Herbalife Settles With Federal Government For $200 Million ... to the delight of Herbalife!
This past Friday, The Wall Street Journal reported that the nutritional supplement juggernaut Herbalife Ltd. has settled a lawsuit from the Federal Trade Commission for $200,000,000.00 (US). For a company which posted $4,496,000,000.00 in sales, this “penalty” has no negative impact on the company’s balance sheet. In fact, Herbalife stock rose 20% on the news of this settlement. From the WSJ article:
Herbalife Ltd. will pay $200 million in a settlement with the Federal Trade Commission that requires significant changes to Herbalife’s business practices but allows the nutritional-products company to avoid being classified as a pyramid scheme.
The FTC, after a long investigation, blasted Herbalife’s operations Friday and said the company will have to make big changes. But it stayed away from talk of pyramids.
“We focused less on the label than on making sure” the FTC’s legal case “alleged what we considered to be the core problem with Herbalife’s business practices,” said Ms. Ramirez, contending the company deceived consumers into believing they could earn substantial income by selling Herbalife products.
Is Herbalife a pyramid scheme? The people who run the non-for-profit organization PyramidSchemeAlert.org sure think so. Some recent comments from them on Herbalife paint a pretty clear picture:
Herbalife’s pay plan, like most MLMs’, allows participants to personally buy large amounts of product in order to qualify for higher rewards. Personal “volume” is also required to maintain “qualification” for possible rewards. Personal purchases can also be added to “group volume” (purchases made by downline recruits) for the individual purchaser to qualify for rewards, increase them or prevent losing them. The net effect is that buying the products is the necessary price to pay to get access to Herbalife’s promised rewards. Almost no recruits who join Herbalife, in fact, ever get the rewards, but millions purchase Herbalife products in order to qualify for receiving them, as the rules require. This is called “pay to play”. It is a classic con game, sometimes called “Spanish Prisoner” or the “Nigerian Scam.”
Instead of looking at how Herbalife and other MLMs use the “pay-to-play to unfairly and deceptively drive “sales”, the FTC has focused on what happens after the consumers are persuaded or induced to buy them. The FTC tries to discover whether rewards paid to recruiters are funded by purchases of recruits themselves or from subsequent retail sales made by the recruits. Few people in MLM are able to make a profit from retailing MLM’s high priced products. Pyramid Scheme Alert asked the FTC to look at the front end of the scam, in which purchases are deceptively induced by tying them to the promise of future rewards (which virtually no one ever receives.)
If you read just the headlines, the penalty seems severe. Severe enough so that “Big Supplement” will never want to see themselves in this sort of position again, right?
Quite the contrary. The settlement helps legitimize the practice of selling unregulated drugs through a discredited marketing and sales structure which is punitive to the company’s salesforce, not to mention the inflated prices foisted on the end consumers, who are buying products which have been questioned about quality and efficacy (here is one example.)
Herbalife escapes the official “stamp” of being a pyramid scheme, all for the relatively paltry one-time penalty of roughly 4% of their 2015 gross sales. I doubt that they could have deliberately spent 4% of their gross sales on an advertising campaign as effective as the results of this settlement.