TINA.org objects to $17 million settlement that gives a majority of the distributors in the class $20 or less, lawyers $5.25 million, while the company gets to continues business as usual
Herbalife, a nutrition and weight loss supplement company that is under investigation
by the FTC and in the midst of a Wall Street battle for survival amid accusations of being a pyramid scheme, is quietly trying to put to rest a class-action lawsuit alleging similar fraudulent business practices and deceptive advertising. The proposed settlement
will allow Herbalife to continue business as usual while giving a majority of distributors in the class who lost money – some thousands of dollars — a mere $20 (at most).
In exchange for this paltry monetary relief, the settlement affecting as many as 1.3 million Herbalife distributors will essentially ban them forever from any further similar litigation against the company. Meanwhile, the attorneys who brought the suit get to pocket $5.25 million.
To TINA.org, this sounds like a raw deal for distributors in the class who already got a raw deal when they were lured by Herbalife’s promises of “financial freedom” only to lose money in the company’s illegal scheme in which they were destined to fail.
Monday TINA.org filed
a friend of the court brief in California where the proposed settlement is awaiting approval asking the federal judge to consider its opposition to the settlement.
“The only winners here are Herbalife and the attorneys,” said Bonnie Patten, executive director of TINA.org. “More than one million distributors will be bound by an agreement that gives the majority of them less than $20 while allowing Herbalife to blissfully carry on with its deceptive marketing scheme.”
The class-action lawsuit
originally filed in April 2013 recounts in detail the inflated earnings promises and the high-pressure tactics Herbalife uses to get new recruits to purchase packages of products each month in order to qualify to earn “millions.” These tactics include testimonials from distributors that emphasize extraordinary and atypical financial earnings, and sales pitches that lure recruits with promises that they can obtain bigger homes and luxury cars and even quit their jobs.
But in reality, at least 88 percent of distributors earned nothing from Herbalife in 2013, according to its average gross compensation statement
. In fact, a majority of recruits lose money trying to build their business lines through nutrition clubs and other efforts and drop out within one year of joining the company. Very few, if any, make any actual retail sales and are instead stuck having to self- consume the overstock of supplements they had to purchase to qualify for bonuses, according to the lawsuit.
Losses not fairly compensated
Yet, the settlement would give a majority of distributors in the class who purchased up to $3,745 worth of products from Herbalife between 2009-2014 just $20 or less. The settlement breaks the distributors in the class into two groups: Those who purchased $750 or more worth of products in at least one year are eligible to receive all of their estimated total losses from the sale of qualifying products or half the price they paid for them, whichever is less. The rest – possibly up to 975,000 distributors, according to the parties’ estimates — are in the flat $20 award category and have to divvy up just $3 million allocated to them out of the $17.5 million settlement, which means they could receive as little as $3.08, depending on how many make a claim.
In addition, a nonprofit group, the Consumer Federation of America, gets any leftovers from the money allocated to distributors instead of the remaining money being used to increase the amounts the distributors can receive. TINA.org has written to CFA Executive Director Stephen Brobeck alerting him to the flaws of the settlement and requesting his organization reject the money.
Business as usual
The settlement also does not require any substantial changes to Herbalife’s business structure, which dooms most recruits to failure while just a few members at the top reap financial rewards.
According to the lawsuit and vocal critics of the company, including Pershing Square hedge fund manager and activist investor Bill Ackman, who labelled Herbalife a pyramid scheme and made a $1 billion bet against it, the company’s compensation plan rewards the recruitment of new participants over product sales by paying recruitment rewards to distributors regardless of whether they actually sold any products. The company’s complex pricing system also effectively leads to inventory loading by pushing distributors to buy more products than they can feasibly consume in order to have the potential to earn any real compensation. The settlement does nothing to address these issues.
“While discouraging recruits from incurring debt, paying shipping for returned merchandise, prohibiting lead generation, prohibiting membership based on product purchases and requiring experience and training for nutrition club members may represent reasonable requirements, they too fail to directly address the endless chain pyramid scheme problem,” said William Keep, dean of the business school at The College of New Jersey and a pyramid scheme expert who provided an affidavit in support of TINA.org’s brief regarding the settlement’s flaws. “A pyramid scheme rewards participants primarily for recruiting others who join to earn rewards primarily for recruiting others in an unending chain rather than for building a retail customer base. The proposed settlement fails to address this aspect of Herbalife’s business structure.”
Growing list of objectors
TINA.org is not the only group objecting to the settlement. More than a dozen Herbalife distributors — some of who lost thousands of dollars — are also filing objections. Douglas Brooks, a Massachusetts-based attorney who is representing the distributors and who has also pursued two other class-action lawsuits against Herbalife, said the company would benefit greatly from the terms of the pending settlement.
“The only reason Herbalife is doing this is to create a template for dealing with the FTC. If the FTC were not investigating, they would not be settling,’’ he said.
The FTC opened an investigation into Herbalife last March, following Ackman’s push for government scrutiny. Several minority and immigrant groups who are concerned that the company targets Hispanics also requested the FTC investigate
the company, as did some members of Congress. Herbalife stocks dropped more than 50 percent in 2014. The Los Angeles-based company founded in 1980 earned $308 million in profit on $5 billion in sales. In February it announced that profits in its fourth quarter were down 16 percent, blaming weakened foreign currencies for the decline.
A hearing on the proposed settlement will be held on May 11.
For more about TINA.org’s efforts on Herbalife click here