By Devika Krishna Kumar
Oct 31 (Reuters) - Herbalife Ltd would pay $15
million to settle an 18-month battle over a class action lawsuit
brought by a former distributor claiming that the nutrition and
supplements company
is running an alleged pyramid scheme,according to a U.S. court filing.
The company would pay $15 million in cash, plus up to $2.5
million for product returns, according to the court filing that
granted preliminary approval for the settlement on Friday.
Under terms of the settlement, Herbalife would also make
"numerous changes" to its business model for at least three
years after the settlement receives final approval, the court
filing said.
Short-sellers and other critics have accused companies such
as Herbalife, NU Skin Enterprises Inc and USANA Health
Sciences Inc of running pyramid-type schemes,
questioning their sales model under which distributors make
money not only from their own sales but from people they recruit
as distributors. Final court approval is still needed.
Dana Bostick, a California housing inspector, filed the
lawsuit in April last year, claiming that hundreds of thousands
of other distributors have failed to make much money by trying
to sell the products.
"The potential cost, as well as the distraction, disruption
and burden of prolonged litigation on the company and its
management team, led the company to decide that the terms set
forth in the settlement agreement provided the best path for
moving forward," Herbalife said in a statement on Friday.
The company said the settlement did not contain an admission
of liability or wrongdoing.
Herbalife gave Carl Icahn three additional seats on its
board earlier this year, after the activist investor openly
voiced his support for the company.
Pitted against him is the company's most prominent critic,
fellow activist William Ackman, who unveiled a $1.16 billion
short position against Herbalife in December 2012.
Under the agreement, Herbalife must make a number of changes
to its corporate
policies, including how it defines itsdistributors, paying shipping charges for products that are
legitimately returned by members and making clarifications in
its membership agreement to make them less confusing.
The product return fund
would be available to distributorswho file valid claims for the return of unused and unopened
products, according to Friday's settlement.
The plaintiff lawyers expect to seek fees equal to 30
percent of the combined sum of the settlement amount, the court
filing said.
"In return for the economic
and corporate policy changesprovided in the settlement agreement, the settlement class will
agree to fully release Herbalife from all claims that were or
could have been raised in the complaints in this action," the
plaintiffs said in the filing.
Herbalife shares closed up about 3.7 percent at $52.46 on
the New York Stock Exchange on Friday. The stock has lost about
a third of its value so far this year.
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.
(Reporting by Devika Krishna Kumar in Bangalore; Editing by
Lisa Shumaker)
