FTC describes Herbalife as a pyramid scheme, refuses to label
Accompanying the FTC’s settlement announcement with Herbalife today was a press-conference held by Chairwoman Edith Ramirez.
Ramirez opened the press-conference by reading from a prepared statement for about seven minutes.
Despite clearly describing Herbalife’s business model as that of a pyramid scheme, the actual words “pyramid scheme” were noticeably absent from Ramirez’s statement.
After Ramirez’s statement she took questions from the media. Not surprisingly, clarification on whether Herbalife was a pyramid scheme was the first question asked.
A journalist from the New York Times asked Ramirez;
So Herbalife in their press-release said the FTC had found that the company was not an illegal pyramid scheme.
In my quick look at the complaint I actually don’t see the words “pyramid scheme” appear anyway, but maybe I missed it.
So can you comment a little bit on that?
Ramirez (right) responded;
Sure. We didn’t allege a pyramid deception count (in the complaint), but what we did allege was an unfairness count.
We are charging that Herbalife’s compensation structure unfairly rewards recruiting that is ultimately unrelated to retail demand.
We focused less on the label then on making sure the facts in the complaint alleged what we considered to be the core problem with Herbalife’s business practices.
So uh… basically Ramirez and the FTC are precisely identifying Herbalife as a pyramid scheme, without explicitly “labeling” it a pyramid scheme.
Sounds to me like Herbalife might have demanded the FTC refrain from explicitly referring to it as a pyramid scheme as part of the settlement.
Another reporter from Bloomberg News brought up the same issue later in the press-conference.
I just want to go back to the question earlier about the pyramid scheme.
I mean it sounds to me … like what you’re saying is that this company has all the hallmarks of a pyramid scheme, isn’t that right?
Ramirez again dodged the question;
You know our focus isn’t on the label, our focus again was on articulated allegations in our complaint that we believe reach the core issue (such as the running of a pyramid scheme?).
The core issue or problem with what we considered to be unlawful practices Herbalife has engaged in (such as running a pyramid scheme?).
And our focus was on getting quick (and) immediate relief for consumers.
So I will leave to you to draw your own conclusions based on the facts that are alleged in the complaint… but our focus was not on a particular label (pyramid scheme… just say it already!).
Not satisfied with Ramirez’s explanation, a third reporter from the Financial Times brought up the same issue.
You said you haven’t focused on the term (pyramid scheme), but it certainly sounds like, looking at the complaint, the focus on recruitment and the deception of consumers, (undecipherable) certainly previous FTC descriptions of pyramid schemes.
Do you think you could talk us through perhaps the public interest argument that the FTC went through and how it came to not prosecute as a pyramid scheme?
Ramirez… once again dodged the question;
All I can tell you very briefly is this is a settlement.
What we aimed to do in our complaint was to allege the core facts that we believe constitute unfair and deceptive practices.
And in addition our aim was to ensure that we could obtain relief promptly and in a timely fashion as opposed to litigating for perhaps years.
So the focus again was less on the label but rather on making sure that our complaint adequately alleged what we are concerned about, and also provided appropriate, both monetary and injunctive relief for consumers.
Towards the end of the press-conference, a fourth question from the media again tried to seek clarification from Ramirez on the pyramid scheme issue.
I know that you’re not going to put any labels on this, but it seems to me if we look at the BurnLounge case, that while this complaint does not use the words “pyramid scheme”, would you agree that a prima facie case of a pyramid scheme is alleged with the allegations within the complaint?
You already know how Ramirez answered…
Again, I will leave it up to you to draw that conclusion.
Our focus in this complaint was in addressing the core issues (yada yada yada).
As uncomfortable as Ramirez was fielding pyramid scheme questions however… they just kept coming.
I hate to belabor the point about pyramid schemes and labels.
I understand you say you don’t want to label and people (should) draw their own conclusions, but since this was a negotiated settlement, should we assume that part of the settlement discussion was whether you would have a pyramid scheme against (Herbalife) in the complaint that was filed?
Creative… but still only good enough to draw another non-answer out of Ramirez.
Well look I think this is belaboring the point. This is a settlement agreed upon, a resolution of this matter.
We’ve alleged the issues that we are concerned about, that’s really our focus.
And we’ve achieved what I think is really important, monetary and injunctive relief that will ensure, in my mind, that Herbalife, if it complies with these provisions, that it operates legitimately going forward.
So that was the key objective. We achieved that and we will certainly do our best as we continue to ensure.
Obviously as frustrated as the rest of us with Ramirez’s answers, the reporter then pressed her on Herbalife’s “we are not a pyramid scheme” statement.
Did you review the language in their (Herbalife’s) press-release that sort of affirmatively said that they were not declared to be a pyramid scheme?
Because they’re sort of having that as an outright headline.
