Herbalife in Talks to Settle Class-Action Lawsuit

Herbalife Ltd., the multi-level marketer (MLM) of nutritional supplements and weight-loss shakes, could be close to settling a class-action lawsuit filed by former distributors, according to court papers filed last month.

Herbalife and the plaintiffs “have tentatively agreed on the principal terms of a settlement," lawyers for both parties told a California federal judge on Aug. 15.

“The parties believe they need additional time to complete the mediation and settlement process and, if appropriate, file a joint motion for preliminary approval of a settlement," the lawyers said in a joint declaration.

At the parties’ request, U.S. District Judge Beverly O’Connell extended some deadlines in the case so the litigants could work on a settlement. Herbalife has until Oct. 20 to respond to the amended lawsuit, while plaintiffs have until Oct. 27 to file a motion for class certification. The court has set Dec. 8 as the deadline for a hearing on a motion for class certification.

Lawyers told the court a settlement meeting was scheduled for Aug. 27 to continue the negotiations. For eight months, Herbalife and the plaintiffs have engaged in roughly 75 hours of mediation and settlement talks, according to the court papers.

Joseph Kroetsch, a Boies, Schiller & Flexner LLP lawyer representing Herbalife, declined comment earlier this week on the scheduled meeting and whether the parties have moved closer to a settlement. Jason Hardin, a Fabian & Clendenin attorney representing the plaintiffs, did not respond to an emailed request for comment.

Over the summer, Herbalife stipulated to the filing of an amended complaint that added four former Herbalife distributors as plaintiffs, provided the company could move to dismiss the lawsuit or otherwise respond to it. The former distributors alleged suffering losses after joining the company.

Dana Bostick, the original plaintiff and a former Herbalife distributor, accused the company of running an unlawful pyramid scheme, an allegation state and federal authorities including the FTC are investigating.

Herbalife denied the pyramid scheme allegations, which have been made repeatedly by billionaire Bill Ackman of the hedge fund Pershing Square Capital Management. Ackman has bet against Herbalife and stands to profit handsomely if its stock tanks. Shares of Herbalife (HLF: NYSE) closed Friday at $43.80, down from $78.65 at the beginning of January.

The New York Post first reported on the settlement talks earlier this month. Sources told the newspaper Herbalife appears willing to accept a class-wide settlement that would cover roughly 1.5 million people.

Without a settlement, Herbalife faces the risk that the court would certify a large class of former distributors, increasing the company’s exposure. On the other hand, denial of class certification would limit the plaintiffs’ potential recovery to claims brought by the five distributors.

As of June 30, the company sold its products in 91 countries through a network of 3.9 million independent members, formerly known as distributors.

Julian Cacchioli, a spokesman for Herbalife, declined to comment Friday on the settlement talks.  

In April, a separate lawsuit was filed against Herbalife by a shareholder, Abdul Awad. The complaint claimed Herbalife made false and misleading statements and/or failed to disclose the company is a pyramid scheme and inappropriately pressured its members to buy more products to resell as a distributor, according to documents filed in the U.S. District Court for the Central District of California.

Herbalife said the lawsuit lacks merit, and the company intends to vigorously defend itself.

"These unfounded claims, styled as a securities suit, are no more than a recitation of ill-informed allegations about the company's business model previously made by a hedge fund manager orchestrating a campaign against our company in support of his $1-billion reckless bet," Cacchioli said in April. "As we have stated repeatedly, we are confident in our products and in our compliance with all applicable laws."

The 34-year-old Herbalife is accustomed to defending itself at home and abroad against pyramid scheme accusations. Late last year, a Belgium appeals court ruled the company was not a pyramid scheme, reversing the finding of a lower court. The appeals court cited an absence of documentation showing that Belgium distributors are saddled with too much inventory.

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.

In an earlier case that the nutrition company filed against former Herbalife distributors who had joined a competing firm (Melaleuca Inc), the distributors counterclaimed with an allegation that Herbalife operated a pyramid or endless chain scheme in violation of California law.

Herbalife moved five years ago to dismiss the pyramid scheme allegations as a matter of law.  A federal judge, Gary Allen Feess, refused, noting: "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 because it is paid based on the suggested retail price of the amount ordered from [Herbalife], rather than based on actual sales to consumers.’"

Feess later dismissed the pyramid scheme claim in Herbalife’s favor. In a May 5, 2010, ruling, the judge found the distributors could not show they were victims who would be entitled to rescission under California law. Herbalife previously informed the judge that it would dismiss its claims against the former distributors if he ruled in the company’s favor on the pyramid scheme question. 

John Stephens, lead counsel for the former distributors, said both parties filed notices of appeal but eventually dropped the case.

“They (Herbalife) didn’t get anything from us. We didn’t get anything from them. And that’s how it ended," said Stephens of the law firm Stephens Friedland LLP in Newport Beach, California.

Stephens said his clients would have standing today to bring the pyramid scheme allegations because California law has changed.

A website maintained by Ackman’s Pershing Square includes links to the litigation, during which time several Herbalife executives were deposed and asked about the company’s business practices.

“I think we did the most substantive work of anybody on this [Herbalife pyramid scheme] issue to my knowledge,” Stephens said.