Stay Informed & Take Action
Herbalife is a pyramid scheme that harms millions of people around the world.
The Deception Continues
The FTC filed a complaint in Federal Court that concluded Herbalife distributors “are primarily compensated for successfully recruiting large numbers of business participants.” Under Koscot, Omnitrition, Vemma and other cases, that finding means the company is a pyramid scheme. While it seems that Herbalife negotiated to avoid being formally labeled a “pyramid scheme,” the FTC’s conclusion is obvious. When some tried to claim that the company had been declared not to be a pyramid scheme, FTC Chairwoman Ramirez responded at a press conference: “I do not endorse that statement.” Without question, the FTC found that Herbalife uses pervasive unfair and deceptive practices to mislead victims about the existence of retail sales and a profitable business opportunity.
As part of the settlement with Herbalife, the FTC imposed a number of restrictions on Herbalife’s business. By eliminating illegal behavior at the company, Herbalife’s pyramid business will be crippled. Nevertheless, Herbalife has continued its misinformation campaign and has spun this outcome as a victory. Notice how the FTC, Herbalife’s main regulator, discusses the strong settlement compared with Herbalife CEO Michael Johnson’s explanation:
On July 15, 2016, following the FTC press conference, FTC Chairwoman Edith Ramirez spoke at the 2016 LULAC National Convention and further articulated the FTC’s enforcement action against Herbalife.
So what did the FTC conclude?
Herbalife’s “program does not offer participants a viable retail-based business opportunity. Defendants’ compensation program incentivizes not retail sales, but the recruiting of additional participants who will fuel the enterprise by making wholesale purchases of product.” FTC vs. Herbalife, Complaint, par. 17.
“The overwhelming majority of Herbalife Distributors who pursue the business opportunity make little or no money, and a substantial percentage lose money.” FTC vs. Herbalife, Complaint, par. 20.
“To confuse participants and the public about distributors’ poor financial outcomes, defendants understate the percentage of distributors who are pursuing the business opportunity.” FTC vs. Herbalife, Complaint, par. 95.
“The retail sale of Herbalife product is not profitable or is so insufficiently profitable that any retail sales tend only to mitigate the costs to participate in the Herbalife business opportunity.” FTC vs. Herbalife, Complaint, par. 18.
Despite claims from Herbalife that retail sales are profitable, the company does not “track either the existence or profitability of Distributor attempts to retail Herbalife products. FTC vs. Herbalife, Complaint, par. 52.
Amount of compensation received “is not based on retail sales of Herbalife products, but rather is based on the volume of product purchased by the Distributor’s recruits, and by their recruits, and so on.” FTC vs. Herbalife, Complaint, par. 105.
“In sum, Defendants’ compensation structure incentivizes Distributors to purchase thousands of dollars of product to receive recruiting-based rewards and to recruit new participants who will do the same.” FTC vs. Herbalife, Complaint, par. 145.
But what does that mean?
In short, Herbalife was violating the law and must drastically revamp its business moving forward.
Under the FTC-imposed changes, Herbalife can only pay distributors based on verifiable retail sales. Herbalife can only pay its distributors at current levels if at least 80% of the company’s sales are to real customers.
This change reflects the FTC’s conclusion that profitable sales of Herbalife products are a fiction.
Herbalife distributors will be required to collect and maintain Retail Sales information.
In the past, Herbalife claimed that collecting such information would be unduly burdensome and would violate customer privacy.
Herbalife distributors can’t be required to make minimum qualifying purchases.
Before, distributors often purchased large volumes of products to advance in the marketing plan regardless of retail demand.
Distributors won’t be able to make misleading income and lifestyle claims.
The days of distributors promising recruits mansions, yachts and planes are over.
Herbalife would like you to ignore the truth above. The company’s spin machine has been working overtime. Here are some misleading claims about the settlement that have been floating around:
Claim: CEO Michael Johnson: “The FTC is an acknowledgment that our Herbalife’s business model is sound.”
Truth: The FTC settlement requires a “top to bottom” restructuring of Herbalife’s business model to “dismantle the alleged deception” and “start complying with the law” https://www.ftc.gov/news-events/blogs/business-blog/2016/07/its-no-longer-business-usual-herbalife-inside-look-200
Claim: Controlling shareholder Carl Icahn: “The FTC settlement announced today, coming after a two-year investigation concluded that Herbalife is not a pyramid scheme.”
Truth: FTC Chairwoman Edith Ramirez disagrees:
Claim: Herbalife would not have agreed to these terms if they couldn’t live with them.
Truth: If Herbalife had not settled, they would have been involved in litigation with the FTC for years and would have been labeled a pyramid scheme.
Claim: Herbalife: The settlement with the FTC only impacts ~20% of Herbalife’s business.
Truth: The FTC works with more than 100 foreign competition and consumer protection authorities around the world. We intend to work with regulators around the world to enforce similar requirements.