Over twenty-five minutes into the press-conference, Ramirez finally delivered an answer:
I do not agree with that statement.
The word “pyramid” does not appear in our complaint that is true, but um again the core facts that we’ve alleged, that we consider to be problematic with their compensation structure, are set forth in detail in our complaint.
And again, I will leave it to readers to draw their own conclusions. But that they were determined to not be a pyramid… that would be inaccurate.
When asked if she endorsed the statement that Herbalife was not found to be a pyramid scheme, Ramirez replied, “I do not endorse that statement”.
I suppose other than Herbalife being able to spin the settlement to the Nth degree, the FTC not explicitly using the term “pyramid scheme” doesn’t really matter.
In no uncertain terms the regulator repeatedly describes Herbalife as a product-based pyramid scheme over and over again in their complaint.
Message received, loud and clear.
And if not using the term “pyramid scheme” was one, if not the only stipulated condition the FTC settlement approval hinged on, it’s not that big of a deal.
Certainly it seems the FTC’s stipulated settlement restrictions would have no doubt been the same had the words “pyramid scheme” explicitly appeared in their complaint.
FTC Press Conference on Herbalife
Posted by Federal Trade Commission on Friday, 15 July 2016
OMG, a complete shocker from the FTC.
this is not a ‘settlement’ by any stretch of the word. this is more like herbalife avoided being shut down by the skin of its teeth.
not being shut down, only allows herbalife to save some ‘face’ today, but it has lost in the long run. edith ramirez has also said that the FTC will be announcing ‘guidance’ for the MLM industry soon, and in light of the herbalife settlement, american MLM will not be the same again.
many details f this settlement are not clear yet, and will probably get clarified over time.
the FTC requires distributors to have 66% retail sales in order to earn commissions. the agreement states:
these ‘preferred customers’ are currently classified by herbalife as ‘members’ who have joined herbalife for discounts.
this ^^ means selling to downlines will be considered ‘retail’ as long as said downlines agree to be classified as ‘preferred customers’.
what is to stop herbalife from making people join as ‘preferred customers’ to consume or retail, and when they recruit they can be bumped up to ‘distributor’ status? as things stand, approx 70% of herbalife distributors do not recruit, and the churn is high. new recruits keep coming in buying some stuff and then leaving. they can be classified as ‘preferred customers’ without much difficulty?
let’s see how herbalife go about meeting the FTC’s requirements.
MLM attorney kevin thompson has put out a couple of videos about the herbalife/FTC settlement and he looks pretty shell shocked at the outcome. my own layman’s analysis of the burnlounge appeal order and the FTC’s advisory to the DSA, did not prepare me for this outcome, and i’m still reeling.
meanwhile oz and behindmlm have shown that they understand the MLM industry more than the industry and it’s attorneys put together. so take a bow, great job oz, and you deserve a little party 🙂
youtube.com/watch?v=3ejCGYm_TfY
We’ve known all along that these aren’t (all) preferred customers. The FTC complaint details evidence of these affiliates purchasing business opportunity material and other indicating factors, clearly determining them to not be just retail customers.
Also selling to actual preferred customers has nothing to do with a downline. It’s a legitimate retail sale.
Herbalife, for reasons known only unto themselves, have refused to create a preferred customer class until the FTC ordered them to.
Nothing. But you can’t be an affiliate and preferred customer. One is retail, one is pursuing the business opportunity.
If Herbalife’s company-wide sales volume is not 80% retail, commissions across the company are slashed. We don’t know how slashed at this time.
Also each affiliate has to maintain 66% or more retail sales volume or they don’t get paid.
It’s just common-sense. Is and always has been.
Meanwhile at some point we’re going to have to tackle Herbalife operating as a product-based pyramid scheme globally, as this settlement only applies to the US (20% of business revenue).
She dodged the pyramid scheme term like a good politician would when pressed for clarification.
Perhaps she will come clean on the term/label when she writes her tell-all biography.
Just like Amway did back in 1979, eh?
yep, and now everyone will argue from here to timbucktu, about whether herbalife is a pyramid scheme or not.
failure of the FTC to clearly state its position, with – ‘we’re not saying herbalife is a pyramid and we’re not saying herbalife is not a pyramid and please decide for yourselves’ – is going to make people decide all sorts of things all over the place.
the safest, middle of the road argument could be – herbalife was in the gray area and the FTC buttkicked it into the safe area.
icahn will probably take herbalife private, and ackman will lose a lot of money, but ackman did vindicate his stand to a large extent, so he has a moral victory over icahn, if not a monetary one.
herbalife will probably flounder in the US, but make up for it in international markets which do not regulate MLM so stringently.
so the FTC socked everyone in the teeth a bit, but everyone will survive.
thus the stance of the FTC ‘we’re not saying herbalife is a pyramid and we’re not saying herbalife is not a pyramid and please decide for yourselves’, seems to be a well tuned and carefully balanced seasoned political gameplay.
