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Federal Trade Commission v. Herbalife International of America Inc

United States District Court, C.D. California

July 25, 2016

FEDERAL TRADE COMMISSION, Plaintiff,
v.
HERBALIFE INTERNATIONAL OF AMERICA, INC., a corporation; HERBALIFE INTERNATIONAL, INC., a corporation; and HERBALIFE, LTD., a corporation, Defendants.

          STIPULATED ORDER FOR PERMANENT INJUNCTION AND MONETARY JUDGMENT

          Hon Beverly Reid O’Connell United States District Judge.

         Plaintiff, the Federal Trade Commission (“Commission”), filed its Complaint for Permanent Injunction and Other Equitable Relief (“Complaint”) in this matter, pursuant to Section 13(b) of the Federal Trade Commission Act (“FTC Act”), 15 U.S.C. § 53(b). The Commission and Defendants stipulate to entry of this Stipulated Order for Permanent Injunction and Monetary Judgment (“Order”), to resolve all matters in dispute in this action between them.

         THEREFORE, IT IS ORDERED as follows:

         FINDINGS

         1. This Court has jurisdiction over this matter.

         2. The Complaint charges that Defendants participated in unfair and deceptive acts or practices in violation of Section 5 of the FTC Act, 15 U.S.C. § 45, by: promoting participation in a multi-level marketing program with a compensation structure that causes or is likely to cause harm to participants; making false or misleading income representations; making unsubstantiated claims regarding the retail sales income earned by participants in Defendants’ program; and providing participants in Defendants’ program with the means and instrumentalities to engage in deceptive acts and practices.

         3. Defendants neither admit nor deny any of the allegations in the Complaint, except as specifically stated in this Order. Only for purposes of this action, Defendants admit the facts necessary to establish jurisdiction.

         4. Defendants waive any claim that they may have under the Equal Access to Justice Act, 28 U.S.C. § 2412, concerning the prosecution of this action through the date of this Order, and agree to bear their own costs and attorney fees.

         5. Defendants waive all rights to appeal or otherwise challenge or contest the validity of this Order.

         DEFINITIONS

         For the purpose of this Order, the following definitions apply:

         A. “Business Opportunity Participant” or “Participant” means any individual who is participating in a Multi-Level Marketing Program. “Business Opportunity Participant” or “Participant” does not include Preferred Customers.

         B. “Business Venture” means any written or oral business arrangement, however denominated, whether or not covered by 16 C.F.R. Part 437, that consists of the payment of any consideration for the right or means to offer, sell, or distribute goods or services (whether or not identified by a trademark, service mark, trade name, advertising or other commercial symbol). The definition of “Business Venture” includes Multi-Level Marketing Programs.

         C. “Defendants” means all of the Defendants and their successors and assigns, individually, collectively, or in any combination.

         D. “Downline” refers to the collection of all Business Opportunity Participants whom a Business Opportunity Participant has personally recruited or sponsored (first level), all Participants and Preferred Customers recruited or sponsored by first level Participants (second level), all Participants and Preferred Customers recruited or sponsored by second level Participants (third level), and so forth, however denominated (including, but not limited to, “downline, ” “tree, ” “cooperative, ” or “income center”), whose activities are the basis, in whole or part, for any payment or compensation from Defendants to the Business Opportunity Participant.

         E. “Multi-Level Compensation” means any payment or compensation (including, but not limited to, “wholesale profit, ” “commissions, ” “royalties, ” “overrides, ” and “bonuses”) in a Multi-Level Marketing Program from Defendants to a Business Opportunity Participant that is based, in whole or in part, on the activities of the Participant’s Preferred Customers and the Participant’s Downline.

         F. “Multi-Level Marketing Program” or “Program” means any marketing program in which Business Opportunity Participants have the right to (1) sell goods or services; (2) recruit others into the Program; and (3) receive payment or other compensation that is based, in whole or in part, upon the Product purchases, sales, or other activities of the Participant’s Downline.

         G. “Net Rewardable Sales” for Defendants means the annual total of

1. Net Sales generated by Preferred Customer Sales and Product sales that result in Profitable Retail Sales; and
2. Net Sales generated by Rewardable Personal Consumption, determined pursuant to Subsection I.E.

Provided, however, that if the total of G.2 would exceed one-third of the combined total of G.1 and G.2, then Net Rewardable Sales shall equal one-and-a-half times the total of G.1.

         H. “Net Sales” means gross Product sales in the United States by Defendants, including packaging and handling, freight recovery, and surcharges, and net of any returns, refunds, Product Discounts, and allowances, including Wholesale Commissions.

         I. “Preferred Customer” means an individual who joins or registers with a Multi-Level Marketing Program as a customer only, and who does not have the right to (1) sell goods or services; (2) recruit others into the Program; or (3) receive Multi-Level Compensation.

         J. “Preferred Customer Sales” or “Sales to Preferred Customers” means sales of Products made directly from Defendants to Preferred Customers.

         K. “Product” means any good sold by Defendants that can potentially generate Multi-Level Compensation pursuant to Defendants’ compensation plan.

         L. “Product Discount” refers to the difference between Defendants’ suggested retail price for a Product and the Product price charged by Defendants to the purchaser in a purchase made directly from Defendants.

         M. “Profitable Retail Sale” means a sale of Product by a Business Opportunity Participant to a Retail Customer or a Preferred Customer that is a genuine sale made at a price above the Business Opportunity Participant’s average wholesale cost over the preceding twelve (12) months for the items sold (including tax and the actual or approximate cost of shipping, handling, and any similar fees) and for which retail sale information is collected and maintained by Defendants.

