A former salesman for Herbalife Ltd. can proceed with a lawsuit accusing the Los Angeles nutrition company of operating a pyramid scheme that victimizes hundreds of thousands of people a year, a federal judge ruled Tuesday.
U.S. District Judge Beverly Reid O’Connell refused Herbalife’s request to dismiss the case, saying former Herbalife distributor Dana Bostick’s allegations were significant enough to proceed toward trial.
“We’re very happy with the judge’s ruling. We see a clear road map for our case and are going to aggressively prosecute it,” said Bostick’s attorney, Philip Dracht.
Bostick, a Los Angeles resident, said he became an Herbalife distributor in 2012 but had a difficult time selling the company’s nutrition products and gave up. He contends in the lawsuit that Herbalife is a pyramid scheme in which the company’s independent distributors earn more money recruiting new sales people than they do selling its products.
Herbalife said in a statement that the ruling does not carry much weight because it was not based on evidence or testimony. The judge, at this point in the case, was required to assume that Bostick’s allegations are true.
“While the court concluded that Bostick had adequately alleged a claim against Herbalife, it expressed no view of the merits of that claim,” the company said. “Herbalife now has the opportunity to present the court with evidence to demonstrate that Herbalife has the policies in place, such as an effective repurchase program, no restocking fees, a satisfaction guarantee and policies that discourage inventory loading. Herbalife will establish these facts for the court and seek dismissal of the complaint at the appropriate time.”
O’Connell said in her ruling that Bostick’s allegations could have merit. “The considerable discounts and advantages offered to supervisors presents [a] risk of recruitment focus,” she said in the ruling.
The judge was not swayed by Herbalife’s argument that the bulk of its distributors sign up to receive discounts on products they personally use, Dracht said.
“That’s a significant blow to their legal theory,” Dracht said. “They’ve tried to use it as a shield, saying 75% of people are just buying products for discounts. I don’t think that’s going to fly here.”
Founded in 1980, Herbalife has been one of the hottest topics on Wall Street this year. In December, hedge fund manager Bill Ackman said he had concluded through extensive research that the company was a pyramid scheme. He bet more than $1 billion that the company’s stock price would fall, but reduced that position recently as the stock soared.
Herbalife shares fell 79 cents, or 1.2%, to $63.92 on Tuesday.
Follow Stuart Pfeifer on Twitter