Man accuses Usana of operating as pyramid scheme

By Steve Green

Friday, April 24, 2009 | 1:30 a.m.

A Clark County man has sued Usana Health Sciences Inc., alleging the big direct marketer of nutritional and cosmetic products operates as a pyramid scheme in which independent distributors must focus on signing up more distributors as opposed to selling products.

Joseph Chirco, in his lawsuit filed last week in Clark County District Court, seeks to have the suit certified as a class-action representing all Nevada Usana distributors. His Las Vegas attorney is John Nowakowski.

Chirco claims to have lost money by purchasing a Usana distributorship.

He alleges violations of Nevada's deceptive trade practices act and accuses Usana of consumer fraud, of failing to disclose all required facts about its marketing program, of unjustly enriching itself at the expense of distributors and of civil conspiracy.

"Those already in the pyramid are greedily incentivized to recruit more and more distributors to grow the base for the benefit of those higher up on the pyramid,'' Chirco's suit charges. "It isn't until one is locked into a distributorship that it becomes clear that merely selling products to consumers without a pyramid position is not a realistically sustainable option. The only way for an associate to economically stay afloat is to recruit lower ranks for the Usana pyramid."

A Usana spokesman could not immediately be reached for comment on the allegations, which the Salt Lake City company has faced before in various lawsuits.

In its annual report filed with the Securities and Exchange Commission, the company said it's careful to comply with marketing laws.

"Associates are encouraged to build and manage their own business group by recruiting, managing, and training others to sell our products. Associates are compensated on sales generated by their business group, and they can also receive compensation by purchasing products at wholesale prices and selling them at retail prices," Usana said. "We believe that network marketing is an effective way to distribute our products because it allows person-to-person product education, which is not readily available through traditional distribution channels. This personal touch may enhance consumers' awareness of the health benefits of our products, as well as motivate them to live and support a healthier lifestyle. Additionally, we feel that network marketing appeals to a broad cross-section of people, particularly those seeking to supplement their income, start a home-based business, or pursue entrepreneurial opportunities other than conventional full-time employment."

As of Jan. 3, the company said it had 198,000 active associates who bought products; and 71,000 active "preferred customers" worldwide who bought products for personal use but did not re-sell products. Active was defined as someone buying products within the past three months. Of $429 million in net sales in fiscal year 2008, 88 percent was generated by associates and 12 percent by preferred customers, the company said.

"Although we have, from time to time, modified our network marketing system to comply with interpretations of various regulatory authorities, we believe that our network marketing program is in compliance with the laws and regulations relating to network marketing activities in our current markets," Usana said.