Wait…did anyone expect to FTC to actual have a clear and concise answer about this situation? Good ol’ Government at work :D.
End of the day, it’s a win for Herbalife. Pay $200M to not die, better than getting gutted and bleed out like Vemma.
@Jim
Might be the situation if that was the only condition, but it’s not.
Herbalife’s US business as we (and they) know it is toast. The big question now is how much longer can they operate as a pyramid scheme throughout the rest of the world?
@anjali
Not me. Labels aside, the FTC described a product-based pyramid scheme over and over again in their complaint.
Basically everything I’d surmised and concluded back in 2013 was proven to be. Herbalife were running a scam and being grossly misleading and manipulative about it.
It would have been nice for the FTC to clarify on them being a pyramid scheme (although they did in so many words in their complaint), but by now it should be obvious Herbalife must have demanded they don’t use the term in the settlement.
A small concession for the FTC being able to prove Herbalife is a pyramid scheme and effectively shutting down their current business model.
Amway was found not to be a pyramid scheme. It could “prove” that sales to downline wasn’t harmful to the average participant … that enough of them could be seen as discount customers purchasing small amounts of products for personal consumption.
Note the use of the term “average participant”. Amway was probably just as harmful as Herbalife to a huge number of people, but it managed to appear less harmful.
Amway had to clean up some “price fixing issues” and some other issues to get off the hook.
Back in 1979. It’s time for another look.
Amway and Herbalife are the same.
The lack of label was clearly negotiated by Herbalife. The FTC did seem to do good work here, you just haven’t taken the time to understand what they’ve done.
In ten months, Herbalife will with be selling primarily retail products out of network or it will be shrinking like vemma.
In both cases, great work by this FTC!
If MLM companies are forced to comply with the Retail Sales Requirements that already exist, they are Out of Business.
That is why I picked MLM Broken Model as my username for this site.
MLM distributors are taught to “lead with the opportunity” and then explain how to achieve Financial Independence via duplication. The activity being duplicated is RECRUITING, not Retail Sales.
Oz posted this back in Sept 2015 about the Vemma court case:
I argued this issue last year with several board members.
The MLM Business Model was already between a rock and a hard place. And NOW, with Herbalife announcement, their dirty little secret has been exposed for all to see.
Their compensation plans are built to reward “recruiting” and NOT Retail Sales.
MLM SUCCESS = large downlines on autoship who are chasing the Dream of Financial Independence.
An old axiom of the Direct Sales is you have to reward the proper behavior or activity.
How to define the word “proper”?
The FTC wants to see the emphasis on Retail Sales. To them, the “proper” activity is reward distributors who make Retail Sales.
THE MLM MODEL HAS TWO OBVIOUS PROBLEMS:
1. A pure Direct Sales model typically has 2 levels of overrides on Retail Sales (insurance, real estate, for example).
With this Model, the agents earn the majority of the margin set aside for distribution and the General Agent or Broker earns a reasonable override to recruit, train and manage the sales force.
THERE IS NO UPLINE!
With MLM, you have multiple individuals who are getting paid a piece of that same Retail Sale.
Where does the money to pay those EXTRA levels come from?
2. Because of #1, the Retail Price of almost ALL products purchased through the MLM Model is jacked up and higher than consumers can find through traditional Retail Outlets.
Plus, the Commissions paid on Retail Sales is too low with the MLM Model.
This is because the product is already overpriced (so they can pay overrides on 3 to 8 levels) PLUS only about 5% of the populations see themselves as Sales Types anyway.
The entire concept just doesn’t make sense unless you ADD the OPPORTUNITY component. Then, it all makes perfect sense.
It looks like the FTC has finally become proactive and is going to start enforcing the laws regarding Retail Sales that already exist.
Companies like Melaleuca, World Ventures, Talk Fusion, ACN (coded bonus driven), Organo Gold should pay close attention, IMO.
Bottom Line: The MLM Model is Broken because the compensation plan doesn’t incentivize the proper activity – Retail Sales.
And, it will only get worse folks.
ENTER DISRUPTION AND DECENTRALIZATION
I see people in the MLM world throwing those two words around as if they benefit their Model.
MLM adds cost to the delivery of goods, products and services.
Disruption and Decentralization is all about cutting out the middle-person and dealing direct between the Source (company, manufacture, wholesaler etc) and the Consumer.
yes in amway, the FTC recognized non recruiting distributors who were buying small quantities for self consumption or retail, as discount members. this argument has been rejected by the FTC in the herbalife settlement.
the FTC has also rejected its own arguments about ‘buyers club’ discount purchases, which it had explained in its 2004 advisory to the DSA.
according to a legal opinion published by ‘spencer reese’ [MLM attorneys], the FTC has adopted a new basis for going after MLM. instead of making the ‘pyramid scheme’ argument the FTC is arguing on the basis of – ‘ “promoting participation in a multi-level marketing program with a compensation structure that causes or is likely to cause harm to participants.”
