Moneybox

The Government Is Finally Punishing Herbalife

Herbalife has to restructure its business practices.

Photo by FREDERIC J. BROWN/AFP/Getty Images

The Federal Trade Commission has finally closed its investigation into Herbalife—the nutritional-supplement company and multilevel-marketing business whose critics have accused it of being a pyramid scheme. That unsavory term is precisely what the FTC is now not accusing Herbalife of being—but its agreement with the company will force Herbalife to pay a hefty fine and commit to restructuring its business, one in which its products are sold by its “members.”

The FTC opened its inquiry into Herbalife’s practices in 2014. In its complaint against Herbalife, filed Friday in federal court, the FTC says that Herbalife’s “compensation program incentivizes not retail sales, but the recruiting of additional participants who will fuel the enterprise by making wholesale purchases.” The complaint also alleged that Herbalife overemphasized the potential for extreme monetary success since, as the FTC asserted, most sellers earned little or no money from actual sales of Herbalife products. While Herbalife’s stock spiked on today’s news—being labeled a pyramid scheme would’ve been a worst-case scenario for the company, as Bloomberg points outthe FTC’s conclusions about the company are pretty damning.

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The sanctions are pretty rough, too. Herbalife will have to “fully restructure their U.S. business operations” and pay the FTC $200 million to compensate consumers. FTC Chairwoman Edith Ramirez said that “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. 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.” One of the most important reforms mandated by the FTC is that “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.”

That marks a pretty significant change for the MLM industry, which has long been prone to abuse. As Michelle Celarier argued in Slate earlier this year, the government let MLMs spin out of control for decades. Now it has to prove it can rein them back in.

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