1

2
3
4
5
6
7
8
9
10
11
12
13
14
15
16

DAVID C. SHONKA
Acting General Counsel
JANET AMMERMAN
CA Bar No. 113996; [email protected]
CHRISTINE M. TODARO
OH Bar No. 0084976; [email protected]
DANIEL O. HANKS
DC Bar No. 495823; [email protected]
600 Pennsylvania Ave. NW, CC-8528
Washington, D.C. 20580
Tel: (202) 326-2222 / Fax: (202) 326-3395
LAURA SOLIS
WA Bar No. 36005; [email protected]
915 Second Ave., Suite 2896, Seattle, WA 98174
Tel: (206) 220-4544 / Fax: (206) 220-6366
Local Counsel
BARBARA CHUN
CA Bar No. 186907; [email protected]
Federal Trade Commission
10877 Wilshire Blvd., Suite 700
Los Angeles, CA 90024
Tel: (310) 824-4343 / Fax: (310) 824-4380

17
18
19

Attorneys for Plaintiff

Federal Trade Commission
UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF CALIFORNIA

20
21
22

FEDERAL TRADE COMMISSION,

Case No. 2:16-cv-0

23

Plaintiff,

24
25
26
27

COMPLAINT FOR
PERMANENT INJUNCTION
AND OTHER EQUITABLE
RELIEF

v.
HERBALIFE INTERNATIONAL OF
AMERICA, INC., a corporation,

28

1
2

HERBALIFE INTERNATIONAL,
INC., a corporation, and

HERBALIFE LTD., a corporation,

Defendants.

5
6
7
8
9

Plaintiff, the Federal Trade Commission (FTC or the Commission), for

its Complaint alleges:
1.

The FTC brings this action under Section 13(b) of the Federal Trade

10

Commission Act (FTC Act), 15 U.S.C. 53(b), to obtain permanent injunctive

11

relief, rescission or reformation of contracts, restitution, the refund of monies paid,

12

disgorgement of ill-gotten monies, and other equitable relief for Defendants acts

13

or practices in violation of Section 5(a) of the FTC Act, 15 U.S.C. 45(a), in

14

connection with the advertising, marketing, promotion, and sale of a multi-level

15

marketing business opportunity.

JURISDICTION AND VENUE

16
17
18
19
20

2.

1331, 1337(a), and 1345, and 15 U.S.C. 45(a) and 53(b).

3.

23
24
25
26

Venue is proper in this district under 28 U.S.C. 1391(b)(2) and

(c)(2) and 15 U.S.C. 53(b).

PLAINTIFF

21
22

This Court has subject matter jurisdiction pursuant to 28 U.S.C.

4.

The FTC is an independent agency of the United States Government

created by statute. 15 U.S.C. 4158.

5.

The FTC enforces Section 5(a) of the FTC Act, 15 U.S.C. 45(a),

which prohibits unfair or deceptive acts or practices in or affecting commerce.

6.

The FTC is authorized to initiate federal district court proceedings, by

27

its own designated attorneys, to enjoin violations of the FTC Act and to secure

28

such equitable relief as may be appropriate in each case, including rescission or

2

reformation of contracts, restitution, the refund of monies paid, and the

disgorgement of ill-gotten monies. 15 U.S.C. 53(b).

DEFENDANTS

3
4

7.

Defendant Herbalife International of America, Inc. is a Nevada

corporation with its principal place of business at 800 W. Olympic Boulevard, Los

Angeles, California. Defendant Herbalife International of America, Inc. is a

wholly-owned subsidiary of Herbalife International, Inc. and an indirectly wholly-

owned subsidiary of Herbalife Ltd., and is employed by those entities to conduct

their U.S. operations. Herbalife International of America, Inc. transacts or has

10

transacted business in this district and throughout the United States.

11

8.

Defendant Herbalife International, Inc. is a Nevada corporation with

12

its principal place of business at 800 W. Olympic Boulevard, Los Angeles,

13

California. Herbalife International, Inc. is an indirect wholly-owned subsidiary of

14

Herbalife Ltd. Herbalife Ltd. employs Herbalife International, Inc. to manage its

15

global marketing company. Herbalife International, Inc. transacts or has transacted

16

business in this district and throughout the United States.

17

9.

Defendant Herbalife Ltd. is a corporation organized under the laws of

18

the Cayman Islands with its principal place of business at P.O. Box 309GT,

19

Ugland House, South Church Street, Grand Cayman, Cayman Islands. Herbalife

20

Ltd. transacts or has transacted business in this district and throughout the United

21

States.

22

10.

This Complaint refers to Herbalife International of America, Inc.,

23

Herbalife International, Inc., and Herbalife Ltd. collectively as Herbalife or

24

Defendants.

25

11.

At all times material to this Complaint, acting alone or in concert with

26

others, Defendants have advertised, marketed, distributed, or sold the business

27

opportunity at issue in this Complaint to consumers throughout the United States.

28

COMMON ENTERPRISE

1
2

12.

Defendants have operated as a common enterprise while engaging in

the deceptive and unlawful acts and practices alleged herein. Defendants have

conducted the business practices described below through interrelated companies

that have common ownership, officers, directors, and office locations. Because

Defendants have operated as a common enterprise, each entity is jointly and

severally liable for the acts and practices alleged below.

COMMERCE

8
9

13.

At all times material to this Complaint, Defendants have maintained a

10

substantial course of trade in or affecting commerce, as commerce is defined in

11

Section 4 of the FTC Act, 15 U.S.C. 44.

DEFENDANTS BUSINESS PRACTICES

12
13

14.

Defendants promote Herbalife as a multi-level marketing business

14

opportunity through which participants may earn compensation by selling weight

15

management, nutritional supplement, and personal care products and by recruiting

16

new participants into the organization.

17

15.

Individuals who participate in Defendants business opportunity are

18

called Distributors (also referred to herein as participants). In 2013,

19

Defendants began calling participants Members rather than Distributors. The

20

change in terminology, however, was not accompanied by any substantive change

21

to the nature of the business opportunity available to Herbalife participants.

22

16.

Defendants represent, expressly or by implication, that Herbalife

23

Distributors are likely to earn substantial income, including significant full-time or

24

part-time income, from pursuing a retail-based business opportunity.

25

17.

In reality, however, Defendants program does not offer participants a

26

viable retail-based business opportunity. Defendants compensation program

27

incentivizes not retail sales, but the recruiting of additional participants who will

28

fuel the enterprise by making wholesale purchases of product.

4

18.

The retail sale of Herbalife product is not profitable or is so

insufficiently profitable that any retail sales tend only to mitigate the costs to

participate in the Herbalife business opportunity.

19.

As a consequence, the small minority of Distributors who receive

substantial income through Herbalife are primarily compensated for successfully

recruiting large numbers of business opportunity participants who purchase

Herbalife product.

20.

The overwhelming majority of Herbalife Distributors who pursue the

business opportunity make little or no money, and a substantial percentage lose

10

money.

11

Defendants Promotional and Marketing Activities Are Misleading

12

21.

Defendants promote their business opportunity in both English and

13

Spanish through a variety of channels, including videos, live presentations, and

14

print materials. Through each of these channels, Defendants represent, expressly

15

or by implication, that consumers who become Herbalife Distributors are likely to

16

earn substantial income, including significant full-time or part-time income by

17

purchasing and re-selling Herbalife products.

18

22.

In some but not all instances, Defendants accompany their misleading

19

income representations with purported disclaimers. These purported

20

disclaimers, which often appear in small print, do not alter the net impression

21

created by Defendants misleading representations, namely, that Distributors are

22

likely to earn substantial income. (See, for example, the graphic illustration at

23

Paragraph 37, which contains the following disclaimer: Incomes applicable to the

24

individuals (or examples) depicted and not average. For average financial

25

performance data, see the Statement of Average Gross Compensation of U.S.

26

Supervisors at Herbalife.com and MyHerbalife.com.)

27
28

23.

