Herbalife Loses Bid to Dismiss ‘Pyramid Scheme’ Lawsuit

Herbalife Ltd. (HLF) lost a bid to dismiss a lawsuit 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.

U.S. District Judge Beverly Reid O’Connell in Los Angeles, in an Oct. 11 order, denied Herbalife’s request to throw out the case. The judge said the plaintiff, Dana Bostick, who seeks to represent other distributors in a class-action lawsuit, had sufficiently argued the allegation at this stage of the proceeding for the case to go forward

Bostick sued in April, claiming he couldn’t sell his products because distributors that are higher up the chain receive a bigger discount than he did on the products they purchased from Herbalife. Bostick also claimed Herbalife’s structure systematically rewards recruiting other distributors over retail sales.

“Bostick gave up on his distributorship once he discovered that he was unable to resell the Herbalife products he purchased by merely relying on a website to do his work for him,” the company said in its May 30 request to dismiss the claims. “Rather than return the purchased products to Herbalife for a full refund, as he concedes he could have done, Bostick sued.”

Hedge fund manager Bill Ackman, whose Pershing Square Capital Management LP has sold short Herbalife shares, has accused the Cayman Islands-based company of swindling unsophisticated consumers with false get-rich promises using overpriced products.

Elected Officials

He has urged U.S. regulators, elected officials and community activists to help shut it down. Herbalife has repeatedly denied Ackman’s allegations.

Bostick’s April 8 complaint alleges violations of California’s Endless Chain Scheme Law, California’s Unfair Competition Law and California’s False Advertising Law, as well as violations of the U.S. Racketeer Influenced and Corrupt Organizations Act. Bostick “intends” to dismiss the Rico claims, according to the judge’s order.

Barbara Henderson, an outside spokeswoman for Herbalife with Worldwide Corporate Communications in Los Angeles, didn’t immediately respond to a phone call to her office seeking comment on the ruling.

The case is Bostick v. Herbalife International of America Inc., 13-cv-02488, U.S. District Court, Central District of California (Los Angeles).

To contact the reporter on this story: Edvard Pettersson in the Los Angeles federal courthouse at +1- epettersson@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net.

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