Civil Case (Akko) 3926/96 Itzik Ralo v. Moshe Zehavi

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The Courts

Magistrates Court in Akko A 003926/96


Before: The Honorable Judge Hanna Lapin-Harel Date: 27/02/2003


In the matter of:

Itzik Ralo

By his representative advocate Barlev



1. Moshe Zehavi
2. Lillian Hirsch Zehavi

By their representative advocate Haim Darash




This action deals with the desire for quick “enrichment,” relations among members in a multi-level marketing organization and legal validity, if any, to an undertaking made by a “sponsor” in a company and a distributor who was recruited by him for the purpose of distributing the products. It shall immediately be noted that the action before is dismissed.

“Herbalife” is a company that, according to its claims, distributes nutritional and plant products manufactured in high quality and standard.

The company is an American company that operates distribution networks worldwide including Israel.

The company is structured like a multi-level organization, that is to say, the products are sold by a network of independent distributors directly to the public without the mediation of shops or any other kind of retail marketing.

Distributors are rates according to a rank system. The lowest rank is “distributor”
followed by a “supervisor” and then “tabulator.”

Definition of functions and the manner of obtaining them is described as follows:

1. Distributor – “you can become a distributor by ordering a distributor kit. In the first stage you will work according to a structure of 25% retail profit and you can sponsor other persons and add them as distributors so that you can advance.”
2. Supervisor – a distributor who met the supervisor qualification requirements. A supervisor can earn royalty overrides (R.O.) and works according to 50% retail profit structure.

Team member, tabulator – successful supervisors can climb the marketing structure of Herbalife. Meeting qualification requirements will entitle a supervisor with the status of tabulator.

There are 3 levels at this stage too –

1. GET – Global Expansion Team
2. Millionaire Team
3. President Team

The last three are irrelevant to the case under discussion.

The foregoing was taken from N/11 – Herbalife Distributor Guide

The Guide also specifies the products supplied by the company, and guidelines as to how to become a distributor, rights and duties, ordering process and more.

This Guide contains additional numerous terms from which we may learn about the company’s method of work, organizational structure, subordination structure, royalties and more. (concerning the case under discussion, in addition to the aforesaid terms, the terms ‘sponsor’ definition and duties, and ‘fully qualified supervisor’ are important), specification of supervisors’ profit rates, different types of advice as to location of new distributors to establish a business, national and international rules of advertisement, and additional information.

The Guide contains an example of a form for a prospective distributor. The form contains two parts: the first part contains details of the candidate-applicant, details of the distributor-supervisor and sponsor details.

The second part is a “distribution agreement” which the candidate signs as a party and includes Mr. Mark Hughes, President of Herbalife, as the other party. My Hughes is founder of the company, its president and he is probably signed on all of Herbalife distribution agreements.
Plaintiff’s claims

The Plaintiff was recruited by the Defendants to serve a distributor. The Defendants are supervisors and members of the international team. The Plaintiff requested to become a “supervisor distributor” and purchased from the company products in the value of $4,000 for that purpose. The order was prepared with the help of the Defendants on 27.6.1995. A purchase in such amount entitles a candidate to become a supervisor immediately upon the start of contracting period, since it entitles the buyer with more than 4000 points required for that purpose. The advantage of being a supervisor lies in the high percentage of profit – 50% retail profit from sales.

The Plaintiff received the products yet was unable to sell and distribute them except for one kit of products sold to his girlfriend. After a few months without success the Plaintiff requested to return the products and receive his money. The Defendants refused.

The Plaintiff and the Defendants conducted “negotiations,” conversations, requests and so on as the Plaintiff wished to receive his money back.

This state of affairs lasted for the few months during which some of the products were kept in the house of the Defendants.

Part of the products was sold and their proceeds were given to the Plaintiff while some of the products were returned to the Plaintiff.

The Plaintiff testified that the Defendants were the ones who convinced him to purchase the products for a higher amount already from the start in order to receive the rank of supervisor and increase his profits. The Plaintiff was convinced and purchased products in the amount of $4,008.
The Plaintiff testified that the Defendants undertook to guide, train, support, teach and assist him in his routine work, and even help him recruit new agents.

According to his claim, the Defendants failed to meet their promises and undertakings. Furthermore, only after signing the agreement he found out that he was on his own, and he was not an employee or a representative or an agent as specified in the ads, but self-employed. The implication of this state of affairs was that he was obligated to report his income to the VAT and income tax authorities.

The Plaintiff testified that the Defendants undertook to give him a 50% discount and instead he received a discount of only 32.25%. Once the Plaintiff, according to his claims, realized that the Defendants mislead him, he returned all the stock at his disposal to the Defendants who promised to return the money within two weeks.

The money was not returned. Instead, the Defendant went to Brazil and tried to sell the products without his permission.

Once the Defendant returned after a while he paid him a small fraction of the proceeds.

