(This Oct.31st story corrects attribution for quote in paragraph 13 to "the plaintiffs" from "Judge Beverly Reid O'Connell")
By Devika Krishnakumar
(Reuters) - Herbalife Ltd (HLF.N) 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 (NUS.N) and USANA Health Sciences Inc (USNA.N) 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 its distributors, 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 distributors who 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 changes provided 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