Direct Sales and MLM

What is Herbalife doing?

By
Kevin Thompson

< src="https://dev-thompson-burton-wpms.pantheonsite.io/wpmlm/wp-content/uploads/2010/02/403_question-mark-200x300.jpg" alt="" width="200" height="300" class="alignleft size-medium wp-image-48" />Herbalife showed up and identified themselves by name in opposition of the anti-pyramid law that was proposed in Tennessee. I was fully expecting the Direct Sales Association to act on behalf of its member companies without mentioning any specific company. But surprisingly, a lobbyist from Herbalife showed up and opposed the bill. Herbalife is one of the largest companies in the industry and I'm not familiar enough with the company to have an opinion about their business model. But I'm certainly confused as to why they would fly to Nashville, Tennessee and explicitly oppose the anti-pyramid bill when they're currently litigating this very issue in the state of California.

Brief Summary of the Bill

After reviewing the bill, you'll see that the main provision that has Herbalife nervous (and companies like Herbalife, I guess) is the requirement of a "condition precedent" of outside sales. Please note, the bill does not require a certain number of customers i.e. a "5 customer rule" nor does the bill require a set percentage to come from customers i.e. 50%.....the bill simply has a sales requirement! Just make a sale, any sale, and there's no issue.

Judge Feess

Herbalife's business model is currently being scrutinized in the Central District of California. Judge Feess, who I've had the pleasure of seeing work in person, is a bright judge. Granted, with respect to one of my former clients, Judge Feess punted on every occasion. But in this case with Herbalife, he's diving into the issues. In a recent Order, Judge Feess denied Herbalife's motion to throw out the pyramid claims made by the other party. Judge Feess held, "Herbalife's entire business model appears to incentivize primarily the payment of compensation that is 'facially unrelated to the sale of the product to ultimate users ...' rather than based on actual sales to consumers," (See the Order below, page 16). I'm not suggesting that Herbalife is down for the count. Quite the contrary, they will undoubtedly put on a tough defense and argue that those outside sales do occur (assuming it goes to trial, which it probably will not).

Confusion

When Herbalife is currently being held to a standard in a federal lawsuit that requires outside retail sales, why would they show up and explicitly oppose a bill that has a conservative outside sales requirement? On the one hand during the trial in California, I'm sure they'll argue that they do in fact accrue revenue from outside sales. On the other hand, they're arguing that the Tennessee anti-pyramid bill will be bad for their business. In the future, they need to stay home and let the DSA do the heavy lifting. Or even better, they should support a bill that raises the professional standards in the industry. As the saying goes, "The rising tide raises all boats."

Questions

If you think I'm missing some important information that would change my opinion, please share. Was it a momentary lack of situational awareness on their part? Does it make sense for them to simultaneously argue that they comply with standards on one end of the country while arguing against similar standards on the other.Herbalife v. Ford_Summary Judgment order

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