As in the example at Paragraph 37, Defendants purported disclaimers

typically reference a separate document, the Statement of Average Gross

5

Compensation, that supposedly presents realistic expectations of the possible

income you can earn. The Statement of Average Gross Compensation does not

provide clarity or realistic expectations, but instead obfuscates through a dense

maze of verbiage and numbers. Neither the reference to nor the Statement of

Average Gross Compensation itself alters the net impression created by

Defendants misleading representations.

Misleading Income Representations

7
8

24.

Defendants use videos to promote their business, making them

available to Distributors through Herbalifes websites, including myherbalife.com

10

and video.herbalife.com. Defendants have at times also included videos in the

11

starter packs that all new Distributors must purchase. Many of the videos are

12

disseminated in both English and Spanish.

13

25.

Defendants videos include representations that Distributors are likely

14

to earn substantial income through Defendants business opportunity; images of

15

expensive houses, luxury automobiles, and exotic vacations; and income

16

testimonials.

17

26.

For example, a promotional video available through February 2016 on

18

myherbalife.com portrays a Mini-HOM (Herbalife Opportunity Meeting) at

19

which various Herbalife Distributors take turns giving income testimonials. The

20

video includes the following income representations:

21

a.

corporate America. . . . Last month it was $7,300.

22
23

I made $4,100 my second month. . . . And I retired from

b.

I average an extra $1,500 a month part-time, around a 60-hour

24

workweek [working in corporate finance], so you can really

25

build this around whatever youre doing.

26

c.

Ive been a coach on the team for a year and a half. . . . Fast

27

forward maybe a year and five months later, thats when I hit

28

six figures in the company. . . . Couple of months later, I make

6

over $13,000 a month now.

1
2

d.

My income ended up getting to $4,000 a month, part time, at

Herbalife. . . . Its been five years, my income got up to

$10,000 a month a couple years ago. Its more than double that

now.

27.

Another video, Design Your Life, was included in every new

Distributors starter pack until January 2013 and was available on

video.herbalife.com until October 2014. Because Defendants intended the Design

Your Life video to be given to potential recruits, ten copies of the DVD were

10

included in the starter pack. In addition to images of expensive cars and opulent

11

mansions the video includes the following testimonials:

12

a.

making $2,500 a month.

13
14

b.

First month in the business, without having a clue . . . first

month it was unbelievable, actually, our income was $1,500.

15
16

About a year and a half into the business, still part-time, I was

c.

A year exactly after I started the business, my checks that

17

month were $5,468.28. Two months later my check went up to

18

$7,080and that was the month I went on vacation, and came

19

back, and got that $7,000 check! So, its been amazing.

20

d.

month, we hit about $16,000.

21
22

You know, the royalties grew five times in five months, and last

e.

When I got to ten thousand, I thought, well that wasnt so hard

23

after all, maybe I can get to fifteen, and I went from fifteen, to

24

twenty, and then to thirty, and then even up to forty thousand

25

dollars a month.

26

f.

quarter of a million dollars.

27
28

The first nine months of really getting going, I had made a

28.

The Design Your Life video also includes the following:

7

There are basically three types of people Herbalife is looking for.

What you need to do next is get back to the person who gave you this

video and let them know what you are. Just tell them A, B, or C . . .

Category A is someone who might be saying . . . I dont need any

extra income but the products sound great . . . I want to get started on

the products right away.

Category B is someone who might be saying, you know, the products

sound great, and Id like to start a small business to earn an extra $500

to $1,500 a month part-time . . . .

10

Category C, you might be saying, wow, everything sounds great. I

11

like the products and would like to start a big business that could

12

generate a career level income or more. $2,500 to $10,000 a

13

month. . . .

14

You make the choice. Are you A, B or C?

15

29.

In addition, from at least January 2009 through August 2013, a DVD

16

called Getting Started was included in the starter packs that all Distributors must

17

purchase. The most recent version of Getting Started included the testimonials

18

of Distributors Glenn and Jennifer:

19

a.

Glenn explains that he was a bartender, broke and struggling

20

to pay [his] bills, before becoming an Herbalife Distributor.

21

Although he didnt have any formal education or any

22

business background, he quickly succeeded with Herbalife and

23

was able to make enough money to quit his job and work full-

24

time as an Herbalife Distributor. Now Im able to live in a

25

beautiful home, drive whatever I want, and theres nothing else

26

Id rather do than work from home, be able to set my own

27

schedule, and be my own boss.

28

b.

Before Herbalife, Jennifer wanted to be a stay-at-home mom for

8

her son. However, she had to put her son in daycare and work

long hours while her husband worked eighty-hour weeks. After

just four months as an Herbalife Distributor, she went full-

time, took [her] son out of daycare, and [] became that stay-at-

home mom. Today, she and her husband are both stay-at-

home parents, we travel the world, we have a six-figure

income, and this company and the products have totally

changed my life.

30.

Defendants also sponsor numerous events for Distributors in both

10

English and Spanish. Many of these events include live presentations at which

11

speakers boast about the high incomes they earn as Herbalife Distributors. These

12

events have names such as Extravaganzas, Leadership Development

13

Weekends, and Success Training Seminars.

14

31.

Defendants strongly encourage Distributors to attend these events,

15

which often require Distributors to pay an attendance fee and/or purchase a

16

minimum amount of product from Herbalife. Defendants craft the agendas and

17

select the speakers who present at these events. Speakers are usually chosen from

18

among the very small percentage of Herbalife participants who have reached the

19

highest status levels of the Herbalife organization. The presentations made by the

20

selected top Distributors repeatedly emphasize that Distributors are likely to earn

21

substantial income through Herbalife, and that Distributors income potential is

22

limited only by their own efforts.

23
24
25

32.

For example, speakers giving live presentations at Defendants events

have made the following statements:

a.

[H]ow many of you would like to make at least a million

26

dollars a year in income? I gotta tell ya, every extra million

27

dollars, I find, comes in handy. OK? You know? Then you

28

get 2 million, 5 million, you know, and with the increases of

9

20%, 25%

Even now, you can put into your mindlike, if you made a

hundred thousand dollars last year, and your income went up

proportionately, an extra twenty thousand dollars? Thats

pretty cool, huh? Couple thousand a month? You make five

hundred thousand dollars, would an extra hundred thousand

dollars come in handy? And were gonna go through how to

make it happen.

[Herbalife Chairmans Club member John Tartol, 2012

10

Presidents Summit, Los Angeles]

11

b.

. . . I can remember when I was new, and I didnt know

12

anything, I didnt know anybody, didnt have any sales or

13

marketing experience, I didnt know, how was I ever gonna get

14

successful? . . .

15

And make no mistake about it, cause it happened for me, Im

16

living proof that it can happen, and all the people down here in

17

this floor here, and the people behind you, all of us are, you

18

knowIm a multi-millionaire, but, you know, all of us are

19

getting groomed to become multi-millionaires. That is an

20

awesome opportunity.

21

Now, you can take advantage of it, or you may only want to

22

make sixty thousand, a hundred thousand, a couple hundred

23

thousand.

24

[Herbalife Founders Circle member Geri Cvitanovich, 2010

25

Herbalife Extravaganza, Los Angeles]

26

c.

[translated from Spanish] It has been 15 years since we arrived

27

here in the United States searching for the American

28

Dream . . . . In 95, we came from Mexico to the United

10

States . . . . I lasted 7 years in a cleaning company, 7 years

earning $2,000 a month. We started the business doing it part

time, the income started coming, it was something incredible,

our lifestyle started to change spectacularly. . . . In the last

three months the company has paid us more than $45,000.

Welcome to Herbalife!

[Raul Snchez, Herbalife Presidents Team member, 2009

Herbalife Extravaganza Latina, Atlanta]

33.

In addition to the spoken content, the live presentations at Defendants

10

events often involve images of expensive houses, luxury automobiles, and exotic

11

vacations.

12

34.

Defendants have recorded many of the live presentations given at

13

Defendants sponsored events and have formally integrated the presentations into

14

their own resources, making the recordings available to Distributors through

15

Herbalifes websites, including myherbalife.com and video.herbalife.com.

16

35.

Like Defendants videos and sponsored-events, Defendants print

17

publications include representations that Distributors are likely to earn substantial

18

income through Defendants business opportunity.