MLM attorneys have often opined that ‘proving pyramid’ is difficult and is akin to ‘nailing jello’, so litigating against MLM on the basis of ‘compensation structure that causes or is likely to cause harm to participants’, provides a broader base to the FTC. this could be the reason the FTC has avoided ‘labeling’ herbalife as a ‘pyramid scheme’, because it has not ‘charged’ pyramid scheme at all.
moving forward, the FTC may use this ^^ new basis against MLM instead of purely ‘pyramid scheme’ allegations.
spencer reese also opines that this settlement puts the retail at the forefront of determining MLM legitimacy, requires minimum quotas for compensation eligibility to be met solely from retail, caps self consumption at 33%, requires clear demarcation between distributors and customers with no overlap, and prohibits autoship.
these demands are not necessarily sourced from standing case law, but are a standard being set by the FTC as a regulator. herbalife has acquiesced to these demands and not legally challenged them, inspite of being an MLM company with a 5 billion cap, and this lays the ground for the MLM industry in the US.
herbalife distributors on other forums are arguing that most herbalife ‘members’ will be converted to ‘preferred customers’ and this settlement will not affect the company much.
recently, the requirement that vemma clearly distinguish between distributors and customers caused sales to crash through the floor.
but vemma requires even preferred customers to be on autoship, and most non recruiting distributors bailed out. in herbalife, the preferred customers will not have any autoship requirement, and some discount buyers may convert their status from ‘distributor’to ‘preferred customer’. how many make this choice remains to be seen.
the spencer reese analysis of the herbalife/FTC settlement:
momofactor.com/ftc-settlement-with-herbalife-omg/
Seeing as pyramid schemes are “compensation structures that cause or are likely to cause harm to participants”, no problems here.
Describe a pyramid scheme in the complaint and call it whatever you want, it’s still obvious what Herbalife got nailed for.
Only by adopting the changes later dubbed “Amway Safeguard rules”, i.e. the 70% restock rule, the 10 retail customer rule, and the 90 day refund rule.
Back then FTC was worried about inventory loading / garage qualifying.
MLM had moved away from that to direct-dropship and self-consumption and threw away the 10 retail customer rule by pushing states to accept “self-consumption” i.e. self-qualifying, which is really just less egregious form of garage qualifying / inventory loading.
And FTC is busting Herbalife and Vemma for doing that.
I remember getting into a discussion with KT regarding self-consumption. I wonder if he changed his mind a little now? 😀
Bogus safeguard rules. All you had to do was log in and make up ten names and assign a dollar amount.
Yes, because its detrimental in the MLM structure if they do.
No stores, no advertising. From the company’s perspective, a retail customer is an end-stop.
A company customer, also called an affiliate who recruits, expands and finds more affiliate customers.
The same end-stop will influence the human nature of the affiliate – especially when their is no mark-up in price aka the preferred customer.
Sprinkle some sugar on it all, call these affiliates ‘business owners’ (lol), hold church style rallies to brainwash, parade riches, and you’ve got yourself an MLM company who has just created their best loyal customer – the affiliate.
Why would they want any other kind?
Hell, affiliate wholesale isn’t even wholesale. It’s retail pricing at best further supporting the fact that the affiliate is the true customer. And, anyone can pay the fake wholesale if they sign up, so it’s a moot point anyway.
But would anyone be a customer without the lure of money? Not enough to sustain the company hence an MLM’s method of operation.
It’s all so obvious when you stop and think about it, and precisely why MLMs act the way they do (did). You can’t fix it unless you change its structure which makes it no longer MLM – endless chain recruitment.
The forced retail will cause it to self destruct. FTC backdoor plan?
Bye bye MLM
That’s probably correct. Pyramid scheme is extremely difficult to prove in court, but most of the details are relatively easy to prove.
Pyramid scheme rules have always been vague.
There’s no law against recruitment of people or against paying people for recruitment. It will first become illegal when an organizer does it as part of an organized business plan where almost everyone do the same thing.
Kinda hard to do nowadays when stuff is NOT SOLD DIRECTLY by the participant, but drop-shipped from the company warehouse, eh?
The sad part is most “MLM” companies aren’t doing even that. Vemma had NO retail requirements. ZERO, before they got hit by the FTC. You can entirely self-qualify by drinking your own 120 PV which makes them one of the most egregious schemes.
Herbalife’s supposedly unofficial wellness centers (where folks go in daily for the diet tea and protein shake) should be able to EASILY prove retail, if the health department don’t shut them first for violating food prep laws.
while i’m trying to wrap my head around the implications of the herbalife/FTC settlement, i cant help wondering why herbalife did not fight back.
i mean, a leader of the MLM industry just lay down and died quietly? the FTC did not achieve a full shut down of vemma by the court, and vemma was allowed to continue by adopting a 50% retail rule, pending the final outcome of the trial.
