BOSTON Oct 15 Herbalife must defend
itself in court against charges brought by a former distributor
claiming that the nutrition and supplements company is running
an alleged pyramid scheme, a U.S. federal judge has ruled.
Judge Beverly Reid O'Connell on Friday denied Herbalife's
motion to dismiss the case brought in April by Dana Bostick, a
California housing inspector who tried to earn extra income by
selling Herbalife products. The ruling was made public on
"Plaintiff has adequately alleged, for purposes of a motion
to dismiss, that distributors pay money for the right to sell
Herbalife products," the judge wrote. She added that the
plaintiff also adequately alleged that "supervisors pay money to
receive recruitment rewards which are unrelated to the sale of
products to ultimate users."
"This is a significant victory for our distributors as the
court laid out a clear analysis of case law which will help in
the prosecution of our case," said Philip Dracht, one of
Bostick is also seeking class action status, claiming that
hundreds of thousands of other distributors have failed to make
much money by trying to sell the products.
"While the court concluded that Bostick had adequately
alleged a claim against Herbalife, it expressed no view of the
merits of that claim," a Herbalife spokeswoman said.
She said the company has policies in place to discourage
inventory loading and that "Herbalife will establish these facts
for the court and seek dismissal of the complaint at the
The Bostick case is the first brought against the company
since its business model caught the attention of Wall Street
Billionaire investor Carl Icahn bet earlier this year that
the share price will climb, while billionaire investor William
Ackman unveiled a $1 billion short bet last year, believing
that the share price will eventually drop.
The judge wrote that pyramid schemes are inherently
fraudulent because they must eventually collapse. "Like chain
letters, pyramid schemes may make money for those at the top of
the chain or pyramid, but must end up disappointing those at the
bottom who can find no recruits," the ruling said.
Bostick's lawyer, Philip Dracht, said Bostick spent
thousands of dollars to purchase Herbalife products but failed
to earn much money by selling them. "The retail profits are not
there because of all this discounting," Dracht said.
He added that Bostick was urged by other Herbalife
distributors to spend more money to buy leads that would help
him earn more money but that he could not afford it.
The company's share price slipped 0.79 percent on Tuesday
but remains up 94.9 percent for the year to date.
The case in United States District Court Central District of
California is Dana Bostick v. Herbalife International of America
Inc. et al CV 13-02488-BRO.