19

36.

Defendants print publications include, for example, Your Business

20

Basics, which is available in both English and Spanish and is provided to all new

21

Distributors. From 2014 through at least December 2015, Your Business Basics

22

included the following representations:

23

a.

time and money to enjoy the finer things in life.

24
25

Earn extra money each month. \ Be your own boss. \ Have the

b.

Regardless of your background and job experience, you can

26

succeed because we have people just like you who started

27

where you are and are now earning substantial incomes.

28

c.

Your income and lifestyle potential with Herbalife are yours to

11

determine. Thousands of others like you have achieved success

with Herbalife. You can do it!

d.

From nutrition to the business opportunity, youll see theres no

limit to your personal or financial potential, and others just like

you have tapped into this incredible opportunity.

37.

The Presentation Book is another of Defendants publications that is

available in both English and Spanish and that is provided to all new Distributors.

It is designed to be shown to potential recruits. The English-language version of

the Presentation Book that was included in the starter pack from 2012 through

10

2014 stated that Herbalife offers [t]he opportunity to earn more than you ever

11

thought possible and make your dreams come true! That publication, a page of

12

which is shown below, included pictures of big houses, fancy cars, cash, and boats

13

alongside the text Great Products Mean Great Business Opportunities! Dream it.

14

Do it.

15
16
17
18
19
20
21
22
23
24
25
26
27
28

38.

Other versions of the Presentation Book have also included

Distributor income testimonials:

12

a.

. . . I started my Herbalife business with the goal of quitting my

job as a collection specialist within a year. Just 13 months

later, I realized that dream! . . . And with my $6,500-a-month

income, weve been able to move into a new house and

renovate.

b.

Now, while earning $25,000 a month with Herbalife, I get to do

all the things I love: play music and ride my motorcycle!

7
8

c.

We went from bankruptcy to being set for life!

39.

From 2012 through 2013, the Spanish-language version of

10

Presentation Book offered similar income testimonials (translated here into

11

English):

12

a.

The days when I would earn a living cleaning houses are behind

13

me because now we are fully dedicated to our prosperous

14

Herbalife business.

15

b.

When we worked in factories our earnings could only pay for

16

basic needs, but now we can take our 12 grandkids on

17

vacations. These are the best years of our lives.

18

c.

Before Herbalife I worked on a ranch tending cattle, but when

19

my sister showed me her royalty check she convinced me then

20

and there. Today, at 22 years old, Im economically

21

independent.

22

d.

We figured out that if we worked hard with our independent

23

Herbalife business, we could achieve anything: health, wealth,

24

and financial liberty. And thats exactly what weve done!

25

40.

Similar representations regularly appear in the Defendants magazine,

26

Herbalife Today, which is available in both English and Spanish and is provided

27

online to Distributors through myherbalife.com. The March 2013 issue of

28

Herbalife Today, for example, includes the following testimonials:

13

a.

Now I have the freedom to do what I like. I can travel the

world and help others change their lives wherever I go.

2
3

b.

home, take vacations and have a flexible schedule.

4
5

Today, as Independent Distributors, theyre able to work from

c.

Now, Dan and Orlyn feel they have found financial stability

and take pride in helping others find better nutrition and

financial success.

41.

To help Distributors recruit new participants, Defendants have

provided Distributors with several tools and training materials, including the

10

videos and print materials discussed above. Defendants encourage Distributors to

11

use these materials in attempting to recruit new participants.

12
13

Misleading Representations Regarding Income from Retail Sales

42.

Many of Defendants representations that Herbalife participants are

14

likely to earn substantial income expressly or impliedly represent that Herbalife

15

participants earn significant full-time or part-time income from selling Herbalife

16

products at retail.

17

43.

Defendants promotional materials often focus on the growth of the

18

weight-loss industry as a result of the worldwide obesity epidemic, and claim or

19

imply that this industry growth translates into the potential for making large

20

amounts of money from the retail sale of Herbalife weight management products.

21

For example, the Ready To Go video, available through February 2016 on

22

video.herbalife.com, begins by portraying a bleak picture of the current state of the

23

economy (rising unemployment, layoffs, salary reductions, reduced

24

benefits) and urges the viewer to take control of your . . . situation / financial

25

future / life and join the emerging megatrend of wellness. The video cites

26

estimates that the global weight loss market will reach $672 billion by 2015 and

27

explains, [t]hat spells growth / opportunity / the answer youve been looking for.

28

The video makes the following invitation: Get in on the opportunity / the health
14

and wellness megatrend / the premier nutrition and wellness company in the world.

Get in on Herbalife.

44.

In 2013, Defendants created and made available to Distributors a

PowerPoint presentation to show prospective and newly-recruited Distributors.

The presentation, which was still in use in 2015, claims that total revenue in the

fitness industry reached $21.8 billion in 2012, and that statistics show a rise in

consumer spending for body image concerns. The presentation goes on to portray

Herbalife as the brand leader in the meal replacement category, noting that in

2012 the company had over $6.4 billion [in] suggested retail sales. The

10

presentation claims that through offering great products and a great business,

11

Herbalife allows you to earn Member discounts and profits instantly by retailing

12

products.

13

45.

Similarly, the Getting Started video mentioned above at Paragraph

14

29, which was included in the starter pack for new Distributors from at least

15

January 2009 through August 2013, claims that the 3 trillion dollar weight-loss

16

industry has surpassed the GNP of all major European countries. The video goes

17

on to claim that Herbalife, with more than 2.5 billion dollars in sales generated by

18

a team of over one million distributors throughout the world, is a leader in this

19

industry, which has become the newest financial powerhouse in the world.

20

Herbalife is described as a great business opportunity: You have the

21

opportunity for financial independence and freedom; you can do it with helping

22

people change their lives, by getting them in a better nutritional mode, by getting

23

them healthier.

24

46.

The Mini-HOM (Herbalife Opportunity Meeting) promotional

25

video available through February 2016 on myherbalife.com presents testimonials

26

that expressly or impliedly represent the full-time or part-time income that

27

participants earn from selling Herbalife products at retail, by emphasizing how

28

much money participants can make immediately (presumably before they have
15

had a chance to build an organization that would generate recruiting-reward

payments):

a.

In my first three weeks, I made an extra $1,200 around my full-

time nursing schedule. So this is really part-time, doing this

super part-time, and I just saw the potential with this . . . .

b.

I started as a client, I was actually the CFO of an entertainment

finance company . . . . So, you know, had the career down . . . .

Went to a volleyball tournament that I was already gonna play

in. Everyone on the beach, you guys, was like, what are you

10

doing, you look better than you did when you were at UCLA,

11

like, hook me up, like, help me, basically!

12

. . . You know, my three days on the beach at a beach

13

volleyball tournament, I made $2,100. And I wasnt actively

14

looking for extra money, but I wasnt gonna give it back.

15

c.

crazy corporate job.

16
17

[I]n my first month, I made an extra 500 bucks around . . . a

47.

In the Design Your Life video, available on video.herbalife.com

18

until October 2014, one of the speakers states that Herbalifes great consumable

19

products that people want and need [are] why we have an incredible financial

20

opportunity. A speaker later states that as an Herbalife Distributor you can

21

develop a successful retail base to help put money in your pocket every day and

22

every month. A voiceover additionally states that [w]ith just ten customers, each

23

spending a hundred dollars a month, you can take in a thousand dollars in retail

24

sales, and make up to $420 in profit.

25

48.

The Design Your Life video also presents numerous testimonials

26

that expressly or impliedly represent the full-time or part-time income that

27

participants earn from selling Herbalife products at retail:

28

a.

My first week in the business, part-time, just learning what to

16

do, I earned $1,000! . . . [M]y first month, part-time, I earned

over $5,000!

b.

I earned $420 in my first ten days. . . . working this business

part-time. I was able to fire my boss, and Ive never had a real

boss since.

c.

When I got started on these products, I got such great results

that I made a thousand extra dollars my first month. . . . And so

I kept working my business part-time . . . while I was still

[working as a nurse] full-time . . .

