate consumers for the losses they have suffered as a result of what we charge are unfair and deceptive practices.”

For example:

  • The company will now differentiate between participants who join simply to buy products at a discount and those who join the business opportunity. “Discount buyers” will not be eligible to sell product or earn rewards.
  • Multi-level compensation that business opportunity participants earn will be driven by retail sales. At least two-thirds of rewards paid by Herbalife to distributors must be based on retail sales of Herbalife products that are tracked and verified. No more than one-third of rewards can be based on other distributors’ limited personal consumption.
  • Companywide, in order to pay compensation to distributors at current levels, at least 80 percent of Herbalife’s product sales must be comprised of sales 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.

What Makes a Company a MLM?

Are You Launching a Network Marketing Company or Pyramid?


I recently fielded a phone call from a business owner who asked me the following question: Does my business model qualify as a multi-level marketing company? It’s a good question whose answer invokes a variety of possible legal implications.


With no single authority providing some sort of precedential definition of “MLM,” the best way of boiling the concept down to its essential elements is through the lens of different authorities and sources.


Amended DSA Code of Ethics: Are the modifications meaningful?

Direct Selling Association Modifies They Current Code Of Ethics - Is It Enough?


Beyond just ringing in a new year, January 1, 2016, also signified the enactment of the Direct Selling Association’s (“DSA”) latest Code of Ethics. Before breaking down the differences that exist between the new and previous versions, my commentary on the subject remains the same: the DSA has a long way to go before providing a Code that offers serious protection for member companies from regulatory issues.

The Code’s prior shortcoming was epitomized by the FTC’s action this past year against Vemma, a longstanding member of the DSA that was touted for exemplifying ethical and appropriate business practices. Vemma went from being a recipient of the DSA’s Ethos Award in 2013 to getting targeted and sued by the FTC.

I’ve said it before and I’ll say it again — to really “tighten the screws,” the DSA needs to take the kind of proactive steps that’s bound to upset some people. This would mean implementing stricter requirements that will cause companies to really stretch, improve and adapt.


Fifth Circuit Creates an “Insurmountable Barrier” to Pyramid Class Actions


In the Fifth Circuit of the United States Court of Appeals, bringing a class action lawsuit against an alleged pyramid schemes just got a heck of a lot harder. According to one of the three Circuit Judges presiding over the case, the court’s decision gives illegal pyramid schemes a “Teflon coating” and protects them “not only from class actions but from any suits claiming fraud.” The entire opinion can be read here.

The case, titled Torres v. S.G.E. Mgmt. LLC (Stream Energy), was a class action suit against the multi-level marketing program Ignite Energy. Plaintiffs were formerly participants in the multi-level marketing venture Ignite, an MLM designed to promote energy services. The Plaintiffs claimed they participated in the venture and ultimately lost money as a result of Ignite’s false misrepresentations that it was a legitimate business. The backbone of Plaintiff’s cause of action rested upon their allegations that Ignite violated the Racketeer Influenced and Corrupt Organizations (“RICO”) Act through mail and wire fraud activity. In order to prove fraudulent mail and wire activity caused their injury, i.e., the loss of their money due to fraudulent promotions online, the law required that Plaintiffs prove they relied on Ignite’s fraudulent misrepresentations claiming to be a legitimate business.

In order to understand the issues surrounding the case, certain legal background and context are necessary. Before a large number of people (“class”), all with a common interest in a particular matter, can sue or be sued, the Federal Rules of Civil Procedure demand what’s called “class certification”. Basically, class certification requires, among other things, that there be questions common to all members of the class. Additionally, these common questions must predominate over any questions that affect only individual class members. As an example, if an individual ate a moldy hamburger at a restaurant, it would not be a “common” issue that would justify class certification. On the flip side, if an individual was overcharged 5% on a cell phone bill, and that strategy was used for all other customers, the “common interest” would certainly exist to justify class certification.


The Vemma Ruling Is Out

What Do The MLM Attorneys Think About The Vemma Case?


The U.S. District Court in Arizona just released its order on the Vemma TRO/asset freeze and receivership. Here’s the quick summary, but the analysis has many angles and moving parts that invite much analysis and interpretation.

