Herbalife: FTC settlement unlikely to slow NC hiring

Posted July 18, 2016

Herbalife says the $200 million settlement it struck with the Federal Trade Commission over charges it deceived participants in its multi-level marketing business will not impact hiring at its Winston-Salem supplement manufacturing plant.

North Carolina officials – Democrat and Republican – have pledged nearly $10 million of taxpayer-funded incentive packages if Herbalife meets its goal of creating about 800 jobs at its facility in Forysth County. In addition to the financial part of the settlement, the company must also change a number of its business practices that the FTC charges mislead consumers about how much they can earn in the program, which depends heavily on a participant's ability to recruit others to sell Herbalife products for them.

The company said Monday that the company is on track to meet its goals at the Winston-Salem facility.

Kim Genardo, director of strategic and economic development communications for the state Department of Commerce, said the settlement "does not impact the company's job development reimbursement from the state."

In late 2012, then-Gov. Bev Perdue, a Democrat, announced more than $6.5 million in potential awards to the company for the creation of 493 jobs by 2016. It was big news, since the company would soon set up shop in the cavernous Dell Inc. plant in Winston-Salem that shuttered operations in 2010. Republican Gov. Pat McCrory followed in 2015 with an announcement that Herbalife would expand its presence in Forsyth County, adding another 301 jobs by the end of 2018. Those new jobs would earn the company an additional $3 million.

North Carolina's incentives are structured so that companies receive funds based on verified hiring figures.

Genardo said that, as of 2014, the company was in full compliance with the terms of its first grant package and that the state is currently reviewing the latest figures from 2015. Herbalife won't report hiring data for its second grant until the end of 2016, she said.

FTC charges allege deceptive practices

The settlement announced last week by the FTC marks the end of a multi-year investigation by the federal agency into Herbalife's business practices, following accusations in 2012 by prominent investor Bill Ackman that the company was a pyramid scheme.

In the complaint filed in a federal court in California Friday, the FTC claimed the company's compensation structure incentivized participants, or "distributors," to buy and recruit others to buy thousands of dollars worth of shake mixes, herbal supplements and other diet products.

"This obviously was pretty close to the line, because the FTC was able to get Herbalife to revise the way their people are compensated to really focus on direct sales," Tom Hazen, a professor at the University of North Carolina School of Law who teaches corporate law and securities regulation.

Despite claims that consumers could earn enough to quit their jobs – claims often accompanied with images of "expensive cars and opulent mansions" – the FTC charged that participants "earn little to no profit, or even lose money, from retailing Herbalife products."

"Only a small minority of distributors have made anything near what the company promises, and they have done so mainly by recruiting a 'downline' of distributors who buy the product at wholesale," FTC Chair Edith Ramirez wrote in a statement. "Indeed, for years, Herbalife’s business model primarily compensated members for recruiting new distributors to purchase product, not for selling product at retail to users outside of the Herbalife network."

In a press release Friday, company officials maintained that, while many of the FTC's claims are false, the settlement with the federal agency and another with the Illinois attorney general were in the company's best interest.

"The settlements are an acknowledgment that our business model is sound and underscore our confidence in our ability to move forward successfully, otherwise we would not have agreed to the terms," Michael O. Johnson, Herbalife chairman and chief executive, said in the release.

Although Herbalife agreed to "new procedures and enhancements to some policies that already exist," company officials said the agreement does not change it's business model in the U.S.

Yet, in the order filed in federal court, the settlement requires the company to limit payment based solely on recruitment, better track its retail sales and change its refund policies, among other things. It must also stop misrepresenting claims that participants in the program can "earn a substantial income" and prohibits images of mansions, private aircraft, yachts and "exotic automobiles" in marketing materials to distributors. Per the order, an independent auditor will ensure the company complies with the agreement.

Part of that compliance will be focused on verifying that at least 80 percent of the company's sales are made to "legitimate end-users."

Those sales indicate genuine demand, Hazen said, which separates the more traditionally successful multi-level marketing companies such as Tupperware or Avon from those that have run afoul with the feds.

"If you're selling to a bulk purchaser, that doesn't reflect any real consumer demand for the products," Hazen said. "Real consumers – that is what will make a sustainable business."

These changes, along with the $200 million Herbalife must pay to consumers the FTC says were harmed by the company, should serve as an "important reminder" to other multi-level marketing firms, Ramirez said.

"They should ensure that income representations are not false or misleading and that compensation structures do not incentivize recruitment and wholesale purchases unrelated to retail demand," Ramirez said in a statement. "Put simply, the structure of a multi-level marketing business should present a viable retail opportunity,"


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