10

d.

When I got started, my first day I actually earned $420 . . . .

11

e.

[I]n the month of August I had retail sales of $3,700.

12

49.

Print materials included in the starter packs that all new Distributors

13

must purchase also portray an opportunity to earn significant income through retail

14

sales of Herbalife products. For example, from 2014 through at least December

15

2015, the Sales & Marketing Plan and Business Rules book, which is included in

16

the starter pack for new Distributors, discussed the opportunity for Distributors to

17

make Immediate Retail Profit from direct sales to customers and states that

18

retailing is an important key to success as an Herbalife Distributor.

19

50.

From 2014 through at least December 2015, the book Building Your

20

Business, which is also included in the starter pack for new Distributors,

21

represented that a satisfied customer base can provide you with regular, long-term

22

income.

23

51.

Similarly, through at least December 2015, a pamphlet that is also

24

included in the starter pack for new Distributors, Your First 72 Hours: Making

25

Your First Sale, provides instruction on making your first sale in 5 easy steps.

26
27
28

Defendants Do Not Offer a Viable Retail-Based Business Opportunity

52.

Although Defendants represent, expressly or impliedly, that

Distributors will be able to sell Herbalife products at a profit, Defendants do not

17

track either the existence or profitability of Distributor attempts to retail Herbalife

products.

53.

The overwhelming majority of Herbalife Distributors who pursue the

business opportunity do not make anything approaching full-time or even part-time

minimum wage because the promised retail sales to customers simply are not there.
54.

Even according to Defendants own survey, sales to customers outside

the Herbalife network account for only 39% of Herbalifes product sales each year;

the remaining approximately 60% is simply Herbalife selling to its own

Distributors. [Herbalife Press Release, July 22, 2014]

55.

10

Analysis of Defendants own Distributor purchase data shows that,

11

even under favorable assumptions about Distributors market reach and sales price,

12

the overwhelming majority of Herbalife Distributors who pursue the business

13

opportunity make little or no money from retail sales. Under these assumptions,

14

and assuming no costs other than an individuals total payments to Herbalife, half

15

of Distributors whom the Defendants designate as Sales Leaders 1 average less

16

than $5 per month in net profit from retail alone, and half of these Distributors lose

17

money. 2
56.

18

As a direct-selling company, Defendants encourage Distributors to

19

sell product face-to-face to family and friends, and to customers with whom they

20

are supposed to develop personal relationships. Distributors are taught to follow

21

three key steps in retailing the product: use the product themselves, wear a button

22
23
24
25
26
27

Sales Leaders are defined by Defendants as Distributors who have reached

status levels of Supervisor and above. Approximately $3,000 in product
purchases are required to reach the lowest level of Sales Leader. Sales
Leaders may purchase products from the Defendants at a 50% discount, which is
the largest discount available to Distributors. See 11118.
2
This figure is based on analysis of Distributors who joined in 200911 and were
designated as Sales Leaders. It assumes that they sold 75% of the product they
purchased, at the full suggested retail price, and incurred no expenses other than
the monies they paid to Herbalife.

28

18

1
2

advertising Herbalife, and talk to people (use, wear, talk).

57.

In order to restrict sales to the direct-selling channel, Defendants have

adopted rules that effectively prevent Distributors from being able to sell to a

larger customer base. Defendants rules prohibit the sale of product in retail stores

and impose many restrictions on online selling. Nonetheless, Defendants foster an

illusion that Distributors can make significant full-time or part-time income from

retail sales. One way in which Defendants accomplish this is by promoting the

concept of the Nutrition Club. The Nutrition Club model was developed from an

idea that started in Mexico and, according to Defendants, has particular appeal for

10

members of the U.S. Latino community.

11

58.

According to Defendants, the Nutrition Club is supposed to be a

12

neighborhood gathering place to promote health and wellness, and to provide

13

income for the Nutrition Club owner. In practice, Nutrition Clubs operate

14

primarily as a tool for recruiting new members rather than as a method for

15

profitably retailing Herbalife products.

16

59.

Defendants encourage Distributors to lease a commercial space (or

17

use space in their homes) to operate a business similar to a juice bar, in which the

18

Distributor will work on a daily basis as the owner and sole employee. [Herbalife

19

Rule of Conduct 8.1.3]

20

60.

Customers who come to the club pay a daily membership fee of a

21

few dollars that entitles them to consume certain Herbalife products that are

22

prepared on the premises. Visitors typically receive one serving of soy protein

23

powder mixed with water and ice (referred to as a shake), herbal tea, and aloe.

24

This method of operating an Herbalife business is often referred to as daily

25

consumption.

26

61.

To find customers, Nutrition Club operators are encouraged to pass

27

out flyers to potential customers on the street, at their childrens school, or other

28

locations, inviting them to visit the club.

19

62.

While only a small percentage of the roughly half-million U.S.

Herbalife Distributors report operating Nutrition Clubs, Defendants claim that club

owners purchase a disproportionate amount of volume of Herbalife product. In

2012, Defendants estimated that there were 3,700 commercial Nutrition Clubs in

the North America region (consisting primarily of the United States); Defendants

also claimed that Nutrition Clubs were driving 3035% of the overall volume of

product purchased in the United States. [Herbalife Second Quarter 2012 Earnings

Conference Call]

63.

Although Nutrition Clubs would appear to be retail establishments,

10

Defendants rules provide that Nutrition Clubs are not retail stores or outlets, nor

11

are they restaurants or carry-out establishments. Nutrition Clubs are not intended

12

to attract walk-in traffic; Defendants rules prohibit signs that state or suggest

13

that Herbalife products are available for retail purchase on the premises. Club

14

owners are not permitted to post signs indicating whether the club is open or

15

closed, and the interior of the club must not be visible to persons outside.

16

[Herbalife Rules of Conduct 8.3.3, 8.4.3, 8.4.4]

17

64.

Club operators may not post, list, or charge prices for servings of

18

prepared products such as shakes, teas, or aloe. The only permissible charge in

19

connection with the provision of these products is the membership fee.

20

[Herbalife Rules of Conduct 8.2.1, 8.2.8] Provision of the shake, tea, and aloe

21

generally costs a Distributor a few dollars, leaving little of the membership fee to

22

cover the various operational expenses associated with the club.

23

65.

Although Defendants create the impression that Nutrition Club

24

owners will make significant full-time or part-time income from retailing Herbalife

25

products to customers at their clubs, many Distributors find it all but impossible to

26

make enough money from retail sales of product to cover the overhead of the club

27

and also generate income for the owner.

28

66.

Many club owners incur thousands of dollars in expensesincluding

20

but not limited to product purchases, rent, utilities, supplies, and licensing fees

that they are unable to recover through the operation of their clubs, and end up

losing money.

67.

In fact, Defendants own telephone survey of 433 current and 69

former Nutrition Club owners in February 2013 paints a discouraging picture of

the experience of many Nutrition Club owners. Fifty-seven percent of Nutrition

Club owners reported that their clubs made no profit or lost money. Club owners

reported spending an average of about $8,500 to open their club.

68.

Some Nutrition Club owners continue to operate their clubs for little

10

or no profit or at a lossfor years, in the hope that things will turn around and

11

their investment will eventually pay off. However, the promised retail-based

12

business opportunity is simply not there.

13

69.

Because Nutrition Clubs are expressly not retail establishments and

14

are often unprofitable, they are principally of value to a small minority of

15

financially successful Herbalife Distributors as a location from which they can

16

recruit new participants.

17

70.

As one top Distributor explained in a PowerPoint presentation:

18

[Nutrition Club] Operators need to realize that the end goal is not how

19

many $4.00 services they sell each day as that is not the way for them

20

to achieve their financial goals. Rather, its upgrading a Consumer to

21

become a Customer and eventually a Distributor and ultimately

22

having Distributors become Operators who will duplicate the

23

Nutrition Club method.

24

[Financial Success System presentation dated March 24, 2010]

25

71.