         N. “Retail Customer” means a purchaser of Products sold through a MultiLevel Marketing Program who is not a Business Opportunity Participant or a Preferred Customer, is not registered with the Program, and is not otherwise participating in the Program.

         O. “Rewardable Personal Consumption” means sales of Product by Defendants to a Business Opportunity Participant, for his own or his household’s use, that can potentially be used to generate Multi-Level Compensation as set forth in Subsection I.E.

         P. “Total Net Sales” for Defendants means the total of Net Sales in a fiscal year.

         Q. “Wholesale Commissions” means Multi-Level Compensation generated by a Product purchase from Defendants that, in total for the transaction, equals the difference between the purchaser’s Product Discount and the lesser of either the maximum Product Discount for the Product under Defendants’ compensation plan or 50% of the suggested retail price of the Product, and is paid by Defendants to Participants whose Product Discount is greater than that of the purchaser and who have such purchaser either in their Downline or as a Preferred Customer whom they recruited or sponsored.

         ORDER

         I. PROHIBITED BUSINESS PRACTICES

         IT IS ORDERED that Defendants, Defendants’ officers, agents, employees, and all other persons in active concert or participation with any of them, who receive actual notice of this Order, whether acting directly or indirectly, are permanently restrained and enjoined from advertising, marketing, promoting, or offering any Multi-Level Marketing Program unless such program has the following characteristics:

         A. Limitations on Multi-Level Compensation. The program shall include, and Defendants shall enforce, the following provisions:

1. Any Multi-Level Compensation paid to a Participant for a given period shall be generated solely by the following categories of transactions (“Rewardable Transactions”) occurring in the same period or, during such Participant’s first six months as a Business Opportunity Participant, the three months prior to that period:
a. Sales to Preferred Customers whom the Participant has personally recruited or sponsored;
b. Sales to Preferred Customers in the Participant’s Downline;
c. Profitable Retail Sales of the Participant’s Downline, as calculated by Defendants using the information collected pursuant to Subsection I.C; and
d. All or a portion of Rewardable Personal Consumption transactions, determined pursuant to Subsection I.E., of the Participant’s Downline; provided that the Rewardable Personal Consumption transactions included in a Participant’s Rewardable Transactions shall be limited such that no more than one-third of the total value of the Participant’s Multi-Level Compensation may be attributable to or generated by such transactions.
2. If a Participant has transactions that are not Rewardable Transactions (“Non-Rewardable Transactions”) in his or her Downline, the amount of any Multi-Level Compensation that the Participant may receive shall not vary from the amount of Multi-Level Compensation that the Participant would be entitled to receive if such Non-Rewardable Transactions were not in his or her Downline; i.e., the total amount of a Participant’s Multi-Level Compensation shall not be increased because the Non-Rewardable Transactions were in the Participant’s Downline rather than in any other Participant’s Downline.
3. Any point system or other method used to measure Rewardable Transactions shall assign the same value to a given Product regardless of whether the Product was sold to a Preferred Customer, to a Retail Customer, or to a Business Opportunity Participant. Any system that calculates Multi-Level Compensation shall not vary the compensation for a Rewardable Transaction based on whether the Product was sold to a Preferred Customer, to a Retail Customer, or to a Business Opportunity Participant for personal consumption.
4. For any fiscal year, if the total of Net Rewardable Sales is less than 80% of Total Net Sales, the sum of Multi-Level Compensation payments excluding Wholesale Commissions by Defendants to Participants may not exceed forty-one point seven five percent (41.75%) of the amount of Net Rewardable Sales, which reflects a ten-percent (10%) increase over the percentage of Multi-Level Compensation excluding Wholesale Commissions paid by Defendants in fiscal year 2015.
5. No compensation shall be paid solely for enrolling or recruiting a Participant or a Preferred Customer into the Program.

         B. Preferred Customer Category. The program shall differentiate between Preferred Customers and Business Opportunity Participants, including through the following requirements:

1. A Preferred Customer’s classification cannot change to Business Opportunity Participant except upon the Preferred Customer’s written request or application or other written expression of intent made directly to and approved by Defendants.
2. A Business Opportunity Participant’s classification cannot change to Preferred Customer except upon the Participant’s written request or application or other written expression of intent made directly to and approved by Defendants.
3. A Preferred Customer who becomes a Business Opportunity Participant may not receive any benefit or status that depends in any way on that individual’s activity as a Preferred Customer, except that any discount that the individual obtained as a Preferred Customer may continue to be used to purchase Product that is designated, at the time of purchase, as being for the individual’s own or household use.
4. All individuals who are registered with or participating in the Program as of the Effective Date of this Section and who have not affirmatively elected to be classified as Preferred Customers pursuant to Subsection I.B.2, above, shall be classified as Business Opportunity Participants.

         C. Collection of Retail Sales Information. Defendants shall collect from Business Opportunity Participants and maintain in a standardized format the following information for any claimed Profitable Retail Sale:

1. the method of payment;
2. the Products and quantities sold;
3. the date;
4. the price paid by the purchaser;
5. the first and last name of the purchaser;
6. contact information for the purchaser, including at least two of the following: telephone number, address or e-mail address; and
7. for any paper receipt submitted to Defendants, the signature of the Retail Customer or Preferred Customer.

         D. Verification of Retail Sales and Preferred Customer Sales. The following requirements shall apply regarding Profitable Retail Sales and Preferred Customer Sales:

1. Defendants shall take all reasonable steps, including both random and targeted audits, to monitor Profitable Retail Sales and Preferred Customer Sales in order to ensure that they are genuine sales of Products, rather than an attempt to manipulate the Program’s compensation plan.
2. Defendants shall take all reasonable steps, including both random and targeted audits, to monitor Profitable Retail Sales in order to ensure that they in fact occurred as reported in the information ...

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