The Belgian Appeal Court has rejected an initial court ruling in a lower court that found Herbalife had engaged in unfair commercial practices via a pyramid selling scheme based on a hierarchical network of independent sellers.
The appeal court's decision found the 'multi-level compensation opportunity' - which sees recruits who move up a level accumulating certain perks like wholesale profit on sales to recruits and later bonuses and royalties - is within European consumer protection laws.
In response to the verdict, the company said: “Herbalife always believed that the first judgement contained factual errors and was based on misinterpretations of its direct-selling sales method.”
Carped business structure
Herbalife has been criticised by hedge fund manager William Ackman of Pershing Square Capital Management who asserted that Herbalife’s strong sales are primarily down to the process of referrals whereby distributors sign up more distributors who then purchase products in an attempt to build their own sales organisations.
Ackman said these products are overpriced, meaning they cannot be sold with a profit margin and must be coupled with promises of potential network sales commissions instead.
George Fischer, vice president of corporate communications at Herbalife, told NutraIngredients that the verdict removes any doubt about the legitimacy of the company and its intentions. He denied Ackman's accusations about how the company secures its sales: "At Herbalife, all compensation is based upon products actually purchased only and we have various safeguards in place."
Currently the ‘business opportunity’ section of the company’s website contains the legal disclaimer: “When considering or comparing business opportunities please be aware that it is illegal for a promoter or participant in a trading scheme to persuade anyone to make a payment by promising benefits from getting others to join a scheme. Do not be misled by claims that high earnings are easily achieved.” A statement of average earnings which new candidates must read is part of the company's attempt to battle recent bad press.
Fischer said that the company is always looking to improve and clarify some aspects of the business to make it easier for others to understand. "We remain committed to an open and transparent relationship with our distributors and their customers, as well as regulatory authorities and all other stakeholders," he said.
The website also includes various endorsements from the company’s ‘independent distributors’, one of which tells of how she was recruited by a sales assistant while wedding dress shopping. “Within weeks I joined the business and started retailing to family and friends. It soon 'spiralled' through all the referrals I was getting and I have now opened my own club,” she said.
Stocks and strife
Since the original 2011 case, put forward by consumer organisation Test-Aankoop, Herbalife has vehemently denied that it is in violation of Belgian law. Meanwhile criticism from the hedge fund titan Ackman has been heavily documented, with Ackman urging stock holders to sell Herbalife stock.
Public reproach from Ackman and a $1bn stock bet against Herbalife, accompanied a fall in the company’s stock prices at the end of last year. Since then the company has presented an in-depth confutation of the allegations in a presentation to market analysts.
After the recent ruling Fischer said: “Anytime a company’s reputation is questioned it can raise doubts in someone’s mind. But we’ve always known we have a good company and our independent distributors in Belgium continued to support their customers and help them achieve their goals throughout. Our business in Belgium remained strong.”
Meanwhile our sister site NutraIngredients USA reported in October that the company has come under fire from a minority group coalition in California which has called on the California attorney general to investigate the firm’s business practices.