Herbalife will have to face charges brought by a former distributor who claims the controversial peddler of protein shakes is a pyramid scheme, a judge ruled.
Los Angeles federal Judge Beverly Reid O’Connell refused to toss out a suit filed by Dana Bostick, a failed Herbalife distributor in California who sued the company. The Oct. 11 ruling was made public on Tuesday.
The case, which seeks class-action status, is the first to go to court since Herbalife came under attack from hedge-fund activist Bill Ackman, who claims Herbalife is a pyramid scheme that transfers wealth from the vast majority of those at the bottom to those at the top. He has a $1 billion short bet on the company.
Herbalife says those at the bottom are merely people who signed up as distributors to get a discounted price on the product.
In her ruling, O’Connell rejected Herbalife’s defense that distributors who use products for their own personal use should be counted as end customers.
“Although defendants contend that distributors should be classified as ultimate users, downline distributors are not ultimate users,” she wrote.
The issue is significant because the determination of whether Herbalife is a pyramid scheme rests largely on whether or not distributors make most of their income from recruiting or from sales to “ultimate users,” according to the Federal Trade Commission and court precedents.
Because sales are not to ultimate users, “the considerable discounts and advantages offered to supervisors presents the same risk of a recruitment focus,” O’Connell wrote.
An Herbalife spokeswoman downplayed the ruling, saying that the company “now has the opportunity to demonstrate that Herbalife has the policies in place, such as an aggressive repurchase program, no restocking fees, a satisfaction guarantee and policies that discourage inventory loading.”
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