FTC Mails Redress Checks to Nearly 350,000 Victims of Multi-Level Marketing Scheme | Practical Law

FTC Mails Redress Checks to Nearly 350,000 Victims of Multi-Level Marketing Scheme | Practical Law

The Federal Trade Commission (FTC) has announced that it is mailing checks to nearly 350,000 people who lost money as part of Herbalife International of America, Inc., Herbalife International, Inc., and Herbalife, Ltd.'s multi-level marketing (MLM) business. These companies reached a settlement with the FTC last year, agreeing to pay the agency $200 million and fundamentally restructure their MLM business. This is one of the largest redress distributions the FTC has ever made in any consumer protection action.

FTC Mails Redress Checks to Nearly 350, 000 Victims of Multi-Level Marketing Scheme

Practical Law Legal Update w-005-3480 (Approx. 4 pages)

FTC Mails Redress Checks to Nearly 350,000 Victims of Multi-Level Marketing Scheme

by Practical Law Commercial Transactions
Law stated as of 12 Jan 2017 • USA (National/Federal)
The Federal Trade Commission (FTC) has announced that it is mailing checks to nearly 350,000 people who lost money as part of Herbalife International of America, Inc., Herbalife International, Inc., and Herbalife, Ltd.'s multi-level marketing (MLM) business. These companies reached a settlement with the FTC last year, agreeing to pay the agency $200 million and fundamentally restructure their MLM business. This is one of the largest redress distributions the FTC has ever made in any consumer protection action.
On January 10, 2017, the Federal Trade Commission (FTC) announced that it is mailing checks to nearly 350,000 people who lost money participating in Herbalife International of America, Inc., Herbalife International, Inc., and Herbalife, Ltd.'s (the Herbalife Companies) multi-level marketing (MLM) scheme. This is one of the largest redress distributions the FTC has ever made in any consumer protection action. These checks are the result of a July 2016 settlement between the FTC and the Herbalife Companies.
In its complaint against the Herbalife Companies, the FTC accused the companies of violating the Federal Trade Commission Act (FTC Act) through their MLM business. Specifically, the FTC claimed that:
  • The Herbalife Companies deceived consumers into believing they could earn substantial money selling diet, nutritional supplement, and personal care products, when the overwhelming majority of distributors who pursued the business opportunity actually earned little or no money.
  • The Herbalife Companies' MLM compensation structure was unfair and caused substantial injury to many of their distributors because the structure rewarded distributors for recruiting others to join and purchase products to advance in the marketing program, rather than in response to actual retail demand for the product.
As part of this settlement, the Herbalife Companies:
  • Were required to:
    • restructure their compensation system so that it rewards retail sales to customers and removes incentives rewarding distributors primarily for recruiting other distributors;
    • pay for an Independent Compliance Auditor to monitor their restructuring of the compensation plan; and
    • pay $200 million to provide consumer redress.
  • Are prohibited from misrepresenting distributors' potential or likely earnings.
The FTC has also released guidance related to this action to help other multi-level marketers comply with the FTC Act. This guidance notes that:
  • False or unsubstantiated earnings claims violate the FTC Act.
  • A business running an MLM operation could be liable if its distributors make deceptive statements, so it should have an effective monitoring program to ensure that distributors comply with the law and aren't conveying misleading claims.
  • To be considered a legitimate MLM operation, there must be sales to "real customers" (people who are unaffiliated with the company and actually buy and use the product the MLM sells).
  • Compensation for distributors should be tied to real sales to real customers.
For more guidance on complying with the FTC Act's claim substantiation requirements, see Practice Notes, FTC Enforcement of Advertising Claims and Substantiation of Advertising Claims.