Herbalife fined $200 million by FTC, will also restructure business
Rumors of an FTC investigation into Herbalife began back in 2013 and here at BehindMLM we’ve been covering the story diligently ever since.
Today a conclusion to the saga is in sight, with news that the FTC has fined Herbalife $200 million dollars for being a pyramid scheme.
About an hour ago the FTC announced they have reached a settlement agreement with Herbalife.
The FTC allege Herbalife’s
compensation structure was unfair because it rewards distributors for recruiting others to join and purchase products in order to advance in the marketing program, rather than in response to actual retail demand for the product.
Herbalife’s compensation program incentivizes not retail sales, but the recruiting of additional participants who will fuel the enterprise by making wholesale purchases of product.
BehindMLM reviewed Herbalife in January 2013 and came to the same conclusion:
The single most problematic issue I see with the Herbalife compensation plan is the complete lack of incentive to sell products at a retail level.
The FTC allege Herbalife’s operation as a pyramid scheme has caused ‘substantial economic injury to many of its distributors‘.
(Herbalife) deceived consumers into believing they could earn substantial money selling diet, nutritional supplement, and personal care products.
The FTC settlement will also see Herbalife ‘pay $200 million to compensate consumers‘. This figure was leaked by Herbalife back in May.
Looking forward, the settlement will see Herbalife unable to get away with primarily paying recruitment commissions at the expense of retail sales.
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”.
Specifically, Herbalife’s new compensation plan will
reward retail sales to customers and eliminates the incentives in its current system that reward distributors primarily for recruiting.
(The settlement agreement) mandates a new compensation structure in which success depends on whether participants sell Herbalife products, not on whether they buy products.
This is a welcome change to Herbalife’s business model, which in my opinion has, by design, operated in the grey for far too long.
BehindMLM will publish a formal review of Herbalife’s new compensation plan when I’ve had a change to go over it in full.
For now, highlights of the plan revealed by the FTC include:
The company will now differentiate between participants who join simply to buy products at a discount and those who join the business opportunity.
“Discount buyers” will not be eligible to sell product or earn rewards.
Herbalife promised to create a preferred customer class in February, 2013. The class was supposed to be created in April the same year.
For reasons that have never been made public, Herbalife reneged on the promise and instead (incorrectly) continued to assert that most of their affiliates were retail customers.
Multi-level compensation that business opportunity participants earn will be driven by retail sales.
At least two-thirds of rewards paid by Herbalife to distributors must be based on retail sales of Herbalife products that are tracked and verified.
No more than one-third of rewards can be based on other distributors’ limited personal consumption.
Sounds good to me. Raw numbers wise you’re looking at each affiliate required to have 66% of their monthly sales volume be retail sales.
Affiliates themselves can only claim a max 33% of their total monthly volume from their downline.
Companywide, in order to pay compensation to distributors at current levels, at least 80 percent of Herbalife’s product sales must be comprised of sales to legitimate end-users. Otherwise, rewards to distributors must be reduced.
In order to ensure this is enforced,
Herbalife will pay for an Independent Compliance Auditor (ICA) who will monitor the company’s adherence to the order provisions requiring restructuring of the compensation plan.
The ICA will be in place for seven years and will report to the Commission.
Herbalife is prohibited from allowing participants to incur the expenses associated with leasing or purchasing premises for “Nutrition Clubs” or other business locations before completing their first year as a distributor and completing a business training program.
This is targeted at preventing new Herbalife affiliates being sold on the dream of opening up a nutrition club off the bat, only to get massively into debt.
Not such a big deal, but in line with the consumer protection spirit of the settlement agreement.
All in all it’s great to get confirmation that Herbalife was operating as a pyramid scheme. And the specific retail sales requirements (a minimum 66% of sales volume for each affiliate), are concrete numbers the MLM industry can use as a guideline.
The $200 million fine isn’t enough to destroy Herbalife outright, but enough to cause a small dent. Personally I think settling being a pyramid scheme will be far more damaging to the Herbalife brand.
As per the settlement agreement, Herbalife have 10 months to implement the FTC’s requested restructuring changes.
As to whether or not Herbalife an survive without operating as a pyramid scheme… I don’t like their chances.
If Herbalife affiliates were able to generate substantial retail sales then it would have been happening. That the FTC had to finally step in means it wasn’t.
Pending some miracle, I predict a slow and steady decline over the next few years. Sort of like what’s happening with Vemma, but over a much longer period of time.
Herbalife isn’t going to be the MLM giant they once were, and other large MLM companies better sit up and take notice.
Man, Herbalife management are sure in denial.
WTF? The entire business model of paying recruitment commissions over retail sales has been changed. If affiliates don’t have 66% retail sales volume each month, they don’t get paid.
How the hell is that “no change” to Herbalife’s business model?
Herbalife’s business model is sound? I suppose that’s why the new Herbalife business model is going to look nothing like the previous model.
I’d prefer MLM be outlawed, BUT IN LIEU IF THAT, if they are forced to comply, they will cease to exist anyway. It won’t be MLM as we know it; and a blessing for all ‘honest’ and informed people to know the truth.
For this to work, I hope they make sure HL don’t cheat like Amway does and just make up customers.
Next on their list needs to be Mary Kay! Ladies have been exploited for far too long.
So Ackman will lose a little (it’s not going to zero), but he’s right enough, after all.
It’s a bit of a shit show at the moment. You’ve got Herbalife management in obvious denial.
The media are proclaiming Herbalife aren’t a pyramid scheme, as if they don’t understand what ‘rewards distributors for recruiting others to join and purchase products in order to advance in the marketing program, rather than in response to actual retail demand for the product‘ means.
Herbalife’s stock price meanwhile was up 11%, purportedly because the FTC didn’t outright shut Herbalife down.
It’s almost as if nobody has actually read the FTC complaint.
This is why endless chain ultimately needs to be outlawed.
We will now just have more confusion about something that, if done following the law, can’t survive.
Why can’t people see that?!!!!!!
Hmm, nobody went to jail for fraud?
Way to go USA, if you want to run a scam and get away with it – make sure it is a massive one – will only get a fine.
I wonder will the DOJ or SEC act on it, or HLF turned out to be above the law.
Why SEC is quiet – when it clearly shown that HLF fabricated quaterly sales reports and corrupted auditors were signing under it?
Well, Michael Johnson’s out as CEO.
Run Herbalife as a legitimate MLM opportunity and get blamed for massive losses?! Hahahahahaha… where’s my check?
He’s staying on as Executive Chairman, whatever that means. Basically still collecting money without the financial responsibility.
I’m just wondering how in the world you can say the FTC actually fined Herbalife for being a Pyramid Scheme?
Did you read any of the actual articles on the settlement. (Ozedit: No, I read the actual settlement document as filed in court. Marketing spam removed.)
Please don’t waste my time with marketing spin bullshit Nicole. I read the actual settlement document from the FTC and they clearly fined Herbalife for being a pyramid scheme.
Paying recruitment commissions in MLM = pyramid scheme, even if the settlement saw the FTC refrain from using the term “pyramid scheme”.
Herbalife certainly didn’t opt to change their business model or pay the FTC $200 million out of the goodness of their heart. Had they of not settled they would have lost in court because the recruitment-based business model was fraudulent.
Herbalife’s business must have tanked pretty hard in the US after getting rid of their pyramid scheme.
Check (redacted) out (redacted) their (redacted) latest (redacted) compliance (redacted) report (redacted).