Antitrust Law Daily Wrap Up, CONSUMER PROTECTION NEWS: Herbalife to pay $200M, restructure marketing operations to resolve FTC suit, (Jul 15, 2016)

By Greg Hammond, J.D.

Three Herbalife companies have settled FTC charges that the companies deceived consumers into believing they could earn substantial money selling diet, nutritional supplement, and personal care products. The Herbalife companies have agreed to pay $200 million in consumer redress and to restructure their business operations (FTC v. Herbalife International of America, Inc., FTC File No. 142 3037, Civil Action No. 2:16-cv-0).

The FTC claimed that Herbalife International of America, Inc., Herbalife International, Inc., and Herbalife, Ltd. represented that Herbalife distributors are likely to earn substantial income, including significant full-time or part-time income, from pursuing a retail-based business opportunity. However, the program does not offer participants a viable retail-based business opportunity, according to the FTC, and Herbalife’s compensation program incentivizes not retail sales, but the recruiting of additional participants who fuel the enterprise by making wholesale purchases of product. The retail sale of Herbalife product is also not profitable, the complaint alleged, or is so insufficiently profitable that any retail sales tend only to mitigate the costs to participate in the Herbalife business opportunity. The FTC consequently asserted that Herbalife engaged in unfair practices and made false or misleading representations, in violation of the FTC Act.

Under the parties’ agreement, Herbalife will be prohibited from misleading distributors about their earnings potential and must pay $200 million in consumer redress.

In addition, "Herbalife has agreed to restructure its business, transforming it from an organization that pays it distributors based on their own wholesale purchases and those of their downlines, to one where compensation is calculated based upon verifiable retail sales," according to a July 15 FTC statement. "Significantly, in order to pay compensation to distributors at current levels, the order requires Herbalife to verify, through receipts and other reliable methods, that its business is driven by retail sales and that at least 80% of its sales are made to legitimate end-users. Otherwise, it must reduce rewards to lower levels."

"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 commented. "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."

Attorneys: Janet Ammerman, FTC. Nitin Reddy and Andrew J. Strenio, Jr. (Sidley Austin LLP), John E. Villafranco (Kelley Drye & Warren LLP) and JB Kelly (Cozen O’Connor) for Herbalife International of America, Inc., Herbalife International, Inc., and Herbalife, Ltd.

Companies: Herbalife International of America, Inc.; Herbalife International, Inc.; Herbalife, Ltd.

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