28 BARRON’S September 28, 2020
before he died in April of this year.
“I’ve lost so much,” she says.
In multilevel sales, early salespeo-
ple recruit other salespeople, who
recruit recruits—all hoping to make
money on the commissions of those
down the line. Recently, the U.S. Court
of Appeals for the 11th Circuit ruled
that Patti could proceed with a federal
lawsuit against 44 top-level Herbalife
distributors. In the suit, for which
she’s seeking class-action status, she
claims they deceived new recruits.
Top distributors are the linchpins
in the outsourced sales model of multi-
level-sales companies like Herbalife
(ticker: HLF). Its products are moved
almost entirely by independent sellers
recruited by a few initial distributors.
If Rodgers gets class-action status
and wins a large judgment against
Herbalife’s sales leaders, it could chill
sales and recruitment, since Herbalife
promotes the leaders as success stories
and gurus, says a retired government
official who regulated the industry and
is familiar with the company.
“These top distributors are really
important,” adds William Keep, a mar-
keting professor at The College of New
Jersey who has studied multilevel com-
panies for a quarter-century and will
be an expert witness for the Rodgers
case plaintiffs. It is the top distributors
who find sales recruits who will chase
the dream of making a high income by
pushing Herbalife products, says Keep.
In its latest annual report, Herbalife
cites the suit as a business risk, but the
appeals court ruling hasn’t been men-
tioned in the client notes of the few
analysts who follow the $7 billion mar-
ket-value company.
Suing sales leaders is a new tactic,
says Doug Lane, an analyst at Lane
Research who has a Buy on Herbalife:
“Whether it opens a can of worms for
the industry, we’ll have to wait and see.”
Herbalife’s sales leaders are wealthy
and closely connected to the company,
notes Lane, adding, “It would have to be
a very large judgment to affect their
desire to continue in the business.”
In a complaint filed in a Miami fed-
eral district court, Rodgers and several
other disappointed salespeople allege
that Herbalife is a racketeering enter-
prise, whose top salespeople fraudu-
lently tell recruits that their riches
resulted from attending Herbalife
training sessions. Rodgers says she
spent $20,000 on training alone.
The top sellers, she alleges, made
their money through tactics like put-
ting relatives on the commission pay-
roll, securing plum territories from
Herbalife, or selling tickets to the
training sessions. Rodgers and her
co-plaintiffs are moving for class-
action status to represent thousands
of failed salespeople. A civil racketeer-
ing judgment in a class action could
result in triple damages—bringing
potential liability for individual
defendants into the millions of dollars.
Herbalife didn’t respond to ques-
tions from Barron’s , but in motions to
dismiss the suit it says Jeff and Patti
Rodgers hadn’t shown that their busi-
ness failure resulted from the training
sessions. In motions opposing class-ac-
tion status, the company says that simi-
lar claims were addressed in a settle-
ment with the Federal Trade Commis-
sion in 2016 and in a 2015 civil class-
action settlement. The company and
the individual defendants deny that
Herbalife Faces a
Fresh Legal Hurdle
A lawsuit aimed at the weight-loss company’s top
salespeople has gathered steam. Could it hurt sales?
“I’ve lost
so much.”
Patti Rodgers, who
is suing Herbalife
sales leaders who,
she contends,
deceived recruits
like her and her
late husband.
I
n 2010, Jeff Rodgers and his wife,
Patti, decided to try selling the
weight-loss products of Herba-
life Nutrition. At training
events, the distributors atop the
company’s layers of independent
sellers bragged of their rich earn-
ings. So, Patti Rodgers says, she and her
husband cashed out their retirement
accounts to fund a few storefront sales
locations—where Jeff worked days, and
Patti, evenings and weekends, around
her job as a teacher of disabled pre-
schoolers. To ensure success, they paid
to attend more than 50 Herbalife train-
ing events led by the top distributors.
By 2015, Patti Rodgers says, they’d
lost more than $100,000 chasing the
Herbalife dream. They ran out of money
for Jeff’s cancer treatments, she adds,
By BILL ALPERT
they coordinate Herbalife gatherings in
a concerted way, and argue that the
plaintiffs haven’t alleged particular
frauds against particular defendants.
The lawyers who jointly represent
the sales leaders didn’t respond to ques-
tions from Barron’s, and calls to several
of the sales leaders went unreturned. In
court filings, they say only that Herbal-
ife forbids them from making mislead-
ing claims about their earnings.
H
erbalife, founded in the 1980s,
sells weight-loss shakes
through a network in which
high-level salespeople earn
commissions from those recruited be-
low. Up to half of the low-level salespeo-
ple drop out each year, according to
company filings, so new recruits must
be constantly pulled in.
In 2016, Herbalife paid $200 million
to settle FTC allegations that the over-
whelming majority of its distributors
made little or no money. Without ad-
mitting wrongdoing, it agreed to avoid
misrepresenting the income and life-
style that its distributors could expect.
In August, Herbalife agreed to pay
$123 million in a deferred prosecution
deal with the Justice Department and a
settlement with the SEC, on charges
that it had concealed bribes paid to win
over Chinese regulators. Herbalife
agreed to cease and desist from bribery.
The July appellate court ruling could
leave Herbalife’s sales leaders exposed.
Herbalife wasn’t itself a party to the
appeal because its sales-recruit agree-
ments stipulate that disputes will be
resolved in arbitration or in a California
court. But the top salespeople aren’t
Herbalife employees. So, U.S. Circuit
Judge Diarmuid O’Scannlain concluded
in his July 29 opinion, they can’t seek
shelter in the arbitration clause.
In years past, the multilevel sales
industry was widely followed—and
bitterly debated—on Wall Street. Ac-
tivist investor Bill Ackman spent $1
billion on a short-sale bet against Herb-
alife in2012, while Carl Icahn bought
25% of the company. Icahn profited as
the stock worked its way up to a Janu-
ary 2019 peak of $60.
Only a handful of analysts now fol-
low the industry, whose growth has
sputtered. Herbalife’s revenue was flat
in 2019 at $4.9 billion, with its net in-
come down slightly to $397 million, or
$2.19 a share. After falling below $30,
its stock is in the high $40s. Jefferies’
Stephanie Wissink rates it Buy, with a
$62 target price. She tells Barron’s that
she can’t comment on the litigation.B Patrick T. Fallon/Bloomberg
Herbalife Plaza in
Torrance, Calif.