Herbalife has reached a settlement with the Federal Trade Commission (FTC). The diet and weight loss company has been in the crosshairs of the government for what regulators deemed a near-pyramid scheme. Herbalife is based in Los Angeles and has built a billion-dollar empire by convincing people it has the key to life and health in the name of nutritional supplements and shakes. The company will now pay $200 million to settle the case. The funds will go into a fund to repay people injured by Herbalife.
The FTC spent over two years looking into claims that the multi-level marketing company was a scam that deceived people into quitting their jobs and selling for Herbalife. The company has well over 680,000 sellers, who are all independent contractors. The scheme operates so that the people who make the most money do so by selling and reselling to as many people in their social circle as possible.
To be considered a true pyramid scheme, distributors wind up purchasing products from the company in order to manipulate the compensation payouts. This often results in sellers buying up product to meet sales goals and then dumping it cheaply online.
According to the FTC, the entire program is worthless and most people who sign up as sellers do not make much money. “The truth is that the overwhelming majority of distributors…earn little or no money,” found the FTC. Even those that Herbalife designates as “leaders” wind up making less than $5 each month. As in all multilevel marketing schemes, the way to make money is to recruit new people to sign up as sales representatives.
Some analysts believed the government would shut down Herbalife, but they opted to allow to stay in business with reforms. The FTC settlement contains many unique provisions that may become mainstays of future settlements with multilevel marketers. The consent decree signed by Herbalife requires the company to submit ongoing proof to the FTC that its products are sold to real customers rather than to other recruits to the company. It may also require actual sales records to be provided. Although the consent decree applies only to Herbalife, the FTC indicated it should be considered as guidance for the industry, according to FTC chair Edith Ramirez. Smaller multilevel marketers may not be able to survive these kind of restrictions.
The multilevel marketers trade association group, the Direct Sellers Association, issued a statement that really made no real comments about the litigation. The DSA believes there are over 20 million people in the USA alone who are involved in direct marketing businesses. Other direct marketers like Avon and Amway declined to comment. Avon withdrew from DSA two years ago.
Although multilevel marketing has never been illegal, courts and regulators have grown skeptical about its claims. The FTC originally adopted Amway rules that the companies were required to follow, but there was little proof that they actually followed the rules. The new standard set by Herbalife gives the FTC teeth in enforcing the laws.