A new Federal Trade Commission settlement with dietary supplement distributor Herbalife International of America could sharply change business practices at multilevel marketing companies that sell health-related items and other products, including firms formerly associated with presumptive Republican presidential nominee Donald Trump.
Under the settlement announced Friday, the Los Angeles-based Herbalife will pay $200 million for consumer redress and revamp its compensation system to reward its independent distributors for sales to actual retail customers rather than for recruiting other distributors. The agency charged that Herbalife deceived its distributors into believing they could earn lots of money selling the company's products, when it actually rewarded distributors for recruiting others to distribute products.
“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 in a news release. “Herbalife is going to have to start operating legitimately….”
The FTC said Herbalife distributors spent an average of $8,500 to get started and 57% reported making no profit or losing money. Nearly half the distributor base quits in any given year, the agency said.
Herbalife, Nu Skin, Amway, Trump's former company Trump Network, and other MLM firms long have been accused of operating what were essentially pyramid schemes—with the companies and their most senior distributors making money off the investments of a “downline” chain of newer distributors and little or no money made from retail sales to non-distributor customers.
Critics also say that in many cases, retail customers can buy similar vitamin, nutritional supplement, personal care, and other products at lower prices in stores or online. In addition, there have been allegations that the companies make scientifically unfounded medical claims for their products. Under the 1994 Diet Supplements Health and Education Act, however, the Food and Drug Administration has no regulatory authority over non-prescription dietary supplements.
There are numerous complaints from former MLM distributors about how the companies' promises of lucrative business opportunities proved illusory, and how they alienated friends and relatives with their efforts to bring them in as distributors.
But the politically powerful multilevel marketing industry, represented by the Direct Selling Association, has fended off most enforcement moves by regulators in the U.S. and other countries. The industry claims that more than 18 million Americans are involved in the industry, generating more than $30 billion a year in sales.
In 2009, Donald Trump launched a company called the Trump Network to sell vitamins and urine testing kits enabling customers to customize doses. The firm claimed its products could help with food allergies, stress, respiratory problems, digestive health, bone health, and lethargy. Trump ended his involvement with the Trump Network in 2011 and the company was sold in 2012. An investigation by the publication Stat found that Trump Network's products and testing were scientifically dubious.
In addition, the Wall Street Journal reported last year that over the past decade, Trump earned millions for plugging ACN, a multilevel marketing firm that sells digital and wireless phone services and satellite TV services. ACN has successfully defended against allegations by regulators in Montana, Canada, and Australia that it was running a pyramid scheme because it was making money mostly from recruiting new distributors rather than selling products to retail customers.
Trump told the Journal that even though he prominently featured the company on his TV show, “The Celebrity Apprentice,” and that he received $2.5 million from ACN for a single speech, he was "not familiar with what they do or how they go about doing that, and I make that clear in my speeches.”
Under Herbalife's settlement with the FTC, at least two-thirds of rewards paid by Herbalife to distributors must be based on verified retail sales of products, and no more than one-third of rewards can be based on distributors' own personal consumption of the products. Companywide, at least 80% of Herbalife's sales must be made up of sales to legitimate end-users, or else rewards to distributors must be reduced.
In addition, Herbalife for seven years will pay for an independent compliance auditor who will monitor the company's compliance with the settlement provisions and report back to the FTC.
For years, billionaire investor William Ackman had argued that Herbalife was a pyramid scheme, and had pressured Congress to take action against the company. But with the FTC's action Friday, he fell short of his quest to shut down the company.