IMO vemma with its pervasive autoship and no retail price, was much closer to a pyramid scheme than herbalife. but vemma is in court fighting to prove its case. however, vemma is on the verge of bankruptcy and may not be able to complete the trial.
herbalife is cash rich, and its model is similar to the amway model which is still relevant in caselaw. herbalife has the support of the DSA behind it, it has some political power too.
with only 20% of herbalife business sourced from the US, herbalife could have chosen to take the fight to court, while continuing its business, with the same type of injunction it has quietly accepted today.
there is no precedent in caselaw requiring complete separation of affiliates and discount customers. caselaw is not based on ‘solely’ arguments but ‘primarily’ arguments ie, the question is not whether affiliates are buying product ‘solely’ for commission or consumption, but the question is whether affiliates are buying product ‘primarily’ for commission or consumption.
in burnlounge, the court had rejected the FTC’s overly strict interpretation of koscot. the court had given weightage to the DSA’s amicus brief in ruling that self consumption can be retail in the right conditions.
so, as an MLM industry leader, did herbalife not ‘owe’ a fight to the industry that has stood behind it? it is possible that the final outcome would have been less stringent than what herbalife has quietly acquiesced to today.
i wonder if herbalife’s quiet surrender has something to do with icahn being its largest shareholder. at his age and with his wealth, icahn’s priority may be to defeat ackman in the stockmarket game and assuage his ego.
a lengthy court battle could have caused the herbalife stock to come down, and help ackman realize his short and win. icahn may not have the time to wait out a protracted court battle, and would prefer to settle scores with ackman now – negotiate with the FTC to not say ‘pyramid’, then take the company private and hence become the ‘winner’.
i mean, this settlement is bad news for herbalife, and there has to be a good reason for them to accept it!
Do I need to point out the obvious?
Herbalife, a poster child for MLM, is a pyramid scheme. Do the math.
MLM ‘industry’ = pyramid scheme, or in the words of the FTC, causes harm to people!
Isn’t it possible they settled because they didn’t have a defense? Could it be that simple?
Because it runs counter to their survival strategy.
DSA is not an ethics board as it wants you to think. It’s an industry organization composed of “acceptable members”, through which PR campaigns are waged. The official DSA position is “our members are what a MLM *should be*”.
In reality, all these companies can say is they are not as… egregious as the obvious pyramid schemes like FHTM. And their attorneys, like JB, KT, and so on, have the same sort of blinders on. I wrote this essay back in 2013:
NOLINK://amlmskeptic.blogspot.com/2013/09/are-you-aware-of-your-own-bias.html
A pronouncement of guilt by FTC, even if appealed by Herbalife, would gut the industry more effectively than Ackman’s short.
Ackman can only destroy one company. FTC will destroy the entire MLM sector if it pronounced Herbalife guilty.
Basically, Herbalife stabbed itself to save the industry, and hope it has enough to survive the process, and it’s not being noble… it’s merely self-preservation, much like a lizard losing its tail.
the part about “I will leave you to draw your own conclusions” is nuts!
Is that not supposed to be the job of this agency?
Who gives a hang doodly what conclusions the average john/jane Q Citizen draws if there is no enforcement of the law?
according to the permanent injunction [PI], preferred customers are part of a herbalife distributors downline. the preferred customer is not ‘outside’ the distribution network!
so, the preferred customer is on the distribution tree, is buying only for self consumption, has no downline himself, and can become a distributor by merely informing the company of this change.
practically speaking, this means that all the 70% herbalife ‘members’ who do not have a downline, will be called ‘preferred members’ from now on, and the moment they recruit, they can send a [readymade] email to the company and be designated a distributor!
PI:
only pure retail customers are outside the ‘network’.
i think the harsh wording of the FTC complaint has put everyone in a state of shock. if you look carefully, there is barely any difference between the 1986 california permanent injunction and this FTC injunction.
What permanent injunction? The FTC didn’t file a permanent injunction, only a complaint.
the FTC filed a complaint and then the FTC and herbalife ‘settled’ the matter with a fine and a permanent injunction:
STIPULATION TO ENTRY OF ORDER FOR PERMANENT INJUNCTION AND MONETARY JUDGMENT.
truthinadvertising.org/wpcontent/uploads/2016/07/FTCHLFstip.pdf
since the FTC and herbalife have formally announced their settlement, i assume the court has signed off on this injunction?
That link is 404.
I haven’t kept up to date with the legal proceedings (that’s why I didn’t know about the PI), but the court has to approve the settlement first. Don’t think that’s happened yet.
