Judge Says Herbalife Can’t Dodge ‘Pyramid Scheme’ Class Action Lawsuit

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A California federal judge last week rejected a motion by Herbalife International of America Inc. to dismiss a class action lawsuit accusing the company of operating as an illegal pyramid scheme, finding that the plaintiff adequately pled that the company’s business model meets the definition.

On October 11, U.S. District Judge Beverly Reid O’Connell refused to dismiss the Herbalife class action lawsuit, finding that plaintiff Dana Bostick has adequately supported the claims he made against the company. Bostick, a retired general contractor, filed the class action lawsuit in April, claiming that 88 percent of the company’s U.S. distributors fail to make money. He accused Herbalife of violating California’s unfair competition, endless chain scheme and false advertising laws.

According to the Herbalife class action lawsuit, Bostick became an Herbalife contractor in 2012. He claims that he spent $3,000 on Herbalife products, set up three websites and paid for coaching sessions on how to recruit new Herbalife representatives. Despite his best efforts, he only recruited one person — a lifelong friend. According to Bostick, his “attempts to sell the products he purchased to wholesalers were unsuccessful because he had to sell at nearly full retail value to make a profit — an unappealing rate compared to prices offered by higher upline distributors.”

Herbalife is a “multi-level distribution system, which relies on individual distributors to market, promote, and distribute Herbalife products,” the class action lawsuit says. Allegedly, Herbalife “is comprised of a hierarchy of distributors, with the various levels determining eligibility for discounted Herbalife products and other benefits.”

Bostick filed the Herbalife class action lawsuit after short-seller Bill Ackman claimed Herbalife was a pyramid scheme. Herbalife has denied this allegation. Bostick seeks to represent a putative class of individuals who were harmed by participating in Herbalife’s alleged pyramid scheme.

Judge O’Connell found that Bostick’s claims meet the legal requirements to classify Herbalife as a pyramid scheme under California law. In her refusal to dismiss the class action lawsuit, the judge said, “Pyramid schemes are considered inherently fraudulent, because they must eventually collapse.”

To prove that Herbalife operates as an illegal pyramid scheme, Bostick showed that parties pay money for the opportunity to sell Herbalife products and receive rewards when they recruit new participants. Bostick claims that he paid $95.55 for an “International Business Pack,” which, according to the Herbalife website is “a starter kit containing everything that you may need in becoming a Distributor and in starting your business in Herbalife.”

“The considerable discounts and advantages offered to supervisors presents the same risk of a recruitment focus” found in similar cases addressing alleged pyramid schemes, Judge O’Connell said. Because Bostick adequately pled that Herbalife is a pyramid scheme, the judge allowed his unfair competition and false advertising claims to proceed as well.

Judge O’Connell rejected Herbalife’s argument that she lacks subject matter jurisdiction over the class action lawsuit because Bostick dropped his civil racketeering claim against the company, leaving only state law claims. She found that Bostick’s agreement with Herbalife does not fall within a securities exception to the Class Action Fairness Act.

Bostick is represented by Philip D. Dracht of Fabian & Clendenin and Thomas G. Foley Jr., Jobert A. Curtis and Justin P. Karczag of Foley Bezek Behle & Curtis LLP.

The 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: Judge sets deadlines in Herbalife class action lawsuit. Arguments for certification must be entered by June 16, 2014. Private mediation and settlement discussions must be held no later than Feb. 23, 2015.

UPDATE 2: 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 3: A California federal judge preliminarily approved the Herbalife class action settlement on Dec. 2, 2014.

UPDATE 4: Former Herbalife distributors who believe the pyramid scheme class action settlement is inadequate are reportedly planning to object to the deal. The deadline to file a claim for the Herbalife settlement passed on Feb. 3, 2015, according to the settlement website. However, some Class Members are concerned they were not adequately informed of the claim process. Class Members who wish to exclude themselves from or object to the Herbalife class action settlement must do so by March 24, 2015.

UPDATE 5: The Herbalife class action settlement received final approval on May 14, 2015.

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