A critical examination of Herbalife’s business model in order to determine whether it is a prohibited scheme under the Consumer Protection Act 68 of 2008.

Abstract

Herbalife is an international direct selling company involved in the production, promotion and sales of a variety of nutritional products including those designed to assist with weight management and personal care. The company has frequently come under legal scrutiny, most recently in the United States of America where it was the subject of a Federal Trade Commission (FTC) investigation. Herbalife shareholders alleged that Herbalife International of America, Inc., Herbalife International, Inc., and Herbalife, Ltd. (the Herbalife companies) were operating like an illegal pyramid scheme rather than like a legitimate multi-level marketing (MLM) company which it purported to be. Pyramid schemes can take different forms and sizes but all share certain common characteristics. The main feature of these schemes is that distributors are primarily compensated for the introduction of new recruits rather than for actual retail sales. The problem with this is that there are a finite number of human beings to recruit and such schemes cannot sustain themselves. It is for this reason that pyramid schemes are mathematically improbable hence unlawful. he FTC investigation concluded that Herbalife was not a pyramid scheme but required that the company make certain changes to its business model and prove, going forward, that its business model is sustainable. This dissertation examines whether Herbalife’s business model amounts to a prohibited scheme under the Consumer Protection Act 68 of 2008. This issue will be analysed particularly through the lens of section 43 of the Act. To help better understand the legal stance on pyramid schemes, pyramid schemes will be viewed in comparison with legitimate MLM firms such as Avon Products Inc. and Tupperware Brands Corporation. In addition, the Herbalife business model will also be viewed in light of other sections of the CPA which proscribes certain conduct.