Almost 350,000 people who helped run Herbalife businesses are receiving checks from the Federal Trade Commission to compensate them for money lost due to the company’s deceptive earnings claims. Specifically, Herbalife was claiming that participants could expect to quit their jobs, earn thousands of dollars a month, and make a career-level income or get rich. Its compensation structure also rewarded distributors for recruiting others to join and purchase products, which was not tied to actual retail demand for the product. Herbalife agreed to pay $200 million and will restructure its multi-level marketing (“MLM”) business model as part of the FTC settlement. Simultaneously, the FTC released guidance for multi-level marketers with lessons drawn from the Herbalife and Vemma cases and subsequent enforcement actions. The FTC noted that:
- False or unsubstantiated earnings claims may violate the FTC Act;
- MLM companies should monitor the claims its distributors are making;
- At the heart of a legitimate MLM are real sales to real customers; and
- Compensation and other incentives should be tied to real sales to real customers.
The FTC also offered tips on what to look for when joining a multi-level marketing company.
Takeaway: The FTC made particular note of MLM companies’ enticement of consumers with promises of lavish lifestyles should they join the company. The agency also emphasized companies’ liability if their agents and distributors are making exaggerated claims. Multi-level marketing companies should be aware of the perils of such lack of substantiation and would be wise to establish protocols so that messaging is monitored at all levels of the organization.