The FTC announced that it has reached a settlement with Herbalife that includes a $200 million payment to compensate consumers. In addition to the payment, the settlement agreement has an unusual provision requiring a complete restructuring of Herbalife’s existing business model.
In its complaint against the company, the FTC alleges that Herbalife claimed that people could earn a substantial income selling Herbalife’s dietary supplements – an income that could supplement or even replace their primary income. Herbalife’s advertisements included testimonials from sellers, including optimistic statements such as “My income ended up getting to $4,000 a month, part time, at Herbalife. … It’s been five years, my income got up to $10,000 a month a couple years ago. It’s more than double that now.” In another testimonial, a seller asserted, “The first nine months of really getting going, I had made a quarter of a million dollars.” The FTC’s complaint alleges that, in fact, very few participants made money with Herbalife. For example, one sales year showed that half of Herbalife’s “Sales Leaders” averaged less than $5 per month in profit from retail sales. The FTC alleges that although Herbalife promoted itself as a sales company, in reality it was not offering a viable retail-based opportunity as the compensation system set up by Herbalife rewarded recruiting other participants into the sales program, and not sales of the product.
The FTC’s settlement agreement targets this aspect of the company. Under the terms of the agreement, Herbalife will restructure its compensation system to reward retail sales. According to FTC Chairwoman Edith Ramirez, “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.” The settlement agreement also requires an independent compliance auditor, who will monitor Herbalife’s adherence to the agreement. The auditor, paid for by Herbalife, will be in place for seven years. This agreement shows the FTC’s willingness go beyond the imposition of a monetary penalty, to require specific structural changes within a company.