Network marketing giant Herbalife has agreed to pay out $12.5 million in a preliminary settlement of a class action suit that alleged the company was inducing distributors to sign up for events that cost $600 or more a year to attend.

Herbalife agrees to pay but does not admit guilt

The company has not admitted guilt in the settlement but has set aside the required funds to make payments to members of the class, as detailed in a recent earnings report. The hearing on the final settlement is set for Oct. 19, 2023.

“We still assert that the suit has no merit and are fully confident  that we would have prevailed, but the potential cost and distraction of prolonged litigation on the company and its management team meant that this settlement agreement was in the best interests of the company as it allows us to focus on the future growth of the company,” a Herbalife spokesperson said in an emailed statement.

The original suit was filed in the U.S. District Court in Florida on behalf of eight original plaintiffs. The cases of four of the plaintiffs were transferred to the Central District of California, where the final settlement agreement was recorded on April 6, 2023.

Of the $12.5 settlement, $7.5 million—or about 60%—will be allocated to pay out settlements to individuals who apply. The rest goes to paying the legal team and other fees.

Complaint alleged RICO violation

The key elements of the case are the “alleged misrepresentations made by Herbalife to its distributors regarding the financial benefits to them that would result from attending its ‘Circle of Success’ events,” according to language of an amended complaint.

The case rested in part on alleged violations of the Racketeer Influenced and Corrupt Organizations Act of 1970 (RICO), a law that was originally put into place to help prosecute organized crime cases. The law has been applied in several different kinds of cases in the intervening decades, however, including a 2018 suit filed against class action law firm Newport Trial Group.

According to the complaint, the distributors were told that “If you go to all the events, you qualify for everything -- you will get rich.”

However, the way the events were structured, the people who really benefited were a cadre of about 100 top-level distributors who allegedly were paid fees for appearing at the events.

Fees for events added up quickly

The complaint alleged two of the plaintiffs spent as much as $20,000 on attending events between 2011 and 2015. Another plaintiff claimed to have forked over $3,500 attending events as well as purchasing $10,000 worth of products to qualify for higher compensation and recognition levels.

An additional plaintiff alleged she was chosen to be part of the “event production team.” This required her not only to work at the events but to spend more than $10,000 in attendance and travel fees.

In addition to the cost of attending events, the complaint alleged Herbalife had structured its business plan in such a way that distributors were “locked in a cycle of mandatory monthly purchases.”

Herbalife subsequently agreed to more transparency on income potential

In 2016, Herbalife agreed to pay a $200 million fine to the Federal Trade Commission to settle a complaint that the company was operating an illegal pyramid scheme.

As part of the settlement, Herbalife agreed to restructure its compensation plan to place greater emphasis on sales of finished products to consumers and to lessen the degree to which the recruitment of new “downline” distributors was rewarded.

As part of that agreement, Herbalife was required to be more transparent about what distributors could reasonably expect to earn.

A chart on the Herbalife website published in August 2022 showed just half of the company’s distributors in 2021—other than those in their first year—earned more than $241 in a typical month, before expenses. Only 10% of these experienced distributors earned $3,925 in a month.

Half of first-year distributors earned more than $190 in a month.

The most successful experienced Herbalife distributors are typically known as the President’s Team members. These Herbalife stars earned more than $18,176 in a month, the chart shows, but they are in the top 1% and typically spent five to 11 years to ascend to the President’s Team.