Herbalife strikes $200M settlement with FTC over business practices

Herbalife strikes $200M settlement with FTC over business practices
© Getty Images

Herbalife has struck a settlement with government regulators that prevents it from being labeled a pyramid scheme but requires it to pay over $200 million.

The Federal Trade Commission announced the settlement Friday, claiming that the company “deceived consumers into believing they could earn substantial money selling diet, nutritional supplement, and personal care products.”

ADVERTISEMENT

The settlement draws to a close a long-running feud over the company’s business practices, which pitted billionaire investors against each other and roped in government watchdogs.

The FTC said that Herbalife led people to believe they could quit their jobs and make a comfortable living selling the company’s products and recruiting others to do the same. But in reality, the regulator said most people made little or no money, with over half earning under $300 in 2014.

The FTC added that many of the company’s “Nutrition Club” owners spent an average of $8,500 to open an enterprise, while 57 percent of those that did reported no profit or a loss.

The $200 million settlement will go toward paying back consumers that spent significant funds on Herbalife. The company also struck a separate settlement with the Illinois Attorney General, in which it would pay $3 million.

“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 Edith 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.”

As part of the settlement, Herbalife did agree to tweak how it does business. For example, the company now will distinguish between people who participate in its offerings simply as buyers as opposed to those looking to earn money by selling it as well.

In addition, the company now will guarantee that at least two-thirds of rewards paid to distributors will be based on actual retail sales to people using the products, while no more than one-third can be based on personal consumption of the products.

In a statement, Herbalife said it believed many of the FTC’s conclusions were “factually incorrect” but believed the settlement was the best course of action given the prospect of lengthy and costly litigation.

The company also said nothing about the settlement will fundamentally change the way the company does business, after it fought back repeated allegations from detractors that it was effectively a pyramid scheme.

"The settlements are an acknowledgment that our business model is sound and underscore our confidence in our ability to move forward successfully, otherwise we would not have agreed to the terms," stated Michael O. Johnson, chairman and CEO, Herbalife.