Herbalife To Pay $200M To Members Who Lost Money; Must Change Business Model

Five months after Herbalife was reported to be working on a settlement to resolve a federal probe into its often controversial business practices – or what some people claim is a pyramid scheme – the company has agreed to restructure its business model and pay $200 million to consumers who purchased large quantities of its products and lost money.

The Federal Trade Commission announced the deal on Friday, putting an end to a nearly two-year investigation into the multi-level marketing company by finding that Herbalife participated in unfair and deceptive acts or practices.

The probe was initiated after the FTC received more than 100 complaints about the company in 2013, and came on the heels of a years-long legal battle with investor Bill Ackman, who accused the company of operating a pyramid scheme.

The FTC’s investigation centered on Herbalife’s multi-level marketing sales strategy that worked by exclusively selling weight-loss shakes and nutritional products through a network of independent distributors, or “members.”

According to the complaint [PDF] against Herbalife, the FTC charged that the company’s compensation structure was unfair because it rewards distributors for recruiting others to join and purchase products in order to advance in the marketing program, rather than in response to actual retail demand for the product, causing substantial economic injury to many of its distributors.

Herbalife claimed that people who participate in the company can “quit your job,” “be set for life,” “earn millions of dollars,” “make more money than they ever have imagined or thought possible,” “realize unlimited income,” or similar representations.

However, the FTC alleges that these promises were untruthful, that an overwhelming majority of distributors who pursue the business opportunity earn little or no money.

In fact, the average amount that more than half the distributors, or “sales leaders,” received was under $300 in 2014, according to the complaint.

Even a survey conducted by Herbalife itself found that most members didn’t even break even after paying an average of $8,500 to open a club. Nearly 57% of these club owners never made a profit or reported losing money during their time selling products.

The complaint alleges that large numbers of Herbalife distributors abandon their business within a year of beginning sales.

FTC investigators claim that those Herbalife members who did make money were a small majority who were compensated, not for selling products, but for recruiting new distributors.

Under the proposed consent order [PDF], Herbalife will revamp its compensation system so members receive payments for how much they sell, not how much they buy from the company.

The new system will also differentiate between participants who simply join to buy products at a discount and those who join for the business opportunity. Those who buy for the discount will not be eligible to sell products or earn rewards.

In order to pay compensation to distributors, at least 80% of Herbalife’s product sales must be comprised of sales to legitimate end-users.

Additionally, under the new structure 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.

To ensure that the company follows the new system, Herbalife is required to hire an Independent Compliance Auditor (ICA) to monitor its practices.

In addition to revamping its business model, the FTC order requires the company to pay $200 million in redress to consumers who purchased large quantities of Herbalife products — including distributors, club owners, and others — and lost money.

Details of the redress system, including eligibility requirements will be announced later.

In agreeing to the settlement, Herbalife neither admits nor denies any of the allegations brought by the FTC.