An appeals court in Belgium ruled Herbalife is not an unlawful pyramid scheme, reversing a lower court ruling and further undermining the contention of a New York billionaire that the marketer of weight-management and nutrition products runs a business that is destined to collapse.
Herbalife Ltd.'s Belgium subsidiary did not infringe on the Belgium Marketing Practices Act, the Court of Appeals ruled Dec. 2.
Herbalife's sales system is not one "whereby the consumer/an enterprise, by means of a payment, receives a chance to a compensation which mainly flows from the establishment of new consumers/new enterprises in the system, than from the sale or consumption of products," the court stated in an English translation of the ruling that Herbalife provided.
The ruling aids Herbalife in its quest to assure investors and the public that its multi-level marketing business model is legitimate rather than an unlawful pyramid scheme as has been alleged by William Ackman of Pershing Square Capital Management L.P.
The loser in the 9-year-old case, the nonprofit consumer protection organization Test-Aankoop, could challenge the appeals decision with the Belgium Supreme Court.
In the appeals decision, the court cited an absence of documentation showing that Belgium distributors are saddled with too much inventory. It cited Herbalife market research last year in Belgium, showing that only 8 percent of Herbalife's consumers were distributors of its products.
"This shows that these products most definitely are being sold to ordinary consumers, and are not only bought and sold within the system, and contradicts that they wander around endlessly within the system," the court stated.
Herbalife has been selling products in Belgium since 1994, 14 years after the Los Angeles-based company was founded. According to the appeals ruling, the company had nearly 7,500 distributors in Belgium as of 2010.
Although Herbalife has adamantly denied allegations of running a pyramid scheme, it has implemented changes to reflect its assertion that most of its "distributors" are actually consumers who join the company for discounts on products rather than to earn a living.
In a third-quarter conference call with investors, Herbalife CEO Michael Johnson said the company changed the name of entering participants to "members".
"However, if a participant does join Herbalife [for] the business opportunity they must confirm that they read the statement of average gross compensation disclosure prior to signing up," he stated.
Herbalife's compensation structure is complicated. But 2012 figures on its website indicate that most distributors earn $5,000 or less annually.