  1. The Temporary Restraining Order. The court found that there is a substantial likelihood that Vemma was running a pyramid scheme. However, the court also found that there were parts of Vemma’s business that were being operated legitimately. Therefore, the court amended the TRO and allowed Vemma to continue to operate those parts of its business that were being run legitimately, but enjoined Vemma from engaging in those practices that it viewed as illegal. As it relates to Vemma’s sales and compensation program, the court enjoined Vemma from incentivizing distributors to buy products to become eligible, or maintain eligibility, for compensation rather than for resale or personal use. (Emphasis added – this is HUGE!). This is seemingly contradicted by another statement in which the court prohibits Vemma from paying compensation related to the sale of products unless the majority of compensation is derived from sales to buyers who are not members of the Marketing Program. (Emphasis added).
  2. Vemma remains enjoined from paying commissions on the sale of Affiliate Packs and on the sale of products to distributors if such sales accumulate sales volume that qualifies the purchasing distributor for compensation. This provision directly impacts Vemma’s autoship program; we will analyze this in much greater detail in upcoming analyses.
  3. The Asset Freeze. Vemma’s assets and the personal assets of the defendants are unfrozen. The court found that the FTC did not present sufficient evidence that the assets were at risk of being dissipated.
  4. The Receivership. The court found that because Vemma is prohibited from engaging in illegal practices, it was unnecessary to have the business run by the receiver. However, the court recognized that Vemma had engaged in numerous illegal actions, so it re-cast the receiver as a court appointed monitor to oversee the defendants’ management and operation of the business. This is a significant step as it puts Vemma’s management back in charge of the company. Of course, the problem is that the company is a mere shell of its former self since the receiver fired most of its employees.

The content of the court’s order simply begs for analysis, and we will be breaking it down into dozens of individual issues for you. However, it’s important to understand that while this is a considerably stronger outcome than other MLMs have experienced in the past following FTC action, the company has been devastated so the FTC still has its “win” (although it certainly has egg on its face for other reasons that we will discuss in subsequent posts). But as I pointed out in my last blog, we have much work to do.

In my opinion, today’s ruling is yet another scenario of another governmental entity acting under the color of the law overstepping its bounds. The FTC misled a federal judge to convince him to grant an order that effectively killed Vemma’s business. Then, before Vemma had a day in court, the FTC’s receiver overstepped the bounds of the Court’s order by firing the majority of Vemma’s employees. Vemma received no hearing until weeks after the FTC had done everything it could do to effectively kill the company.

In reading between the lines, today’s court order indicates that the court viewed the FTC’s action as overreaching. Notice that I said “overreaching,” and not that Vemma was innocent of the charges. That’s a key distinction because in so doing the court sent a message that the FTC went too far in convincing the court to issue the draconian relief set forth in its original order that froze Vemma’s assets, turned the company over to a receiver, and shut the business down.

Vemma was not an altar-boy, and the court’s order recognizes that. Indeed, the court’s order indicates that it believes that the FTC will successfully prove that Vemma was operating an illegal pyramid scheme. I’m not commenting on whether or not that is true, but nobody can credibly argue that Vemma and its distributors were not too aggressive in some practices. But did Vemma’s transgressions justify the FTC’s initial actions in killing the company? Or are we faced with a situation in which the FTC, as the top-cop in the consumer protection arena, is exhibiting and exercising a bias against direct sales?

I am not one to espouse conspiracy theories, but how many consumer (and OSHA, and EEOC, and on and on …) complaints have been filed against WalMart, McDonalds, or any other high-profile business? Does the government shut them down, freeze their assets, and appoint a receiver to liquidate the company? Does the government shut down an auto company when the company builds cars knowing that they have flaws because they calculate that the lawsuits from the ensuing accidents will cost less than fixing the problems? I have yet to hear of an asset freeze or ex parte shut-down of a tobacco company, although the harm they cause to individuals, our health care system, and society at large dwarfs any harms alleged to have been caused by Vemma.

Obviously these are extreme examples, but they are fitting. Let’s face it, the government does not kill businesses in other fields, even though their transgressions are far more devastating in terms of life and property than the harm that can be caused by a flawed direct selling company.