Successful Nutrition Club owners make money not from retailing

26

product, but from recruiting other participants who are encouraged to open their

27

own clubs, buy more product, and recruit more participants. When recruited

28

participants purchase product to sell at their clubs, these purchases generate

21

recruiting rewards for the sponsor, even if the clubs themselves lose money. These

recruiting rewards are the only pathway to achieve the high incomes touted in

Defendants promotional materials.

72.

Regardless of whether Distributors operate a Nutrition Club,

Distributors experience difficulty in selling product to customers outside the

network. Nevertheless, Defendants compensation structure puts pressure on

Distributors to purchase large quantities of product in order to qualify for greater

wholesale discounts and recruiting-based rewards (see discussion below at 135

44).

10

73.

As a result, many Distributors buy product that they find difficult to

11

sell. Although Defendants have a buy-back policy, in order to take advantage of

12

the policy, a Distributor must resign his distributorship. Many Distributors have

13

been unaware of the policy or, for various reasons, have been reluctant to attempt

14

to use it.

15

74.

Distributors dispose of excess product purchases in numerous ways.

16

At the simplest level, when Distributors are left with product they are unable to sell

17

they may give it to friends, throw it away, or gradually consume it themselves.

18

Such self-consumption is not driven by genuine demand for the product, but is the

19

easiest and most convenient way for a Distributor to get some benefit from product

20

that the Distributor would not have bought absent his or her participation in the

21

business opportunity. In other instances Distributors attempt to sell their excess

22

inventory at a discount on auction websites or at flea markets, although such

23

efforts to mitigate their losses are prohibited by Defendants rules. [Herbalife

24

Rules of Conduct 4.1.1, 7.3]

25

75.

The overwhelming majority of Distributors who attempt to retail the

26

product make little or no net income, or even lose money, from retailing the

27

product.

28

22

Distributors Abandon the Business Opportunity in Large Numbers

76.

In light of their poor financial results, many Distributors either stop

buying product or leave the organization altogether, resulting in a high turnover

rate.
77.

Despite Defendants efforts to promote retention of Distributors

whom it characterizes as Sales Leaders, in 2014 nearly 60% of first-time Sales

Leaders did not purchase sufficient product to requalify as Sales Leaders.

[Statement of Average Gross Compensation Paid by Herbalife to U.S. Members in

2014]

10

78.

Retention for non-Sales Leaders, many of whom are pursuing the

11

business opportunity, is even worse. An analysis of Defendants data shows that

12

the majority of Distributors stop ordering Herbalife products within their first year,

13

and nearly 50% of the entire Herbalife U.S. Distributor base quits in any given

14

year. Roughly half of all Herbalife Distributors at any given time are in their first

15

12 months of membership, and roughly 40% of the volume of Herbalife products

16

sold by Defendants each year is sold to participants in their first year.

17

79.

During 200913, an annual average of approximately 242,000 new

18

Distributors signed up in the United States. On average, 89% of those newly-

19

recruited Distributors, however, simply replaced U.S. Distributors who left that

20

same year, with an annual average of approximately 216,000 Distributors leaving

21

during this time period.

22

80.

For example, while approximately 277,000 new Distributors joined

23

Herbalife in the U.S. in 2013 (from a base of approximately 520,000 Distributors

24

at the end of 2012), approximately 256,000 existing Distributors left that year.
Defendants Business Opportunity is Based on Recruitment

25
26

81.

Notwithstanding Defendants express and implied representations that

27

Herbalife offers a retail-based business opportunity, in truth the only way to

28

achieve wealth from the Herbalife business opportunity is to recruit other

23

Distributors. Purchases by these recruited Distributors, referred to as a

downline, generate rewards for the sponsoring Distributor. (See 119.)

Through a variety of channels, Defendants admit, expressly or by implication, that

recruiting is the key to financial success.

82.

Defendants print materials emphasize the importance of recruiting

new Herbalife participants. For example, through at least December 2015 the book

Building Your Business, which is included in the starter kit that every

Distributor must purchase, discussed the power of duplication and illustrated

what you can achieve if you recruit and retain two active Supervisors. In the

10

illustration, the Distributor purchases a certain quantity of product (costing over

11

$1,000) each month and recruits two new participants who also purchase that

12

quantity each month. Those two participants then recruit a total of twelve

13

additional participants in two additional levels below them. For each month that

14

the Distributor and the fourteen recruits purchase the specified quantity of product,

15

the Distributor will earn $1,750.

16
17
18
19
20
21
22
23
24
25

83.

The English-language version of the 2012-2014 Presentation Book

26

also includes examples of how recruiting two or three new participants can

27

translate into $2,450 to $8,775 per month for the recruiter, assuming that the new

28

participants make substantial wholesale product purchases and themselves recruit

24

1
2

new participants who also make substantial wholesale product purchases.

84.

The Spanish-language version of the 2012-2013 Presentation Book

similarly discusses the power of duplication that can result when you bring in 3

people to the business, who each bring 3 people, who in turn bring 3 people . . . .

(translated from Spanish).

85.

Speakers giving live presentations at Defendants events also make

representations concerning the importance of recruiting in Herbalifes

compensation program:

a.

Its wonderful that we have everybody consuming and we have

10

everybody doing the different methods of retail . . . but you got

11

to think about it, guys, the name of the game here is royalty . . .

12

and you dont get paid royalty off of customers. You get paid

13

royalties off of distributors that you help to become successful

14

to become supervisors. [Herbalife Founders Circle member

15

Susan Peterson, 2009 Herbalife Extravaganza, Atlanta]

16

b.

[translated from Spanish] The only way to scale the ladder of

17

success is through sponsorship. [Herbalife Presidents Team

18

member Dalia Gonzlez, 2009 Herbalife Extravaganza Latina,

19

Atlanta]

20

c.

The key to royalty growth[:] New distributors qualifying as

21

Supervisor every month. [Herbalife Chairmans Club member

22

Kurt OConnell, Building Your Royalties Presentation, 2011

23

Herbalife Extravaganza, Las Vegas]

24

86.

Savvy Distributors have figured out ways to use the recruiting reward

25

structure to reap rewards, even without profitable retail sales. For example, during

26

the years 200914, one top Distributor paid over $8 million for product (with a

27

total Suggested Retail Price of over $16 million) which the Distributor purchased

28

in the names of various downline members, thereby generating additional rewards

25

and qualifying for higher payments from Defendants. This Distributor then

donated all of this product to charity, rather than attempting to sell it. The

Distributor generated enough rewards through these purchases to make a net profit,

without even selling the products.

87.

Similarly, other Distributors have used unprofitable retail sales of

product to generate large reward payments. These Distributors have created

specialized websites offering products at discounts of up to 50% with no tax and

free shipping. Although the net profit earned from these online retail sales has

been de minimis, by manipulating Herbalifes compensation system, these

10

Distributors have generated significant recruiting reward payments from the

11

large volume of product purchases made by their purported downlines.

12

Few Business Opportunity Participants Earn Recruiting Rewards

13

88.

14
15
16
17

Although recruiting is the only path to a high income, very few

Herbalife participants earn income from recruiting.

89.

Most Distributors (80%) do not successfully recruit any new

participants, and therefore receive no recruiting rewards.

90.

Even among those who do recruit, a substantial percentage

18

receive no reward payments. For example, as of December 31, 2014, more

19

than 111,000 U.S. Distributors had recruited a downline, but approximately

20

43% of them (47,714) received no reward payments from Defendants.

21

[Statement of Average Gross Compensation Paid by Herbalife to U.S.

22

Members in 2014]

23

91.

Income from recruiting is low even for many in the top 13% of all

24

Distributorsthose who reached the status of Sales Leaders with a downline. In

25

2014, more than half (57.6%) of the Distributors in this elite group received

26

average gross reward payments from Defendants of under $300 for the year. [Id.]

27
28

92.

Rewards are highly concentrated among a small number of

Distributors. In contrast to the experience of the vast majority of Distributors who

26

make little or no money from recruitment-based rewards, the top 0.03% of U.S.

Distributors (205 individuals) received average gross reward payments of over

$600,000 per year. [Statement of Average Gross Compensation Paid by Herbalife

to U.S. Members in 2014]

93.

