New deadlines have been set in a class action lawsuit accusing Herbalife International of America Inc. of operating a pyramid scheme, indicating that settlement negotiations may occur within the next year.
U.S. District Judge Beverly Reid O’Connell set June 16, 2014 as the deadline for hearing arguments to certify the class action lawsuit on behalf of all persons who were Herbalife distributors from April 2009 to the present. O’Connell also ordered both sides to enter into private mediation and settlement discussions no later than Feb. 23, 2015.
If the Herbalife class action lawsuit is certified, the company could potentially face millions of dollars in liability from the company’s 400,000 distributors.
The lead plaintiff in the case, Dana Bostick, sued Herbalife in April 2013, claiming he was “doomed from the start by an Herbalife marketing plan that systematically rewards recruiting over retail sales.”
Bostick is a former distributor for Herbalife and claims to have spent approximately $3,439 on Herbalife products, tools, coaching, websites, and incidental expenses. Despite his best efforts, he was only able to recruit one person — a close friend — and was unsuccessful at selling Herbalife products because he had to do so at nearly full retail value. Bostick alleges that Herbalife “is comprised of a hierarchy of distributors, with the various levels determining eligibility for discounted Herbalife products and other benefits.”
Herbalife had tried to have the class action lawsuit dismissed in October, but O’Connell denied the motion based on the financial evidence Bostick had presented. O’Connell ultimately found that Bostick presented adequate evidence to classify Herbalife as a pyramid scheme, based on the unfair distribution of profit loss and gain.
In Bostick’s presentation, he showed that distributors actually pay to have the opportunity to sell Herbalife products and only receive rewards when they recruit new participants or sell the products. For Bostick, he paid $95.55 for an “International Business Pack,” which was supposed to be a marketing starting kit, containing everything that they may need in becoming a successful distributor. O’Connell agreed that the evidence Bostick presented showed that the company’s business model meets the definition of a pyramid scheme, and dismissed Herbalife’s request.
The class action lawsuit claims that Herbalife violated Section 327 of the California Penal Code, which prohibits schemes that require an individual to pay money in exchange for the possibility to receive compensation for recruiting others to work.
Bostick alleges Herbalife did exactly this by giving their distributors virtually no opportunity to earn a profit on Herbalife’s products, because the multi-level marketing company (MLM) sets the suggested retail price of the products. The rates are exceedingly high, with the company offering extra incentives to their top distributors with recruiting bonuses, the class action claims. Many distributors found it difficult to sell these products to customers when they are available online for significantly cheaper.
Herbalife had allegedly reeled in their distributors with promises of a quick road to a lavish lifestyle, and building a steady income to retain that wealth. Instead, due to the required products the distributors were required to buy themselves, the top distributors allegedly only earned $0.46 to $0.64 in recruiting bonuses.
In court documents, Herbalife argued that Bostick could not have been fooled in such a way because he had read a statement which revealed the distributors’ modest earnings before he had signed. On average, a distributor would earn $2,900 a year, while a medium compensation level had been $741. Additionally, Herbalife argued that Bostick exerted very little in trying to sell the products, and had made no attempt to return them.
While Bostick’s legal team acknowledged his lack of effort to sell the products, they argued that it did not change the fact that the company had violated California state law against pyramid schemes. The fact that recruiters of Herbalife get paid whether or not the distributors sell the products was the main attribution of this violation.
Both Herbalife and Bostick will have the chance to mediate before any trial is decided, and seem to be confident in their arguments.
Plaintiffs are represented by Dracht and Thomas Foley with Santa Barbara, CA-based Foley Bezek Behle & Curtis, LLP. Herbalife’s counsel includes Jonathan David Schiller, Jonathan Sherman and Karen Paik of New York-based Boies Schiller & Flexner LLP
This Herbalife Pyramid Scheme Class Action Lawsuit is Dana Bostick v. Herbalife International of America Inc., et al., Case No. 2:13-cv-02488, in the U.S. District Court for the Central District of California.
UPDATE: On Oct. 17, 2014, Herbalife asked a federal judge to push back pre-trial deadlines again as the parties finalize the terms of a class action settlement.
UPDATE 2: A California federal judge preliminarily approved the Herbalife class action settlement on Dec. 2, 2014.
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