Herbalife Ltd. (HLF:US) won a Belgian appeals court ruling rejecting claims the company is a pyramid scheme, and concluding that income its distributors earn from others recruited to buy or sell its products isn’t a violation of European consumer protection laws.
The ruling, from the Court of Appeal in Brussels, reverses a decision by a Belgian judge that would have blocked compensation at Herbalife derived primarily from the introduction of new consumers into its sales system, rather than from sale or consumption of its products. A copy of the ruling, which couldn’t be independently verified in court records, was provided by Herbalife.
“The fact that the earned remuneration is based on sales of products by other participants in the network, namely ‘downline’ distributors, does not constitute a violation” of the consumer protection and market practices law at issue, the appeals court said in its Dec. 2 ruling.
The allegations presented by Test-Aankoop, a nonprofit consumer organization, “does not lead to the conclusion that we are dealing with a prohibited pyramid scheme,” the court ruled.
Herbalife has been under scrutiny amid allegations by hedge-fund manager Bill Ackman that the company is a pyramid scheme. While Herbalife has consistently denied Ackman’s claims, the activist investor last month said he will take his bet against the company “to the end of the earth.”
The Los Angeles-based supplement seller, which has reported 16 straight quarters of sales (HLF:US) growth, earlier this year hired PricewaterhouseCoopers LP to audit its books for 2010 through 2012 after its previous auditor resigned because of alleged insider trading. Herbalife has said the review will be completed by the end of this month.
“Herbalife always believed that the first judgment contained factual errors and was based on misinterpretations of its direct-selling sales method, and was confident that the original judgment would be overturned on appeal,” the company said in a statement.
A representative of Test-Aankoop in Brussels couldn’t be reached after regular business hours for comment on the ruling.
In October, Herbalife lost a bid to dismiss a lawsuit in federal court in Los Angeles brought by a former California distributor of its nutrition products who alleged the company’s business model is a “pyramid scheme” that didn’t allow him to make a profit.
The case is N.V. Herbalife International Belgium v. Test-Aankoop, No. 2012/AR/736, Court of Appeal of Brussels.
The Los Angeles case is Bostick v. Herbalife International of America Inc., 13-cv-02488, U.S. District Court, Central District of California (Los Angeles).
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