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Home arrow Commercial Cults arrow Herbalife arrow Suit looks at seamy side of network sales

Suit looks at seamy side of network sales

The Arizona Republic, November 20, 1998
by Jane Larson

Dan Fallow and his wife, Mary, strolled onto the stage and told a packed house of Herbalife International Inc. distributors how the couple had made $300,000 in their first year with the weight-loss products company.

A few years later, they were back, telling how they had made an "incredible" $40,000 in just the past few months.

On Thursday, in a Maricopa County Superior Courtroom, the couple shook their heads, swallowed hard and looked grim as a lawyer for Herbalife showed video clips of their accolades and accused them of refusing to play by the company's rules.

The Fallows, for their part, contend that it was Herbalife that breached their distributorship contracts and followed rules only when it suited the company.

They allege that the company suspended their distributorships on false information, cut off their checks and refused to compensate Fallow for risking his life against the Russian Mafia during attempts to expand the business internationally.

What once was a lucrative business for the former Valley residents has turned into a contentious court battle that is providing a glimpse inside the seamier side of the network marketing industry.

The monthlong trial of their lawsuit against the Los Angeles company started by Mark Hughes, a multimillionaire who pitches the company on infomercials, has made news in Forbes, the Wall Street Journal and on the Internet through a Web site posted by Dan Fallow's son, also a Herbalife distributor.

The case went to the jury Thursday afternoon.

The Fallows filed the lawsuit in 1996, charging Herbalife with fraud, racketeering, breach of contract and other misdeeds.

Herbalife countersued, alleging the Fallows breached their contract and asking the court to severe the business relationship.

In the lawsuit, the Fallows say the company arbitrarily withholds income from distributors or gives it to others "more favored" in the organization.

"In reality, Herbalife is a dictatorship run by its founder and a small group of favored sycophants," the lawsuit says.

In closing arguments, the Fallows' attorney, Thomas Littler, said the couple had built a business that, including other distributors in their "down line," had sold $37 million worth of Herbalife products in 1996 alone.

Then the company says, "We can do whatever we want," including terminate them for violating rules even when it failed to enforce them against others, Littler said.

Fallow offered to help the company fight a counterfeiting organization in Europe, Littler said, in exchange for favorable treatment of his wife's and son's distributorships. But the company claims such a deal never existed and refused to pay Fallow for his efforts, Littler said.

The couple are seeking to be compensated for the income they say they should have received since 1990, including bonuses for being top producers and a percentage of the millions their organization members sold.

Herbalife attorney Matt Hodel, however, said the broken promises in the case were the Fallows' fault, and that Dan Fallow was not to be trusted.

The couple never complained when they were making money, he said. But they had agreed when they applied to become distributors that husbands and wives could not operate separate distributorships. They broke that agreement when, during a brief separation, Dan Fallow helped operate his son's organization, Hodel said.

Dan Fallow also was involved in setting up a competing organization in Europe, using Herbalife's name and copying its labels, he said. The company is seeking to be compensated for the costs of shutting down the American manufacturer who was supplying the competitor.

Hodel argued that the company values its good distributors.

"Hughes believes people who work hard for their money and are entitled to money should get money," he said.

But people who try to cheat good distributors cannot be allowed to stay in the organization, he said.

"This is a case about character, it's about who we are," Hodel repeatedly told the jury.

Herbalife sells herbal weight loss, nutritional and personal care products. The Fallows' lawsuit claims products are marked up 600 percent and shipping and handling charges are inflated to finance large payments to distributors.

The company pitches distributorships as an opportunity to own one's own business and claims income limited only by individual effort. Members also can sponsor other people into the network and get royalties from their sales.

The Fallows began as distributors in Mesa in 1984.