In the proposed settlement agreement however I don’t recall there being any exclusions pertaining to preferred customers. Just retail (non-affiliates (participants)).
the 1986 california injunction had also made it compulsory for herbalife to pay compensation based on ‘retail’, much as the present FTC injunction does.
however ‘retail sale’ included sales to persons who had registered with herbalife, and were buying for self consumption and not receiving any MLM compensation.
IIRC in the 1986 injunction , a herbalife distributor and to tick a box on a form to indicate he was buying for personal use, and the current injunction requires a member to send an email informing the company that he is buying for personal consumption as a preferred customer. big difference?
1986 to present Herbalife were deliberately operating in the grey because they had no actual preferred customer class, just affiliates. All this “not receiving commissions = retail customers” BS was just pyramid scheme smoke and mirrors.
The new settlement agreement will see them create a pref customer class that is cut off from the income opportunity (what they promised and then reneged on in 2013).
As far as I know retail sales will include sales from this class as well as non-preferred retail customers.
the point to note is that the new ‘preferred’ member class is not ‘cut off’ from the business opportunity, they are a part of the ‘network’. till they are not recruiting they are ‘preferred members’ and when they recruit they will be assigned ‘distributor’ status by informing the company of the change.
this makes no ‘material’ difference to how HLF was set up till present IMO.
oz try to access the PI document from the TINA website. i reached it through there.
truthinadvertising.org/herbalife-ftc-documents/
Stop trying to make this confusing.
The old affiliates who don’t recruit = retail customers crap is dead. Now it’s 60% actual retail sales or no commissions.
boss, the language of the PI is damn confusing, but i’m seeing a lot of similarity between the 1986 california injunction and the present FTC injunction.
correct me if i’m wrong, but a ‘preferred customer’ is supposed to be outside the network just like a retail customer, right? the difference between a preferred customer and a retail customer is that retail customers can buy any amount of product at any time at retail price, while preferred customers commit to buying a certain amount of product on an ongoing basis and thus get a ‘discount’ off the retail price.
the thing with the herbalife injunction is that these preferred customers are allowed to be ‘recruited’ to the ‘downline’ of the distributor and can simply be ‘activated’ as distributors when they begin recruitment [at any time up to 70% herbalife members do not recruit].these herbalife preferred customers do not have any minimum buying requirements either.
as such i’m not seeing a big difference between herbalife’s current ‘member’ class and the proposed ‘preferred member’ class except for small changes like not providing any marketing material to ‘preferred members’, not making them purchase joining kit etc.
let’s see how herbalife explains this in its new comp plan. i’m thinking new recruits will be signed up as preferred customers and will upgrade to distributor when they begin recruitment which happens only 30% of the time, thus creating a large preferred member class for herbalife.
And what they purchased earlier will not count. See the stipulation:
But business opportunity participants does. For the 12 months starting now, max self-consumption is limited to $200 per month, and drops DOWN to $125 AFTER that… or calculated as 75 percentile of all preferred customers who had joined for at least 6 months… but only if there are more than 20000 preferred customers.
People can buy more than that, but that’s the top limit that can be counted toward commission. So there’s no incentive to garage-quality.
Also, starter kit is NOT commissionable.
And here’s the real kicker:
Yep, only preferred customers can do autoship.
Oh, boy, FTC really nailed Herbalife on this one.
Oh, it gets better. The stipulation also adds an independent compliance auditor, a true third party, PAID FOR by Herbalife, to make sure HLF is playing by the rules, and regularly report to FTC for SEVEN YEARS, and FTC can replace the ICA (and if HLF want to argue, it’ll go back to court).
There’s even a section that prohibits the HLF noobs from leasing or buying a facility (i.e. the diet clubs) unless 1) they have been pushing HLF for 12 months and 2) have taken a course, given by Herbalife, that covers some essential topics like local regulations, profit and loss, AND 3) write a business plan that covers all the important stuff, subject to approval from HLF (which really means FTC/ICA) (i.e. prevent noobs from digging a hole for themselves) and HLF is in charge of enforcing that. 😀
@anyone
You’re not saying that preferred customers HAVE to do autoship to receive a discount, but distributors don’t?
I’m confused.
What’s the difference in discount between a member and distributor?
Distributor sign up fee? Member sign up fee?
Distributors are PROHIBITED from joining autoship program
If they are starting out, “none”. Distributor can achieve higher discount by selling to preferred customer or documented retail (of which, limited amount can come from self-consumption).
Let me rephrase that:
According to the stipulation, based on what I read here and signed off by both FTC and HLF…
You can join as either (income opportunity) participant, or (preferred) customer. Company cannot arbitrarily reassign you… you have to SIGN a request to convert either way.
Assuming the discount you get as customer is “level 1” (I made up the name), if you convert to participant, you still get your level 1 discount, but what you bought as customer CANNOT be counted as part of your own qualification for higher levels of discount.