For the fewer than 1% of Distributors who receive substantial income

through Defendants business opportunity, their compensation for recruiting large

numbers of new business opportunity participants dwarfs whatever they might

make from retail sales of the product.

94.

The overwhelming majority of Herbalife Distributors who pursue the

10

business opportunity earn little or lose money, while those few Distributors who do

11

make a living from their Herbalife business do so by recruiting other business

12

opportunity participants who purchase product, not by retailing the product.

13

To Confuse Participants and the Public About Distributors Poor Financial

14

Outcomes, Defendants Understate the Percentage of

15

Distributors Who Are Pursuing the Business Opportunity

16

95.

Although Defendants heavily promote their business opportunity, in

17

recent years Defendants have begun to claim that most consumers who sign up to

18

be Distributors are merely customers who purchase the product only for their own

19

consumption and are not interested in pursuing the Herbalife business opportunity.

20

96.

Defendants do not offer a separate customer or discount buyer

21

status for consumers who are uninterested in pursuing a business opportunity and

22

thus do not systematically track or distinguish Distributors who might be discount

23

buyers from Distributors who are pursuing a business opportunity.

24

97.

Defendants rules provide that all consumers who sign up with

25

Herbalife must enter into an agreement that includes the business opportunity. The

26

2015 version of that agreement consists of seven pages of small print and includes

27

a number of provisions that would be inapplicable to a discount buyer, such as a

28

requirement that the participant indemnify, defend, and hold harmless Herbalife
27

from any cost or liability arising from the participants breach of the agreement or

the conduct of his or her Herbalife business.

98.

Since 2013 Defendants have publicly claimed or implied that a mere

27% of their Distributors are pursuing the business opportunity either full-time or

part-time, and that a substantial majority (73%) are simply interested in buying

Herbalife products for their own personal consumption.

99.

Defendants express or implied claim that a substantial majority of

their Distributors are not pursuing the business opportunity is based not on

Distributor behavior, but on surveys commissioned by Defendants beginning in

10

July 2012 that are flawed and unreliable. For example, many survey participants

11

who were included in the category of Distributors who purportedly joined

12

Herbalife primarily as discount customers themselves reported that they quit

13

Herbalife because finding new customers was too difficult and/or time

14

consuming, or the business was harder than [they] originally believed.

15

100. Based on such survey results, even some Distributors who reach

16

Presidents Team (the highest status level in Herbalife) and earn over $100,000

17

in recruiting rewards annually from the business opportunity have been categorized

18

in Defendants representations as merely discount buyers.

19

101. When observable Distributor behavior from Defendants data is

20

analyzed, the percentage of Distributors who are attempting to earn income from

21

the Herbalife business opportunity readily exceeds the 27% in Defendants claims.

22

Such behaviors include, for example, purchasing promotional literature and sales

23

and recruiting aids from Defendants.

24

102. Furthermore, many Distributors interested in the business opportunity

25

may make some effort to earn income and fail, without engaging in the type of

26

measureable and overt behaviors that would make their pursuit of the business

27

opportunity readily apparent.

28

103. In short, many of the Distributors whom Defendants would expressly

28

or impliedly characterize as solely discount buyers are, in fact, pursuing the

business opportunity.
104. Regardless of the number of so-called discount buyers, it is clear

3
4

that collectively they could account for only a small percentage of the volume of

Defendants products sold in the United States. Even using a grossly overstated

measure of discount buyersthat is, counting as discount buyers the roughly

80% of participants who are not Sales Leaderssuch Distributors collectively

account for less than 25% of the volume of Defendants products sold in the

United States. The remainder, over 75%, is purchased by Distributors at the Sales

10

Leader level, who are clearly pursuing a business opportunity.

Overview of Defendants Compensation Plan

11

105. The amount of compensation a Distributor receives from Defendants

12
13

is not based on retail sales of Herbalife products, but rather is based on the volume

14

of product purchased by the Distributors recruits, and by their recruits, and so on.
106.

15
16

Thus, the compensation plan contains incentives for Distributors to

recruit participants and to persuade them to buy as much product as they can.
107. To become a Distributor, an individual must pay either $59.50 or

17
18

$92.25, plus tax and shipping, to purchase a starter pack called an International

19

Business Pack, 3 the contents of which have varied over time but which have

20

included an Herbalife tote bag; samples of various Herbalife products; literature

21

about Herbalifes products; sales aids (such as a Presentation Book and buttons

22

the distributor is supposed to wear to advertise Herbalife); DVDs about the

23

business opportunity such as Design Your Life; multiple publications concerning

24

the Herbalife business opportunity, including the pamphlet Your First 72 Hours:

25

Making Your First Sale and the books Your Business Basics, Using &

26
27

In 2013, Defendants began calling the pack required for all new participants the
Herbalife Member Pack rather than the International Business Pack.

28

29

Retailing Your Products, Building Your Business, and Sales & Marketing Plan

and Business Rules; and a single receipt form that can be given to a customer in

the event of a single sale of product.

108. Defendants rules provide that participants must enter into an

Agreement of Distributorship either online or, if the pack is not purchased

online, in hardcopy form. (In 2013, Defendants began calling the agreement an

Herbalife Membership Application and Agreement rather than an Agreement of

Distributorship. The change in terminology, however, was not accompanied by

any substantive change to the nature of the business opportunity available to

10

Herbalife participants.) Upon purchasing the International Business Pack and

11

submitting the Agreement to Defendants, a participant is assigned an Herbalife ID

12

number and becomes an official Distributor.

13

109. The details of Defendants compensation program are complex and

14

convoluted, and involve specialized terminology and concepts. These details,

15

terminology, and concepts are laid out in a book included in the International

16

Business Pack entitled Sales & Marketing Plan and Business Rules. The 2014

17

version of the Sales & Marketing Plan and Business Rules has 114 pages and

18

consists of more than 58,000 words. The book is difficult to read and understand

19

and many participants rely upon their sponsors to explain the program.

20

110. The core concepts of Defendants compensation program are as

21

follows:

22

a.

Participants advance to higher status levels in the organization

23

and qualify for reward payments based on product purchases

24

(not product sales); and

25
26
27
28

b.

The only way to reach the highest levels of compensation is to

recruit more participants.

A simplified version of the compensation plan is set forth below.

111. New recruits start at the lowest level, called Distributor (or, since
30

2013, Member). A Distributor can purchase product from Defendants at a

discount of 25% off the earn base (a dollar value that Defendants assign to each

product that is generally slightly less than the value that Defendants assign as the

Suggested Retail Price for that product). The only way a participant at this level

can make money is to buy product from Herbalife and sell it to a customer for

more than his total cost, with the difference representing the participants Retail

Profit. Retail Profit is also the only form of compensation available to those

Distributors who have not recruited other Distributors.

112. The vast majority of Herbalife participants never progress higher than

10

the Distributor level, and most stop purchasing product within a year and do not

11

renew their memberships.

12

113. Higher status levels are obtained by meeting threshold requirements

13

of Volume Points, which are accumulated by purchasing greater quantities of

14

products. (The Volume Point is a unit created by Defendants to measure the

15

value of product purchases across currencies. A product with a Suggested Retail

16

Price of $100 generates roughly 100 Volume Points.) The Sales and Marketing

17

Plan contains complicated rules regarding how much of the threshold Volume

18

Point requirement must be volume that is personally purchased by the Distributor,

19

and how much may be volume purchased by other Distributors whom he recruits.

20

114. A Distributor can advance to the status level of Senior Consultant,

21

which allows him to purchase product at a 35% discount, by accumulating at least

22

500 Volume Points in one month.

23

115. A Distributor who purchases 1,000 Volume Points in a single order

24

obtains the status of Success Builder and is entitled to a 42% discount for that

25

month.

26

116. A Distributor who accumulates a total of 2,500 Volume Points over

27

one to three months obtains the status of Qualified Producer and is entitled to a

28

42% discount through the following year.

31

117. The maximum discount, for those at the Supervisor status level and

above, is 50% off the earn base. A Distributor who accumulates a total of 4,000

Volume Points obtains Supervisor status and is entitled to a 50% discount

through the following year.