Let me be clear. I am not defending pyramid schemes. There is NO ROOM in the direct sales distribution channel for pyramid schemes. I am however shouting loudly about the bias that the FTC has for the direct selling industry. The court’s action in amending the Vemma TRO highlights that less draconian remedies are appropriate and suitable to address problems within our industry while legal proceedings wind their way through the courts. The Vemma case highlights this fact very clearly. The FTC identifies a target with an objective to shut the company down, conducts a flawed investigation, presents highly selective evidence to the court, and kills the company, all without due process of the law. What other industry gets such treatment? I can think of none.

So what do we do? One thing is for sure; we DON’T sit back crying boo-hoo, we’re such poor victims of the big, bad FTC. Direct selling is built on high-energy, high-output people who get things done! So these are my recommendations:

  1. Make sure your house is in order. This is KEY! There’s no sense in trying to fix a system if each of us cannot fix ourselves. My guess is that every company knows, or at least has a good idea, of where it’s pushing the envelope. Find out if you’re overstepping the bounds, and let’s clean up our act.
  2. Get in contact with your federal government officials. Contact your Senators and your Congress-person. You have a voice. Use it.
  1. Work together. Sure, every company is in competition with one another. But on industry-wide issues such as the FTC’s abuse of power against direct sellers, a unified voice will have far greater effect than everyone working individually.

I anticipate that change will be slow, but let’s get the conversation started!


Today’s the Day. . .

Vemma Court Decision Expected Today


We’re expecting the court’s decision today in the Vemma action on whether the Federal Trade Commission’s temporary restraining order will be lifted, modified, or remain in place in the form of an injunction. There are MANY lessons to be learned from the FTC’s action, and we will be addressing them one-by-one in the coming weeks, so stay tuned. (Note: The order from the hearing is here.)

But as we wait for the immediate outcome, one thing of which we can be certain is that if the court completely lifts the TRO (highly unlikely), Vemma as we know it is done. The FTC’s favorite receiver did such a hatchet-job on the company that he killed it long before Vemma saw the light of the court room. Employees were dismissed within days after the raid, and while Vemma certainly had a cadre of loyal distributors, many more have departed given the specter of the FTC’s action.

The FTC’s playbook in pyramid cases is to freeze the corporate and personal assets of the owners, get an ex parte TRO, and have a receiver liquidate the company. The receiver in the Vemma case, Robb Evans and Associates, is the FTC’s go-to receiver in numerous actions, including the Trek Alliance and Burnlounge cases. Interestingly, a motion has been filed in a pending lawsuit in Utah to sue Robb Evans and Associates alleging that Evans is the FTC’s lackey, doing the FTC’s bidding because the Commission stamps his meal ticket, and in doing the FTC’s bidding he overstepped the bounds of the court’s order in the case. A recent article in the Salt Lake Tribune reports on this motion at

While I am certainly in favor of stopping pyramid schemes dead in their tracks, the FTC’s brazen disregard for Constitutional due process is appalling, and the direct selling distribution channel is at the receiving end of the FTC’s spear. I regret to say that in my opinion the industry itself is partially to blame because we have not been sufficiently proactive at the federal level. Let’s face it, although the FTC is charged with prosecuting pyramid schemes, the Commission is incapable of providing a comprehensible definition of a pyramid scheme. Rather, the Commission’s position on what constitutes a pyramid is at best a fuzzy and ever-changing. The industry itself has not done a good enough job at: (a) shaping a federal law or regulatory rule that clearly establishes the parameters of what constitutes a legal multilevel marketing program as opposed to what constitutes an illegal pyramid scheme; and (b) educating the FTC on how the industry actually operates.

Unless the industry can resolve this issue with the government, we will continue to be forced to deal with the FTC’s playbook and the denial of Constitutional Due Process and watch as one company after the next is buried. In coming months we will be addressing these topics, so stay tuned. In the meantime, we will report back on the outcome and the import of the Vemma decision as soon as it is published.


What Does The DSA Have To Say About The FTC Claiming VEMMA Is A Pyramid?

Direct Selling Association Preliminary Analysis - Federal Trade Commission Action against Vemma Nutrition Company


John W. Webb, Associate Legal Counsel & Senior Director, Government Relations of the Direct Selling Association wrote the following preliminary analysis on the FTC .vs Vemma pyramid allegations.