If you want to self-consume, you can definitely do it, but you have to designate the amount, and only part of it will be commissionable (capped at $200 for 12 months, to be DROPPED to 125 later)
ONLY VERIFIABLE retail sales (documented and auditable) or preferred customer sales count as qualification for higher levels of discount (“level 2 and beyond”) and/or commissions, bonuses, etc…
And no funny math. If participant claimed to have made X in profitable retail sales, but actually ordered LESS than X (minus any amount designated for self-consumption), NO COMMISSION!
So preferred customers, not distributors, do or don’t have to be on autoship to receive a benefit?
Nothing in the stipulation about that. It just says participants cannot be on autoship.
@anjali
That’s probably the easiest way to go. Some time over the next 10 months they’ll release a new comp plan and we’ll go from there.
Are their products competitive? I don’t know anyone using them. Never heard it mentioned in my life. But i can’t imagine a pyramid scheme company would deliver quality merch.
if a preferred customer achieves a higher level of discount with his purchases and then becomes a distributor, the level of discount will continue for his personal consumption as a distributor.
so, as distributors are allowed $200 [$125 after an year] worth of self consumption, and if they have achieved a higher level of discount on this self consumption while being a preferred customer, it will bring down the ‘average’ cost of his purchases as a distributor.
therefore, a preferred member does have some ‘incentive’ to purchase herbalife products to get a better price as a distributor.
also, the injunction requires that people be given ‘training’ before they become distributors.
this^^ requirement will also be an excuse for herbalife to sign up new recruits as ‘preferred members’ while they decide on their future with herbalife, and they will be encouraged to buy products so that they can have a price advantage if they become distributors.
IMO the ‘preferred member’ is a halfway house between retail customers and ‘distributors’.
generally, preferred customers give some undertaking to purchase a certain amount of products, though it may not necessarily be autoship.
recently amway [india] has introduced a ‘preferred customer’ class which gets the same discount as a new distributor, has no required quantity of purchases, and can carryover any discount benefits they have achieved a a preferred customer to their distributorship.
how herbalife defines its ‘preferred customer’ class remains to be seen.
MLM attorney kevin thompson has published his understanding of the FTC injunction against herbalife.
separately, he has commented about being surprised that herbalife swallowed this pill:
thompsonburton.com/mlmattorney/2016/07/16/moving-forward-heres-what-the-ftcs-order-requires-herbalife-to-do/
Like they had a choice.
If herbalife did actually have lots of non-affiliate preferred customers, they would never have renegged on introducing a preferred customer class back in 2013. Instead they rolled the dice, continued to lie to everyone and lost.
They know as much as anyone the creation of a pref customer class spelled the end of pretending to have significant retail sales. Personally I think the FTC have negotiated this settlement also aware of this, and are content to just let Herbalife decline over the next few years.
MLM attorney jeffrey babener has posted his view of the herbalife/FTC settlement.
worldofdirectselling.com/ftc-v-herbalife-settlement/
i think the DSA is going to push for the new anti pyramiding legislation ‘HR 5230’, which has been submitted, and is currently making a slow journey through congress.
according to MLM attorney kevin thompson, this bill is going to face tough times ahead:
I haven’t looked into it but if HR 5230 legislation attempts to legitimize autoship recruitment and justify insignificant retail activity, it needs to be blocked.
Good one guys. Don’t change your pyramid scheme compensation plans, instead try to change the law. /facepalm
some 12 US states have statutes that make reasonable amounts of self consumption on autoship, ‘legal’ in MLM.
HR 5230 is an attempt to legalize product based pyramid schemes.
there’s no way it will be passed in its current format. on the other hand, donald trump is a sleazy businessman turned politician, and who knows what can happen if he gets kicked up into the white house.
in it’s Q2 earnings call, this is how herbaife has described retail sales:
the fourth category, where the distributor purchases products for resale in the ‘field’ is where a lot of fudging can take place.
a distributor May not be required to provide an ‘address’ for these sales, and Maybe a name and email ID of the customer will suffice. if this is the case then a lot of faking will go on.
herbalife also intends on making [some of] these changes to its business globally over time:
also, its not that if a distributor does not have 66% retail, he will not get any commissions. according to CEO johnson:
so, if self consumption is more than 1/3rd, the extra self consumption will not be paid on, that’s all.
in the vemma injunction, it was an ‘all or nothing’ condition – retail sales have to be over 50% or nothing will be paid.
herbalife’s 66% retail rule is a sliding scale.
the transcript of the Q2 earning call can be read here:
seekingalpha.com/article/3995512-herbalife-hlf-michael-o-johnson-q2-2016-results-earnings-call-transcript?part=single
hello hello, i’m a bit confused here.
herbalife distributors have been allowed to self consume $200 worth of product every month [for the first year, $ 125 from the next year].
so i am distributor A, and i have two distributors in my downline ie B and C.