He received a selection of products as security until the Defendants would supplement the amount they owed him, since this agreement was not executed the Plaintiff wrote to Herbalife that guided him as to the manner of returning the products and cancel the transaction.

The Plaintiff testified that following the intervention by a person by the name of Epstein, he received NIS 1,200 from the Defendants instead of 475 Brazilian Reals on 4.8.1996. In addition he received NIS 500 as rate of exchange differentials.

The Defendants breached their undertakings towards the Plaintiff in two levels. First, they did not guide or help him to succeed in his work. And second, they did not return his money, NIS 8,419. The balance of the original amount after reduction of the products he used himself.

The Defense

Only Defendant no. 1, Moshe Zehavi, testified on behalf of the Defendants, even though the distribution agreement states that Mrs. Lillian Hirsch is the sponsor and supervising distributor of the Plaintiff. Mrs. Lillian did not provide her testimony, regrettably.

In his affidavit Mr. Zehavi testified in his affidavit that both he and his wife (Mrs. Hirsch) were supervisors and members of Herbalife international team. In the framework of his role to recruit agents, following advertisement campaigns, the Plaintiff arrived to him. The Plaintiff arrived to a meeting set up by a number of supervisors in a lecture hall on 27.6.1995. About 30 people attended the meeting that day and the company’s method of work was explained to them.

The Plaintiff was the one who requested to become a supervisor and even though the Defendant advised him to wait a few days, the Plaintiff insisted that he wanted to become a supervisor immediately in order to increase his profits.

The Plaintiff received in this meeting a kit of products for self-consumption, a video tape containing guidance instructions and the Guide (N/11). The Defendant testified that already in September the Plaintiff informed him that he was unable to market the products.

Consequently the Defendant attempted to help the Plaintiff and arranged a meeting in a conference hall in “Carlton” hotel yet no one showed up for the meeting.

The Defendant stated that at the Plaintiffs’ request and out of a desire to help him, he agreed to keep the Plaintiff’s products for a limited period of time. According to his claim, the Plaintiff made this request so that the products would not be foreclosed by the execution office. At a later stage, the Plaintiff started to demand from the Defendant to return the money paid for the products.

The Defendant agreed to sell the products for the Plaintiff in Brazil, where he went.

The Defendant returned from Brazil and in April 1996, following his return, he gave the Plaintiff 475 Brazilian Reals, the value of the products he was able to sell. The two agreed that the remaining products, in the amount of NIS 5,000 including VAT, will remain with the Defendant so that he could sell it and under the condition that if the products would not be sold, they would be returned to the Plaintiff. Mr. Zehavi denied the Plaintiff’s claims that he did not receive any guidance. The opposite is true, the Plaintiff attended approximately 20 meetings that were held in his home and he made every attempt to help him market the products, yet failed.

Mr. Zehavi testified that he explained to the Plaintiff that there was a way to return the products to the company by filing a suitable application and to the best of his knowledge the Plaintiff acted in this manner.

Two persons were involved in this process of sale of the Plaintiff’s products and return of money, and they are Mr. Epstein and Mr. Benny Saar. They were not summoned to testify.

As part of the defense evidence, three notes, N/4, N/6 and N/7 were presented. When N/6 was also enclosed that the affidavit on behalf of the Plaintiff.

N/4 is a card containing the Plaintiff’s name, address and phone number, on which the following is written:

1. 1.4.96 products in the amount of NIS 5,000 remain to be sold.
2. 10.7.96 paid on account of check for products sold 500

Balance NIS 4,500

The signature of the Plaintiff appears on this card and the word “approved.”

While giving his testimony the Plaintiff denied that the words “sold products, products instead” and the word “returned” appeared in N/4 while he signed it and therefore he believed that the note was forged.

N/6 is a note dated 4.8.96, written and signed by Mr. Epstein Arye, who exchanged 475 Brazilian Reals for NIS 1,200 and gave a check with the same amount to the Plaintiff.

Mr. Epstein wrote that 475 Reals were given by the Defendant to the Plaintiff.

N/6 bears the Plaintiff’s signature which he approved.

N/7 is a note dated 10.4.96 specifying that the products in the amount of NIS 5,000 + purchase tax remained with the Defendant and the products or equivalent in value would be returned.

During a certain period between November 1995 and April 1996 the Defendant went to Brazil and took with him some of the Plaintiff’s products, following the Plaintiff’s consent, according to his claim, while the Plaintiff claims that this was done against his consent. The Defendant sold some of the products and gave the proceeds to the Plaintiff.

Even though the Defendant attempted to help the Plaintiff as much as he could, the Plaintiff filed the action. Then the Defendant contacted Herbalife and was physically assaulted by the Plaintiff.

The Plaintiff claimed that he was assaulted too and advocate Darash said that criminal cases were opened against the Parties for these events and were closed afterwards.