118. If a Distributor makes it to the Supervisor level, there are numerous

higher levels that offer additional rewards that are based on recruiting. Herbalife

refers to Distributors who reach the Supervisor level or above as Sales Leaders.

119. The essential requirement for moving up to the highest status levels is

recruiting a large downline. A given participants downline is comprised of all

10

those whom the participant has personally recruited (Level One), all those

11

recruited by his Level One participants (Level Two), and so forth, down to as

12

many levels as have been created by recruitment.

Defendants Compensation Plan Incentivizes Recruiting

13
14

120. Defendants compensation plan gives participants a powerful

15

incentive to recruit more participants, because recruiting a downline entitles a

16

participant to receive multiple different types of payments directly from

17

Defendants.

18

121. One such type of payment is called Wholesale Profit (or

19

Commissions). An Herbalife participant may receive Wholesale Profit based

20

on purchases made by participants he has recruited who are at a lower discount

21

rate. For example, if a participant at the Supervisor status level (50% discount

22

rate) recruited a participant at the Senior Consultant status level (35% discount

23

rate) who then ordered product with a Suggested Retail Price of $100, the

24

participant at the Supervisor level would receive a commission check from

25

Defendants of approximately $15, representing the 15 percentage point difference

26

between the two participants discount rates.

27
28

122. An additional type of payment based on downline purchases, available

to participants who are at or above the status level of Supervisor and who have
32

recruited a downline, is called Royalty Overrides. To understand how Royalty

Overrides work, it is necessary to understand two volume concepts in

Defendants Sales & Marketing Plan: Total Volume and Organizational

Volume.

123. Total Volume is a total of the Volume Points associated with a

participants own product purchases, plus the Volume Points associated with the

product purchases made by certain members of the participants downline.

Specifically, the Total Volume of Participant A would include the product

purchases of Participant As downline members who (i) have a status level lower

10

than Supervisor, and (ii) do not have any participants who have a status level of

11

Supervisor or higher in the chain of participants between them and Participant A.

12

124. In simplified form, Organizational Volume refers to the Total

13

Volume of a participants first three levels of Supervisors who are active in a

14

given month.

15

125. Royalty Overrides are payments ranging from 1% to 5% of a

16

participants Organizational Volume. The amount of the Royalty Override

17

percentage that a given participant earns each month depends on the participants

18

Total Volume for that month. Thus, 500 Total Volume points entitles the

19

participant to a 1% Royalty Override; 1,000 Total Volume points earns a 2%

20

Royalty Override; and so on, up to 2,500 Total Volume points which earns a

21

maximum 5% Royalty Override.

22

126. Participants are eligible to earn Royalty Overrides only if they have

23

(i) obtained a status level of Supervisor or above ( i.e., Sales Leaders) and

24

(ii) recruited a downline.

25

127. As of December 31, 2014, only about 13% of all U.S. Distributors fell

26

into the category of Sales Leaders who had recruited a downline. Even among

27

this group, most receive little or nothing in compensation from Defendants. In

28

2014, approximately 57.6% of this group received an average gross annual

33

payment from Herbalife of about $299, and approximately 14.3% received

nothing. [Statement of Average Gross Compensation Paid by Herbalife to U.S.

Members in 2014]
128. The participants who receive the highest gross compensation from

4
5

Defendants are at the top three status levels of the compensation system: Global

Expansion Team, Millionaire Team, and Presidents Team, called

collectively TAB Team (Top Achievers Business Team).

129. At the TAB Team status levels, participants may be eligible to

8
9

receive three different types of income based on their downlines purchases:

10

Wholesale Profits, Royalty Overrides, and a third category of income called

11

Production Bonuses. A Production Bonus is a monthly payment of 2% to 7% of

12

the product purchases of the participants entire downline, on all levels infinitely

13

deep.

14

130. Participants at the TAB Team status levels may also qualify to

15

receive the Mark Hughes Bonus Award, which is a payment based on a

16

percentage of Herbalifes worldwide sales.

17

131. It is only at the TAB Team status levels that a small number of

18

participants begin to see the rewards promised by Defendants, although even at this

19

level, the majority of participants are hardly receiving lavish income from

20

Defendants. For example, in 2011the last year in which Defendants publicly

21

released income data by participant levelthe median annual compensation that

22

participants at the Global Expansion Team status level received from Defendants

23

was $19,417. In comparison, the U.S. Census Bureaus 2011 poverty threshold for

24

a family of two with no children was $14,657.

25

132. Rewards are concentrated at the very highest levels. Participants at

26

the top level, Presidents Team, accounted for only about 0.05% of all

27

Distributors in 2011 but their median annual gross income from Defendants was

28

$336,901.
34

1
2
3
4
5
6
7

133. In 2011, the top U.S. Distributor received over $7 million from
Defendants, broken down as follows:
Wholesale Profits

$2,847

Royalty Overrides

$944,058

Production Bonuses

$4,256,817

Mark Hughes Bonus

$2,000,000

Total

$7,203,722

8
9

These reward payments were not based on retail sales to consumers, but on

10

wholesale purchases made by downline Distributors in his worldwide organization.

11

134. The only way to reach the TAB Team status levels is to recruit a

12

large organization of participants at the Supervisor status level who purchase

13

thousands of Volume Points worth of product. Thus, for example, to reach the

14

top level, Presidents Team, a participant must recruit an organization of

15

Supervisors who generate at least 10,000 Royalty Override points each month for

16

three consecutive months. Because the maximum Royalty Override percentage is

17

5%, this means that the first three levels of Supervisors must collectively generate

18

a minimum total of 200,000 Volume Points of product purchases each month, for a

19

total of 600,000 Volume Points of product purchases over the three months.

20
21

Defendants Compensation Plan Incentivizes Wholesale Product Purchases

135. Defendants compensation plan requires large wholesale purchases of

22

products in order for a participant to advance to a higher status level and to make

23

money from rewards. As explained below, participants must purchase product

24

from Defendants, or convince others to join and purchase product from

25

Defendants, in order to (i) qualify to move up to a higher status level; (ii) requalify

26

for those status levels and prevent being demoted; and (iii) qualify to receive

27

Royalty Override and Production Bonus payments from Defendants. These

28

product purchases are made as payments to participate in the Herbalife operation

35

rather than in response to actual retail demand for Herbalife products.

Product Purchases Are Required to Advance to Higher Levels

2
3

136. To advance from the lowest status level, Distributor, to any of the

status levels providing a higher discount, an Herbalife participant must make

substantial wholesale product purchases from Defendants and/or recruit downline

participants who will make substantial wholesale product purchases from

Defendants.

137. For example, reaching the status of Supervisor requires wholesale

product purchases totaling a minimum of 4,000 Volume Points. An order totaling

10

4,000 Volume Points costs roughly $3,000 and would entail a large amount of

11

Herbalife product. As an example, the following would represent a 4,000 Volume

12

Point order sufficient to qualify a participant as a Supervisor:

13
14

SKU

Description

Qty

Volume
Points Each

16

32.75

524.00

32
boxes

13.22

423.04

1188 Herbal aloe concentrate (half gallon)

92.55

740.40

0106 Herbal tea concentrate (3.5 oz.)

16

34.95

559.20

3115 Formula 2 multivitamin (90 tablets)

16

19.95

319.20

3123 Formula 3 Cell Activator (60 tablets)

16

21.95

351.20

3277 Lift-Off (30 tablets)

Herbalife 24 Prolong canister
1415
(37 oz.)

16

47.70

763.20

41.60

332.80

15
16
17
18
19
20
21
22
23
24
25
26

3106

Formula 1 shake mix canister

(30 servings)

0365 Protein bar deluxe (14 bars)

TOTAL

Volume
Point
Total

4,013.04

27
28

36

138. It is impossible to reach the highest status levels of Defendants

compensation programGlobal Expansion Team, Millionaire Team, and

Presidents Teamwithout recruiting new participants who collectively

purchase large quantities of product. Under Defendants compensation plan,

recruitment is required to reach these status levels.

