Herbalife has agreed to restructure its U.S. business operations and pay $200 million to reimburse consumers as part of a settlement announced Friday with the Federal Trade Commission (FTC).
The agreement settles "charges that the companies deceived consumers into believing they could earn substantial money selling diet, nutritional supplement, and personal care products," according to the FTC.
Consumers who purchased large quantities of Herbalife products and lost money will be among those who will see a portion of the $200 million settlement.
The FTC took Herbalife to task over its business operations, but did not call the company a pyramid scheme.
"This settlement will require Herbalife to fundamentally restructure its business so that participants are rewarded for what they sell, not how many people they recruit," FTC Chairwoman Ramirez said in a statement. "Herbalife is going to have to start operating legitimately, making only truthful claims about how much money its members are likely to make, and it will have to compensate consumers for the losses they have suffered as a result of what we charge are unfair and deceptive practices."
According to the FTC, most Herbalife distributors "earn little or no money," despite company claims that they can "expect to quit their jobs, earn thousands of dollars a month, make a career-level income, or even get rich."
"Finding themselves unable to make money, the FTC's complaint alleges, Herbalife distributors abandon Herbalife in large numbers," the FTC said. "The majority of them stop ordering products within their first year, and nearly half of the entire Herbalife distributor base quits in any given year."
Under the agreement, Herbalife has to eliminate current incentives that reward distributors primarily for signing up members as well as implement a new compensation structure "in which success depends on whether participants sell Herbalife products, not on whether they buy products," the FTC said.
Although Herbalife maintains that many of the FTC's allegations are "factually incorrect," the company said it agreed to the settlement to avoid protracted and costly litigation.
"The FTC settlement is an acknowledgment that our business model is sound and underscores our confidence in our ability to move forward successfully, otherwise we would not have agreed to these terms," said Herbalife chairman and CEO Michael Johnson.
Herbalife officials also said the company has reached a $3 million settlement with the Illinois Attorney General's Office. With the Illinois investigation now settled, the company said it is not aware of any other active investigations into Herbalife.
The Illinois Herbalife Campaign, a coalition of consumer and community groups that have advocated for investigations into Herbalife's business practices and marketing techniques, issued a statement Friday in reaction to the settlement news:
Today the FTC found that Herbalife was operating illegally in violation of the Federal Trade Commission Act. For decades Herbalife has preyed on vulnerable consumers targeting low-income families with misleading information on the earnings potential of investing in Herbalife. We are encouraged that federal regulators and the State of Illinois will require Herbalife to restructure its business; which will bring about meaningful changes to the way the company operates. We are proud of the many victims that stepped forward to file consumer complaints against the company to bring light to this issue. We must ensure that Herbalife follows suit on all the new changes asked of them in the settlement to prevent future fraud.