In a ruling that will surely rock the multi-level-marketing world, the U.S. Federal Trade Commission (FTC) has ruled that Herbalife, a nutritional supplements company, must restructure its US operations and pay $200 million to compensate consumers who were bilked out of millions by the company’s deceptive practices.
According to a press release from the FTC, Herbalife has been charged with deceiving consumers into believing they could earn substantial money selling diet, nutritional supplement and personal care products.
According to the FTC’s complaint, Herbalife claimed that people who participate could expect to quit their jobs, earn thousands of dollars a month, make a career-level income, or even get rich. But the truth, as alleged in the FTC complaint, is that the overwhelming majority of distributors who pursue the business opportunity earn little or no money.
For example, the average amount that more than half the distributors known as “sales leaders” received as reward payments from Herbalife was under $300 for 2014. Many of those who invested in the Nutrition Club brand spent an average of $8,500 with the majority (57%) losing money or breaking even.
The small minority of distributors who do make a lot of money, according to the complaint, are compensated for recruiting new distributors, regardless of whether those recruits can sell the products they are encouraged to buy from Herbalife.
Finding themselves unable to make money, distributors abandon Herbalife in large numbers. The majority of them stop ordering products within their first year, and nearly half of the entire Herbalife distributor base quits in any given year.
While stopping short of accusing the company of operating a pyramid scheme, FTC Chairwoman Edith Ramirez said, “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. 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.”
The settlement announced last week requires Herbalife to revamp its compensation system so that it rewards retail sales to customers and eliminates the incentives in its current system that reward distributors primarily for recruiting. It mandates a new compensation structure in which success depends on whether participants sell Herbalife products, not on whether they buy products.
The settlement also prohibits Herbalife from misrepresenting distributors’ potential or likely earnings. The order specifically prohibits Herbalife from claiming that members can “quit their job” or otherwise enjoy a lavish lifestyle.
In addition, the order imposes a $200 million judgment against Herbalife to provide consumer redress, including money for consumers who purchased large quantities of Herbalife products (such as many Nutrition Club owners, among others) and lost money.
Multi-level marketing companies are big business in the U.S. with private distributors selling everything from nutritional supplements and essential oils to cosmetics and cleaning products. Click here for more information on how they operate and how you can protect yourself!
