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Company Must Tie Distributor Rewards to Verifiable Retail
Product Sales And Stop Misleading Consumers about Potential Earnings
Note: A press conference with FTC Chairwoman Edith Ramirez
will be held today at 10 a.m. ET, 600 Pennsylvania Ave. NW, Room 432,
Washington, DC.
Reporters unable to
attend the event can call in. Chairwoman Ramirez and FTC staff will be
available to take questions from the media about the case.
The phone number is
(800) 288-8961; the confirmation ID number is 398337. The lines, which are
only for news media, will open at 10:00 a.m. The conference leader is Bruce
Jennings.
In its complaint
against Herbalife, the FTC also charged that the multi-level marketing
company’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, causing substantial economic injury to many of its
distributors.
“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, 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.”
According to the FTC’s complaint, Herbalife claims that people
who participate can 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, as stated in the complaint, the average amount
that more than half the distributors known as “sales leaders” received as
reward payments from Herbalife was under $300 for 2014. According to a
survey Herbalife itself conducted, which is described in the complaint,
Nutrition Club owners spent an average of about $8,500 to open a club, and
57 percent of club owners reported making no profit or losing money.
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, the FTC’s complaint
alleges, Herbalife 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.
The settlement announced today 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.
For example:
- 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.
- 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.
- 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.
- 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.
Under the order, 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, which
shall have authority to replace the ICA if necessary.
The settlement also prohibits Herbalife from misrepresenting
distributor’s earnings 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. Information on the FTC’s redress
program will be announced at a later date.
The Commission votes authorizing the staff to file the
complaint and stipulated final order, and to issue a Statement
of the Commission, were 3-0. The complaint and the stipulated final
order will be filed shortly in the U.S. District Court for the Northern
District of California, San Francisco Division.
NOTE: The Commission files a complaint when it
has “reason to believe” that the law has been or is being violated and it
appears to the Commission that a proceeding is in the public interest.
Stipulated final injunctions/orders have the force of law when approved and
signed by the District Court judge.
Contact Information
MEDIA CONTACT:
Frank Dorman
Office of Public Affairs
202-326-2674
Peter Kaplan
Office of Public Affairs
202-326-2334
STAFF CONTACT:
Janet Ammerman
Bureau of Consumer
Protection
202-326-3145
Daniel O. Hanks
Bureau of Consumer
Protection
202-326-2472
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