The third-largest network marketing company, Herbalife Ltd just announced they agreed with the United States Federal Trade Commission to change many of their business practices and to pay the agency a penalty of $200 million. According to the Chairwoman of the FTC, Edith Ramirez, that money will go to company distributors to compensate them for losses. It’s the largest consumer redress settlement ever obtained by the FTC.
In return, the FTC agreed not to label Herbalife as a “pyramid scheme,” which is a felony.
The Background of the Probe
The FTC has been investigating Herbalife since 2014. Herbalife said they still disagreed with the FTC, but preferred to avoid litigation. Michael Johnson, Herbalife Chief Executive, said in an email, “The settlements underscore our business model is sound . . .”
Herbalife’s status as one of the largest network marketing companies traded on the New York Stock Exchange (HLF) makes this case unusual. Also, it involves two billionaires, Carl Icahn and Bill Ackman.
Ackman runs the hedge fund Pershing Square Capital Management. Back in 2012, he announced his fund took a $1 billion position shorting Herbalife stock. That means his fund makes money only if the stock price goes down. He continues to claim, unofficially, Herbalife is a pyramid scheme. He is also keeping his large short position in the company. In reaction to the settlement, he said instituting the FTC’s required changes would drive distributors out of the company, causing “the pyramid to collapse.”
The Company’s Products
Back in February 1980 when Mark Hughes started the company, selling a shake to lose weight out of the trunk of his car, few Americans knew about or took herbs. Today the company sells a wide range of herbs, nutritional, weight loss and personal care products.
Herbalife agreed to compensate distributors based on how much product they sold to retail customers, not on how many new distributors they signed up. According to the FTC, relatively few Herbalife distributors made a profit from their business, and therefore Herbalife misrepresented this when they told recruits they would make full-time incomes. They have agreed to change their marketing practices.
Traditionally, network marketing companies have compensated distributors both ways. Distributors keep a percentage of what they sell to retail customers and, also, what their downline sells to retail customers. And the only one to obtain money from the sales made by downline customers is to have a downline making those sales.
How Will Herbalife Comply With the Agreement?
One compliance issue will be how to distinguish between a retail customer, who is not a distributor, and a downline distributor who buys the product just because the company requires every distributor to buy a certain amount of personal volume to receive their check. The company may need to require distributors to give every customer a receipt.
The implications of this agreement might affect every other network marketing company in the United States.
A former FTC commissioner, Pamela Jones Harbour, serves as a senior Vice-President of Herbalife for compliance. A former chairman of the FTC, Jon Leibowitz, will advise the board of directors.
The Stock Market’s Reaction
After the announcement, shares of Herbalife stock jumped 20% in price, then went down to a 9% gain. The company authorized board member Carl Icahn to buy additional shares, raising his percentage of ownership from 18.3% to 35%. This move created speculation Carl Icahn planned to take the company private by Icahn Enterprises.
Herbalife has survived government regulatory action before. In 1985 the United States Senate held hearings on weight loss products, including Herbalife. The adverse publicity caused most U.S. distributors to leave the company, which survived on profits from foreign sales. It settled the government suits in 1986, and again grew to surpass the billion dollar size.
There is much more to learn more about the latest industry legal trends, including the Herbalife agreement. At Network Marketing Labs we are proud to share the most current and up to date news and information about the direct selling or multi-level marketing industry.
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