A can purchase $200 of herbalife every month and that’s my self consumption.
A can sell $200 of herbalife to B and C for their self consumption, which will be a Retail Sale for A.
A has a total purchase of $600, $400 of which is retail and $200 of which is self consumption and hence the FTC rule is satisfied.
where ^^ am i going wrong? anybody?
the FTC/herbalife settlement has not fixed any separate percentages for the different kinds of retail which is allowed. within ‘allowed limits’ self consumption by herbalife distributors is retail, which can make herbalife a $200 pop a month product based pyramid, much like what has been proposed by the DSA bill HR 5320 ?
There was an auditor or some such appointed from memory. I’m sure they’ll suss out if shenanigans are taking place and notify the SEC.
As for the sliding scale, might as well be all or nothing. Affiliates won’t stick with the business if they’re making peanuts on what was previously big bucks (affiliate recruitment).
Let them release the new compensation plan first. No point trying to apply the FTC restrictions to the old plan.
MLM attorney jeffrey babener has published an interesting article on the impact of the FTC/herbalife settlement:
my personal opinion is that the FTC settlement with herbalife is not in line with caselaw or its own 2004 advisory to the DSA.
the FTC should have updated its 2004 advisory Before taking a stand contrary to it. regulation should also toe the line of caselaw, otherwise what is the purpose of having caselaw which is developed from actively discussing the merits of a issue.
but mostly, i want to sock herbalife for being such a pansy and capitulating and leaving the industry to deal with the uncertainty this settlement has created.
worldofdirectselling.com/ftc-herbalife-settlement-guidance/
That’s Babener talking tough, but what’s more likely to happen, IMHO, is other companies voluntarily assume this is the new “standard” and adopt it without prompting, much like the Amway Safeguard rules came to define MLM after 1979.
Those rules only applied to Amway, yet all MLM companies adopted the rules voluntarily with minor variations. And as a result most where not bothered by FTC for decades until now.
ding ding!
aaaaand icahn starts the preliminary moves to take herbalife private:
carl icahn is sure putting a lot of money into herbalife inspite of the changes in its comp plan.
i suspect he doesn’t care so much about herbalife being successful but rather defeating ackman in his lifetime!
herbalife shares spiked up to over $63 on this news, and with ackman’s breakeven point in the low 30’s, he’s going to be in for a high loss which may even shut down his pershing square.
He’s probably betting on nothing changing in China and Herbalife continuing to operate as a pyramid scheme there.
1. Is there any way one (or more) of you guys can simplify this Herbalife thing so a regular guy, like me, can understand it? Or at least refer me to a source that can reasonably understand this mess… it seems to get more complicated the more I read these posts!
2. Also please clarify or direct me to a resource that can, HOW pyramids manage to continue operating illegally.
3. Also, please explain the common rebuttal that MLM’s aren’t so bad because W Buffet etal own several?
4. For me it’s the math ALONE, a geometric expansion for compensation, that is the scam – that you simply saturate the market hopelessly, when the geometric expansion explodes… Regardless of the legal maneuvers the bottom rung is left holding the bag and will just not profit, despite a few who will for a period of time, until they too drop out and are replaced by another hard working but hopeless SUCKER.
5. HOW do these Pyramid scams continue? I know they’re scamming, but they just keep on scamming along, even when shut down (i.e. Ulimate Cycler).
Somebody: please simplify for the stupid!
I’ll give it a stab:
1. Herbalife intentionally didn’t track retail sales most of their customers were affiliates. They made the assumption that most affiliates were simply customers wanting to purchase product and not interested in the business opportunity.
This was baloney because they had years to implement a preferred customer class, which was cut off from the income opportunity.
Rather than prove they weren’t a pyramid scheme in court, Herbalife settled with the FTC. They are going to introduce a new compensation plan mid this year, after which it’s expected the US arm of the company will collapse (although this will probably take a few years).
2. Regulation is slow. There’s no getting around it.
3. Strawman argument that you shouldn’t waste any time on. MLM companies aren’t pyramid schemes because of who owns them, they are pyramid schemes because of their business models.
4. Retail sales legitimize MLM companies. Unfortunately it feels like for the most part they have been abandoned in favor of affiliate recruitment. This might change after the recent Vemma/Herbalife busts.
5. There’s seven billion people on the planet. Throw in greed and desperation and that’s enough to keep them going for years.
Some insight into politics over consumer protection in California, one of Herbalife’s biggest US markets.
Makes you wonder what might have gone on at the FTC level too… or at least explain the strangeness of their enforcement announcement.
huffpost.com/entry/why-did-kamala-harris-let-herbalife-off-the-hook_n_5c8fab16e4b03e83bdc39a37
Thanks for passing on the info. The field just got a little less crowded for me.