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According to a Brussels-based not-for-profit consumer organisation, Herbalife’s sales method is in contradiction with certain articles of the Market Practices Act; whereas the company argued that it uses a legal “multi-level” sales system
Herbalife, a global direct selling firm, has been declared as an illegal scheme by Commercial Court in Brussels, Belgium. According to experts, the decision comes largely on the assessment that the company could not show its retail customer base. However, the company has decided to challenge the ruling.
Herbalife, a US-based company is a global nutrition company selling weight-management, nutrition, and personal care products in 79 countries, including India, through a network of approximately 2.5 million independent distributors.
According to complainant, Test-Aankoop, a Brussels-based not-for-profit consumer organisation, Herbalife’s sales method is in contradiction with certain articles of the Market Practices Act. Whereas the company argued that it uses a legal “multi-level” sales system.
The court decided that, “Herbalife is in breach of Articles 91, 4 and 99 of the Act regarding market practises and consumer protection because it has established, managed or promoted a pyramid scheme, whereby the consumer or a business stands to make money which is more likely the result of introducing new consumers or businesses into the scheme than from the sale or use of products. The court orders cessation of this breach and thus of the Herbalife pyramid scheme whereby a consumer or an business stands to make money which is more likely the result of introducing new consumers or businesses into the scheme than from the sale or use of products.”
The court also ordered, Herbalife to pay a fine of 5,000 euro for each breach that is established from two months after the date of this ruling.
According to Robert FitzPatrick, the co-author of the book, False Profits, the first book-length analysis of pyramid schemes and multi-level marketing, and also the founder and president of Pyramid Scheme Alert, “The court largely based its conclusion on the assessment that Herbalife could not show it had a retail customer base. The court rejected Herbalife's claim that its salespeople (distributors) serve as ‘end-users’. The Belgian court’s conclusion was that Herbalife is not a direct selling company, as it claims to be, but a pyramid recruiting scheme that offers much more reward for recruiting than for retailing. The court also cited the huge dropout and loss rates among Herbalife distributors.”
Mr FitzPatrick writes on his blog, that, “The ruling addresses the most obvious and fundamental of all the deceptions regarding ‘business opportunity’ frauds. This deception is the scheme’s disguise of ‘direct selling.’ Most of the evaluations and defences of such schemes concern ‘front-loading’ and ‘product return’ policies, the size of the sign-up fees, and the commissions to recruiters based on ‘product sales’ (to sales people) rather than from entry fees.”
He adds, “In fact, those are only incidental factors, and they distract from the most basic of all questions that determine legality and legitimacy: Where are the scheme’s retail customers? Where does the money for rewards to recruiters (ultimately) come from? Retail sales or from the investments of the salespeople?”
According to Mr FitzPatrick, the decision is a global predator. “In 2005, Herbalife disclosed in its annual 10K report to the SEC that the dropout rate of its distributors was 90% for the ‘non-leaders’ and 60% for the leaders. It reported that about 25% of all sales people were ‘leaders.’ So, overall, approximately 80% of Herbalife’s distributors quit the scheme every year. Translation: Herbalife signs up hundreds of thousands of new people every year! The Belgian court says all recruited people will be deceived and virtually all will lose money. If that is the case, Herbalife would be a global predator.”
Meanwhile, the company has decided to appeal against the verdict. It said in statement that, “Herbalife believes the judgment contains factual errors and is based on misinterpretations of the law and its direct-selling sales model. Herbalife remains committed to its multi-level direct-selling sales model and is confident that, with clarifications in certain aspects of its business, there will be no doubt as to its compliance with all applicable Belgian laws.”