The Federal Trade Commission filed a 42-page complaint against Herbalife, alleging the company’s compensation structure primarily rewarded distributors for recruiting others rather than for retail product sales. The FTC's July 2016 action detailed how the vast majority of participants in the multi-level marketing scheme earned little or lost money.
Herbalife's payment program heavily incentivized recruiting new participants. Distributors who achieved substantial income did so mainly by enrolling large numbers of new recruits who then purchased products wholesale from the company. Retail sales to customers outside the network played a minor role in overall compensation.
Distributors often found it difficult to sell Herbalife products to actual consumers. But the company's system pressured them to buy large quantities of inventory themselves. These purchases were necessary to qualify for bigger discounts and the recruiting-based rewards that formed the core of the compensation plan.
This structure meant many distributors ended up with more product than they could sell. Herbalife did maintain a buy-back policy for unsold inventory. However, distributors had to resign their positions to use it. Many remained unaware of this policy or hesitated to invoke it for various reasons, leaving them with excess stock.
So, distributors found other ways to get rid of the product. They gave it to friends, threw it away, or consumed it themselves over time. This self-consumption often did not stem from genuine demand. Instead, it was an attempt to extract some value from products they would not have bought had they not been chasing the business opportunity.
Some distributors tried to sell their excess inventory at a discount through online auction sites or flea markets. Herbalife's rules explicitly prohibited such sales, adding another layer of difficulty for those attempting to recoup losses.
Despite Herbalife's explicit and implied claims of offering a retail-based opportunity, the primary path to significant wealth involved recruiting other distributors. Success required buying product from Herbalife, or convincing others to join and buy product from Herbalife.
Herbalife's compensation plan gave participants strong incentives to recruit more people. Bringing in a downline entitled distributors to receive multiple types of payments directly from Herbalife. These payments were not based on retail sales. They depended instead on the volume of product purchased by the distributor's recruits, and by their recruits, and so on down the line.
The plan contained clear incentives for distributors to recruit participants and then persuade them to purchase as much product as possible. Recruiting stood as the only viable route to high income. But very few Herbalife participants actually earned income from recruiting activities.
Most distributors, about 80%, recruited no one at all. These individuals received no recruiting rewards. Even among those who did recruit, a substantial percentage received no reward payments. By December 31, 2014, for example, more than 111,000 U.S. distributors had recruited a downline, but approximately 43% of them, or 47,714 individuals, received no reward payments from Herbalife.
Income from recruiting remained low for many even within the top 13% of all distributors, those who achieved "Sales Leaders with a downline" status. In 2014, over half, 57.6%, of distributors in this elite group received average gross reward payments from Herbalife of under $300 for the entire year.
Rewards were highly concentrated at the very top. The top 0.03% of U.S. distributors, a group of 205 individuals, received average gross reward payments exceeding $600,000 per year. This disparity meant the overwhelming majority of Herbalife distributors who pursued the business opportunity earned little or lost money. The few who made a living did so through recruiting other business opportunity participants who purchased product, not by retailing it.
Herbalife's program did not offer participants a viable retail-based business opportunity. The overwhelming majority of distributors who tried to retail the product made little or no net income, or even lost money. For the fewer than 1% of distributors who received substantial income through Herbalife's business opportunity, their compensation from recruiting large numbers of new participants dwarfed whatever they might earn from retail sales.
Some savvy distributors discovered ways to exploit the recruiting reward structure without engaging in profitable retail sales. During 2009-2014, one top distributor paid over $8 million for product, with a total suggested retail price exceeding $16 million, purchased in the names of various downline members. This scheme generated additional rewards and qualified the distributor for higher payments from Herbalife.
This distributor then donated all of this product to charity rather than attempting to sell it. The rewards generated through these purchases were enough to yield a net profit, without any actual product sales.
Other distributors used unprofitable retail sales to generate large reward payments. They created specialized websites offering products at discounts of up to 50% with no tax and free shipping. The net profit from these online retail sales was negligible. But by manipulating Herbalife's compensation system, these distributors generated significant "recruiting" reward payments from the large volume of product purchases made by their purported downlines.
Herbalife promoted its business opportunity in both English and Spanish through videos, live presentations, and print materials. Across each of these channels, Herbalife represented, expressly or by implication, that consumers who became Herbalife distributors were likely to earn substantial income. This included significant full-time or part-time income from purchasing and re-selling Herbalife products.
Herbalife used videos to promote its business, making them available to distributors through the company's websites. These videos included claims that distributors were likely to earn substantial income, alongside images of expensive houses, luxury automobiles, and exotic vacations, coupled with income testimonials.
Herbalife also sponsored numerous events for distributors in both English and Spanish. Many of these events featured live presentations where speakers boasted about the high incomes they earned as Herbalife distributors. These events, bearing names like "Extravaganzas," "Leadership Development Weekends," and "Success Training Seminars," were strongly encouraged for attendance. Distributors often had to pay an attendance fee or purchase a minimum amount of product from Herbalife to participate.
Herbalife crafted the agendas for these events and selected the speakers, usually choosing from the very small percentage of participants who had reached the highest status levels. The presentations by these top distributors repeatedly emphasized that attendees were likely to earn substantial income through Herbalife. They often claimed distributors' income potential was limited only by their own efforts. In addition to the spoken content, the live presentations frequently included images of expensive houses, luxury automobiles, and exotic vacations.
Herbalife recorded many of these live presentations given at its sponsored events. The company formally integrated these recordings into its own resources, making them available to distributors through its websites. Like Herbalife's videos and sponsored events, its print publications also included representations that distributors were likely to earn substantial income through the business opportunity.
To assist distributors in recruiting new participants, Herbalife provided various tools and training materials, including the videos and print materials mentioned. Herbalife encouraged distributors to use these resources when attempting to recruit new members. Many of Herbalife's claims that participants were likely to earn substantial income expressly or impliedly suggested that participants earned significant full-time or part-time income from selling Herbalife products at retail.
The overwhelming majority of Herbalife distributors who pursued the business opportunity did not make any money. The FTC's final order mandated Herbalife pay $200 million in restitution to victims and fundamentally change its compensation structure to reward retail sales over recruitment.