It’s no longer business as usual for Herbalife: A closer look at the FTC’s $200 million settlement

Multi-level distributor Herbalife will pay $200 million in damages to people who were deceived by what the Federal Trade Commission alleges were misleading money-making claims. But when it comes to protecting consumers, that may not be the most important part of the just-announced settlement. What’s more important than $200 million? The order requires Herbalife to reorganize its business from top to bottom and start complying with the law.

Herbalife advertised in English and Spanish, promoting its business opportunity as a way for people to quit their jobs and make a lot of money. Other ads promoted Herbalife as a means for already hard-working people to provide more for their families: “When we worked in factories, we only earned enough to cover our basic needs, but now we can take our 12 A grandson is going on vacation.”

But don’t start packing your kids’ bags because, according to the Federal Trade Commission, it’s nearly impossible to make money selling Herbalife products. As explained in the complaint, our analysis shows that half of Herbalife’s “Sales Leaders” earn an average of less than $5 per month from product sales. For those who invested the most to build actual retail operations—the brick-and-mortar stores Herbalife calls Nutrition Clubs—most gained nothing or even lost money.

Which brings us to a disturbing little secret about Herbalife alleged in the FTC complaint: The few distributors who actually make money don’t make their money by selling products to people who want the company’s powders, pills, and potions, Instead, they make money by recruiting other people.As a dealer – and encourage them Shop for Herbalife products.

The lawsuit alleges that Herbalife deceived consumers into believing they could earn significant income from business opportunities or make large sums of money from retail sales of the company’s products. Additionally, the complaint alleges that one of the fundamental tenets of Herbalife’s business model — incentivizing distributors to buy products and recruit others to join and buy products so they can further the company’s marketing plans, rather than responding to actual consumer demand — is violated Unfair Practices of the Federal Trade Commission Act.

Under the settlement, that all has to change. The order requires Herbalife to abandon its current system of rewarding distributors, which is primarily used to recruit “downline” people willing to buy products wholesale, regardless of whether there are customers who actually want the goods.Under new compensation structure, success of Herbalife marketing program must depend on whether participants Sell product, not whether they can recruit more dealers purchase product.

You will need to read the order for detailed caveats, but they are all germane to the violations alleged in the complaint. To give one example: The order requires a clear distinction between those who join solely to purchase discounted products for their own use and those who join to gain access to business opportunities. For those in bizopp, 2/3 of the rewards must be based on verifiable retail sales, with no more than 1/3 coming from products designated as “personal consumption.”

It’s not a “we’ll take your word for it” thing. The order includes teeth that will impose financial losses on those who don’t comply. To ensure that everyone at Herbalife buys into the new setup, 80% of the company’s net sales must be real sales to real buyers. Failing that, top dealers will see their income cut. What’s more, over the next seven years, Herbalife must hire an independent compliance auditor to monitor what the company is doing to comply with the new pay plan. The auditor will report to the FTC, which will have the authority to replace that person if necessary.

We’re excited to return $200 million to consumers. (Details about the refund program will be announced soon.) But another key goal is to eliminate alleged deception and unfairness in the way Herbalife does business. We’ll be watching closely as the company rewrites its advertising campaign and restructures its compensation system. Auditors will be watching. Consumers should be concerned, too.