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Herbalife Agrees to Pay $850,000 Penalty (1986)

Stephen Barrett, M.D.

In 1986, Herbalife International, Inc., and its president Mark Hughes, agreed to pay $850,000 to settle charges by the California Attorney General that the company made false medical claims and engaged in an illegal pyramid-style marketing scheme. Herbalife has been selling its products through a multilevel marketing program in which the amount of money received by its distributors depended upon the amounts purchased by them and by those whom they recruit as distributors. The Attorney General's suit, filed in 1985, cited the following questionable claims made for Herbalife products:

• Slim and Trim Formulas comprise an effective weight loss program which can produce a typical weight loss of 10-29 excess pounds a month.
• Cell-U-Loss can attack "cellulite," eliminate inches, suppress appetite, improve circulation, and help many other conditions.
• Herbal-Aloe can aid digestion, "heal" and "cleanse the system."
• N.R.G. can increase energy, increase mental alertness, and provide a "nutritional lift." (The fact that caffeine is one of its active ingredients was not disclosed.)
• Lifeline aids the cardiovascular system.
• Schizandra Plus can combat damage that leads to premature aging.
• Tang Kuei is effective against hot flashes and can help the regularity of the menstrual system and relieve menstrual disorders.
• Flora-Fiber "scrubs and cleanses" the intestine with fiber and prevents disease.
• K-8 stops "induced depression" and "elevates your mood so you can handle stress."

The suit also charged:

• Early editions of the Herbalife Official Career Handbook made illegal claims that various herbal ingredients were effective against more than 70 diseases and conditions. Although most of these claims were deleted in subsequent editions of the handbook, the company had not replaced the original pages sent to distributors with the revised pages or asked these distributors to destroy them.
• Similar testimonial claims were made in company broadcasts over cable television.
• To attract new distributors, the TV programs and company magazine contained stories of individuals who made large amounts of money by building large networks of Herbalife distributors. These representations are misleading because there is no reasonable basis to assert that most people who become distributors will earn large sums.
• Although the company offered a "full warranty" on all of its products, customers who tried to invoke the warranty were often thwarted in their efforts by the defendants.

The court order settling the case, dated October 14, 1986, forbids representations without reasonable basis that:

• Herbalife products contain herbs that can curb appetite, burn off calories, or cleanse the system.
• Product users can lose weight without reducing caloric intake.
• Cell-U-Loss can eliminate "cellulite."
• Other products or their ingredients are effective as specified in the Attorney General's complaint.

The court ordered strict limits on testimonials and said that the caffeine content of N.R.G. should be disclosed in the career book and on the product's label. It also ordered Herbalife to change its marketing program so that distributors can profit only from retail sales and are discouraged from maintaining (and possibly becoming stuck with) large product inventories in order to qualify for bonuses.

The $850,000 penalty-payable over a five-year period-was assessed to reimburse the state for costs, attorneys' fees, expenses of investigation, and other expenses. Mark Hughes was ordered to post a $400,000 security deposit to cover possible default by the company.

On December 3, 1986, The Wall Street Journal reported that Herbalife had merged with a Utah-based shell corporation and plans to raise $14 million with a public stock offering. The company netted $7.6 million on sales of $115.7 million during the first half of 1986 and $12.4 million on $462.9 million of sales in 1985.