Product Purchases Are Required to Requalify for Status Levels

6
7

139. Participants who obtain a particular status level must annually

requalify to retain that level or be demoted. Requalification is based on the

volume of wholesale product purchases by the participant and/or his organization.

10

To requalify as a Supervisor and retain his or her downline, for example, a

11

participant must accumulate another 4,000 or 10,000 Volume Points, depending on

12

the method of requalification.

13

Monthly Product Purchases Are Required to Qualify for Reward Checks

14

140. Participants who are eligible to receive Royalty Overrides or

15

Production Bonuses must also accumulate, on a monthly basis, specific volumes

16

of product purchases to qualify to receive those reward payments. An eligible

17

participant qualifies to receive Royalty Override and Production Bonus

18

reward payments for a given month by accumulating in that month a threshold

19

amount of Total Volume ranging from 2,500 Volume Points to 5,000 Volume

20

Points.

21

141. All of these volume requirements are based on wholesale purchases of

22

product from Defendants. Defendants do not track what happens to the product

23

after a participant purchases it.

24

142. Higher-level Distributors who are eligible to receive reward payments

25

frequently buy Herbalife products in order to meet the thresholds for obtaining

26

these rewards, rather than to satisfy consumer demand. For example, analysis of

27

Defendants purchasing data reflects that, in the months in which participants at the

28

TAB Team levelsthe highest levels in the Herbalife marketing planreceived

37

Royalty Override payments, they frequently purchased almost precisely the

amount of product necessary to qualify for the payment.

143. These participants at the highest status levels who must make monthly

product purchases in order to earn recruiting rewards are the most robust wholesale

purchasers of Herbalife products. In the time period from January 2009 through

March 2014, such high-level participants purchased on average almost eight times

as much product per person as participants at the lowest level of Sales Leaders

(Supervisors), who by and large were ineligible for such recruiting rewards.

9
10

144. This purchasing behavior reflects an excessive emphasis on

purchasing product for the purpose of qualifying for recruitment rewards.
CONCLUSION

11
12

145. In sum, Defendants compensation structure incentivizes Distributors

13

to purchase thousands of dollars of product to receive recruiting-based rewards and

14

to recruit new participants who will do the same.

15

146. This results in the over-recruitment of participants and the over-

16

supply of Defendants products and exacerbates participants difficulty in selling

17

Herbalife products for a profit.

18

147. Participants in a business opportunity should have some reasonable

19

prospect of earning profits from reselling products to customers. However, most

20

Herbalife participants earn little or no profit, or even lose money, from retailing

21

Herbalife products.

22

148. In the absence of a viable retail-based business opportunity,

23

recruiting, rather than retail sales, is the natural focus of successful participants in

24

Defendants business opportunity.

25

149. Thus, participants wholesale purchases from Herbalife are primarily

26

a payment to participate in a business opportunity that rewards recruiting at the

27

expense of retail sales.

28

38

1
2
3
4
5
6

VIOLATIONS OF THE FTC ACT

150. Section 5(a) of the FTC Act, 15 U.S.C. 45(a), prohibits unfair or
deceptive acts or practices in or affecting commerce.
151. Misrepresentations or deceptive omissions of material fact constitute
deceptive acts or practices prohibited by Section 5(a) of the FTC Act.
152. Acts or practices are unfair under Section 5 of the FTC Act if they

cause or are likely to cause substantial injury to consumers that consumers cannot

reasonably avoid themselves and that is not outweighed by countervailing benefits

to consumers or competition. 15 U.S.C. 45(n).

10

COUNT I

11

Unfair Practices

12

153. As alleged above, Defendants promote participation in Herbalife, a

13

multi-level marketing program, which has a compensation structure that

14

incentivizes business opportunity participants to purchase product, and to recruit

15

new business opportunity participants to purchase product, in order to advance in

16

the marketing program rather than in response to actual retail demand.

17

154. Defendants actions cause or are likely to cause substantial injury to

18

consumers that consumers cannot reasonably avoid themselves and that is not

19

outweighed by countervailing benefits to consumers or competition.

20

155. Therefore, Defendants practices as described in Paragraph 153 above

21

constitute unfair acts or practices in violation of Section 5 of the FTC Act, 15

22

U.S.C. 45(a) and 45(n).

23

COUNT II

24

Income Misrepresentations

25

156. In numerous instances in connection with the advertising, marketing,

26

promotion, offering for sale, or sale of the right to participate in the Herbalife

27

program, Defendants have represented, directly or indirectly, expressly or by

28

implication, that consumers who become Herbalife Distributors are likely to earn
39

substantial income.

157. In truth and in fact, in numerous instances in which Defendants have

made the representations set forth in Paragraph 156 of this Complaint, consumers

who become Herbalife Distributors are not likely to earn substantial income.

158. Therefore, Defendants representations are false or misleading and

constitute deceptive acts or practices in violation of Section 5(a) of the FTC Act,

15 U.S.C. 45(a).

COUNT III

False or Unsubstantiated Claims of Income from Retail Sales

10

159. In numerous instances, in connection with the advertising, marketing,

11

promotion, or offering for sale of the Herbalife business opportunity, Defendants

12

have represented, expressly or by implication, that consumers who become

13

Herbalife Distributors are likely to earn significant full-time or part-time income

14

from selling Herbalife products at retail.

15

160. In numerous of these instances, the representations set forth in

16

Paragraph 159 are false or were not substantiated at the time the representations

17

were made. Therefore, the making of the representations set forth in Paragraph

18

159, above, constitutes a deceptive act or practice, in or affecting commerce, in

19

violation of Section 5(a) of the FTC Act, 15 U.S.C. 45(a).

20

COUNT IV

21

Means and Instrumentalities

22

161. By furnishing Herbalife Distributors with promotional materials to be

23

used in recruiting new participants that contain false and misleading

24

representations, Defendants have provided the means and instrumentalities for the

25

commission of deceptive acts and practices.

26

162. Therefore, Defendants practices, as described in Paragraph 161 of

27

this Complaint, constitute a deceptive act and practice in violation of Section 5(a)

28

of the FTC Act, 15 U.S.C. 45(a).

40

CONSUMER INJURY

163. Consumers have suffered and will continue to suffer substantial

monetary loss as a result of Defendants violations of Section 5(a) of the FTC Act.

In addition, Defendants have been unjustly enriched as a result of their unlawful

acts and practices. Absent injunctive relief by this Court, Defendants are likely to

continue to injure consumers, reap unjust enrichment, and harm the public interest.

THIS COURTS POWER TO GRANT RELIEF

164. Section 13(b) of the FTC Act, 15 U.S.C. 53(b), empowers this Court

to grant injunctive and such other relief as the Court may deem appropriate to halt

10

and redress violations of any provision of law enforced by the FTC. The Court, in

11

the exercise of its equitable jurisdiction, may award ancillary relief, including

12

rescission or reformation of contracts, restitution, the refund of monies paid, and

13

the disgorgement of ill-gotten monies, to prevent and remedy any violation of any

14

provision of law enforced by the FTC.

PRAYER FOR RELIEF

15
16

Wherefore, Plaintiff FTC, pursuant to Section 13(b) of the FTC Act,

17

15 U.S.C. 53(b), and the Courts own equitable powers, requests that the Court:

18

A.

FTC Act by Defendants;

19
20

Enter a permanent injunction to prevent future violations of the

B.

Award such relief as the Court finds necessary to redress injury

21

to consumers resulting from Defendants violations of the FTC

22

Act, including but not limited to, rescission or reformation of

23

contracts, restitution, the refund of monies paid, and the

24

disgorgement of ill-gotten monies; and

25

C.

Award Plaintiff the costs of bringing this action, as well as such

26

other and additional relief as the Court may determine to be just

27

and proper.

28

41

Respectfully submitted,

1
2

DAVID C. SHONKA
Acting General Counsel

3
4
5
6
7
8
9
10

Dated: July 15, 2016

/s/
JANET AMMERMAN
CHRISTINE M. TODARO
DANIEL O. HANKS
LAURA SOLIS
Attorneys for Plaintiff
FEDERAL TRADE COMMISSION

11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28

42