FTC rewrites rule book of prohibitions on Herbalife, MLM

It should not surprise anyone who followed the FTC’s two-year inquiry into deception and unfair trade practices by the “multi-level marketing” company Herbalife that when the FTC’s findings of deception and imposition of prohibitions were announced in July they would be met by… deception. In an earlier essay in The Hill, I had alerted members of the newly formed “Direct Selling Caucus” in the House about “MLM” deception. Now, the FTC has verified it.

For many years, Herbalife was accused in class action lawsuits, by individual consumers in whistle-blower blogs and websites and recently by some on Wall Street of engaging in the Big Lie. Now that the FTC has announced its findings and conditions to allow Herbalife to stay in business, Herbalife is in Big Denial.

{mosads}What else can it do? The FTC’s charges and settlement terms confiscate Herbalife’s tools of deception – illegal tools, according to the FTC – to generate future revenue. Publicly admitting the truth now is to signal mortal distress. To acknowledge the facts that are presented in the FTC documents requires Herbalife to repudiate past statements to investors, the media, and regulators. For three years Herbalife made unremitting claims, pious promises and absolute guarantees that the FTC would never find any wrongdoing.

If provable wrongdoings were not found, why would Herbalife agree to disgorge $200 million, enact fundamental changes to its structure, policies, and pay plan that it has used for 30 years, and agree to wear the equivalent of an electronic ankle monitor for the next seven years to ensure the changes are carried out?

To fact-check my account of reality against Herbalife’s paid consultants’ claims of FTC exoneration and business-as-usual, read the FTC’s actual charges of unfairness, deception, consumer harm, and illegality. Examine the sweeping prohibitions in the FTC Press Release, “Herbalife Will Restructure”,  the FTC Complaint against Herbalife,  the terms of the Permanent Injunction, and the direct statements of FTC Chairperson Edith Ramirez:

• “The FTC also charged that the multi-level marketing company’s compensation structure was unfair…
• This settlement will require Herbalife to fundamentally restructure its business…
• 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…
• The small minority of distributors who do make a lot of money, according to the complaint, are compensated for recruiting new distributors, regardless of whether those recruits can sell the products they are encouraged to buy from Herbalife…
• Defendants’ actions cause or are likely to cause substantial injury to consumers…”

Opinions may reasonably diverge about the justice of the FTC settlement, but not about its content. The facts are on the FTC website in plain English. The press release is in Spanish too. The FTC settlement has imposed special restrictions on Herbalife’s practice of misleading Latinos into investing savings in unprofitable “nutrition clubs” which constantly open and close in lower-income Latino neighborhoods.

The FTC Complaint lays out many restrictions but one in particular will most negatively affect Herbalife’s revenues and recruiting. It ends the deceptive and abusive practice of inducing consumers to buy Herbalife products in order to access the fabled and promised rewards that turn out to be available only to a tiny few. The FTC described Herbalife’s “pay to play” practices: “Defendants’ compensation program incentivizes not retail sales, but the recruiting of additional participants who will fuel the enterprise by making wholesale purchases of product.”

Bold-faced denials and Orwellian reversals of reality cannot change what is about to happen to Herbalife and all other companies like it. The rule-book of legality has been rewritten by the FTC on what is called “MLM.” Anyone relying on reassurances of status quo needs to read the record.

FitzPatrick is the ad hoc chairman of the Steering Committee of the International Coalition of Consumer Advocates and president of Pyramid Scheme Alert.org. FitzPatrick has no financial or lobbying relations with the companies or subjects addressed in this op-ed.