BOSTON, Oct 15 (Reuters) - Herbalife must defenditself in court against charges brought by a former distributorclaiming that the nutrition and supplements company is runningan alleged pyramid scheme, a U.S. federal judge has ruled.
Judge Beverly Reid O'Connell on Friday denied Herbalife'smotion to dismiss the case brought in April by Dana Bostick, a California housing inspector who tried to earn extra income byselling Herbalife products. The ruling was made public onTuesday.
"Plaintiff has adequately alleged, for purposes of a motionto dismiss, that distributors pay money for the right to sellHerbalife products," the judge wrote. She added that theplaintiff also adequately alleged that "supervisors pay money toreceive recruitment rewards which are unrelated to the sale ofproducts to ultimate users."
"This is a significant victory for our distributors as thecourt laid out a clear analysis of case law which will help inthe prosecution of our case," said Philip Dracht, one ofBostick's lawyers.
Bostick is also seeking class action status, claiming thathundreds of thousands of other distributors have failed to makemuch money by trying to sell the products.
"While the court concluded that Bostick had adequatelyalleged a claim against Herbalife, it expressed no view of themerits of that claim," a Herbalife spokeswoman said.
She said the company has policies in place to discourageinventory loading and that "Herbalife will establish these factsfor the court and seek dismissal of the complaint at theappropriate time."
The Bostick case is the first brought against the companysince its business model caught the attention of Wall Streetinvestors.
Billionaire investor Carl Icahn bet earlier this year that the share price will climb, while billionaire investor WilliamAckman unveiled a $1 billion short bet last year, believing that the share price will eventually drop.
The judge wrote that pyramid schemes are inherentlyfraudulent because they must eventually collapse. "Like chainletters, pyramid schemes may make money for those at the top ofthe chain or pyramid, but must end up disappointing those at thebottom who can find no recruits," the ruling said.
Bostick's lawyer, Philip Dracht, said Bostick spentthousands of dollars to purchase Herbalife products but failedto earn much money by selling them. "The retail profits are notthere because of all this discounting," Dracht said.
He added that Bostick was urged by other Herbalifedistributors to spend more money to buy leads that would helphim earn more money but that he could not afford it.
The company's share price slipped 0.79 percent on Tuesdaybut remains up 94.9 percent for the year to date.
The case in United States District Court Central District ofCalifornia is Dana Bostick v. Herbalife International of AmericaInc. et al CV 13-02488-BRO.
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