The Federal Trade Commission (FTC) reached a landmark $200 million settlement with nutritional supplement company Herbalife, on July 15. The complaint and subsequent investigation was centered on the organization’s business model, which the FTC found deceitful and made grossly exaggerated claims. Herbalife is a multi-level marketing company (or MLM, for short). Similar to Nu Skin, Amway, and Avon Products, these companies use independent contractors to both sell products and recruit new sellers. Contractors receive commission not only on their own wholesale purchases from the company, but also from the purchases of their entire network of recruits.
Many MLMs, also referred to as direct selling companies, resemble pyramid schemes, but the FTC has accepted that not all MLMs are illegal as long as they follow the Amway rules, which emerged from a 1979 ruling against that company.
The $200 million dollar fine is the largest the FTC has ever levied in a consumer protection case. According to the ruling, Herbalife will have to stop advertising claims of the incredible wealth and lifestyles that becoming a contractor can provide, as well as offer recruits the ability to get their money back from product purchases or promotional packages for up to a year. The most consequential condition, however, comes in the form of accountability. Herbalife will now be required to provide proof that its products are being sold to end consumers, not just the recruited sellers. This change shifts the burden of proof to the company to verify that it is operating legally.
As of now, this decision only applies to Herbalife and its practices, but these standards could become a norm throughout the industry. Although Herbalife may be able to absorb these changes, many direct sellers likely will not. The direct selling industry employs some 20 million Americans and generates over $36 billion dollars in sales annually.
According to FTC chair Edith Ramirez, “Herbalife is going to have to start operating legitimately.” We will have to wait and see whether or not the ruling will push the entire MLM industry to reform.
Read more here: “Herbalife deal poses challenges for the Industry” (Roger Parloff, Fortune)