Herbalife Ltd. has agreed to pay $200 million and change its U.S. operations to settle Federal Trade Commission charges that it fooled consumers into believing they could earn substantial money selling diet, nutritional supplement, and personal care products.
In its lawsuit against Herbalife, the FTC also charged that the multi-level marketing company’s payment structure was unfair because it rewarded distributors for recruiting others to join and purchase products to sell, rather than responding to demand for the product, causing substantial economic loss to many of its distributors.
“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.”
Herbalife made claims that people who sign up could expect to quit their jobs, earn thousands of dollars a month, make a career-level income, or get rich, according to the FTC’s lawsuit. But the truth, the FTC alleges, is that the most of distributors earn little or no money.
For example, as stated in the lawsuit, the average amount that more than half the distributors, called “sales leaders,” received as payments from Herbalife was under $300 for 2014.
Nutrition Club owners spent an average of about $8,500 to open a “club,” and 57 percent of club owners reported making no profit or losing money, according to a survey conducted by Herbalife, which is described in the lawsuit.
The small minority of distributors who do make a lot of money, according to the lawsuit, are paid for recruiting new distributors, regardless of whether those recruits can sell the products they’re encouraged to buy from Herbalife.
Finding themselves unable to make money, the FTC’s lawsuit alleges, Herbalife distributors abandon the company in large numbers. The majority of them stop ordering products in their first year, and nearly half of Herbalife’s distributors quit each year.
The settlement announced Friday requires Herbalife to revamp its payment system so that it rewards sales to customers and eliminates the incentives that reward distributors mostly for recruiting. It requires a new payment structure in which success depends on whether participants sell Herbalife products, not on whether they buy products.
Under the order, Herbalife will pay for an auditor who will monitor how the company is following the order provisions requiring restructuring of the payment plan. For seven years, the auditor will report to the FTC.
The settlement also prohibits Herbalife from misrepresenting distributor’s earnings potential or likely earnings. It prohibits Herbalife from claiming that members can “quit their job” or otherwise enjoy a lavish lifestyle.
In addition, Herbalife will pay $200 million to pay back consumers, including money for consumers who purchased large quantities of Herbalife products, such as many Nutrition Club owners, and lost money. Information on how consumers can get the funds will be announced later.