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Jenny Craig Inc. Agrees to Class-Action Suit Settlement : Courts: Firm will pay $10 million and give away $36 million in merchandise. Litigants had alleged that the company's diets could cause gallbladder disease.

July 16, 1994|JOHN O'DELL and CHRIS WOODYARD | TIMES STAFF WRITERS

SANTA ANA — Weight-loss center operator Jenny Craig Inc. has agreed to pay $10 million in cash and give away merchandise worth $36 million at retail prices to settle a 4-year-old lawsuit alleging misleading advertising and improper business practices.

Though Jenny Craig is based in Del Mar, the class action suit on behalf of 360,000 of its clients was filed in Orange County Superior Court in 1990.

It alleged that the company's diets could cause gallbladder disease.

The settlement signed Thursday applies to people who used Jenny Craig centers between 1987 and 1990.

In agreeing to settle the case, Jenny Craig did not admit any wrongdoing.

The company on Friday acknowledged the final settlement, which had been announced in April, but a spokesman said there would be no other comment.

Like most of its competitors, Jenny Craig has been hit hard by the recession and by a shift in dieters' approaches to weight loss.

The settlement should not be a significant financial blow to the company, said Ronald Rotter, an industry analyst with Seidler Cos. in Los Angeles.

The numbers sound sizable, he said, but Jenny Craig's insurer is paying $6 million of the $10-million cash payment, which is to be divided among 22,000 former clients who filed claims against the company as a result of the suit.

And very few of the 360,000 former Jenny Craig clients eligible for the $100 merchandise certificates are expected to claim and cash them.

Even if everyone cashed in the coupons, Rotter said, there is a "sizable" markup--50% or more--on the prepared dietary food products that the company sells through its network of weight-loss centers.

That means the actual cost to the company of settling the suit is likely to be far less than half of the stated amount.

"They have $40 million cash and no long-term debt, so it shouldn't hurt too much," Rotter said.

One possible complication remains, however. Jenny Craig has filed a lawsuit against one of its insurance carriers that the company said was supposed to pay $2 million of the $6 million being covered by insurers.

The suit, filed in Orange County Superior Court Thursday, alleges that First State Insurance Co. of Boston has reneged on the agreement worked out in April and is now refusing to pay its share unless new conditions are met.

The company took a charge for the cash settlement in its third fiscal quarter, resulting in an $8.7-million loss for the three months ended March 31.

For the first nine months of its fiscal year, the company posted a profit of just over $200,000--down from $27 million for the same period a year earlier.

Jenny Craig, one of the nation's largest weight-loss chains, has more than 800 centers in the United States and overseas.

Company officials and industry analysts have said that weight-loss centers like the Jenny Craig chain that rely on sales of their own diet food products are being hurt by the recession, increased competition from supermarket sales of frozen diet meals and a shift in dieting goals away from weight loss for the sake of appearance and toward weight control for health reasons.

Jenny Craig gets about 90% of its total revenue from the sale of its prepackaged meals, which cost participants from $50 to $75 a week. Clients also pay a $7 weekly fee to attend a weight clinic meeting.

"As absurd as it sounds," Rotter said, "this settlement might--and I stress ' might '--help add to their business. If people do use the coupons and like the food and the programs the company now is offering, they could decide to come back."

"The coupons could become a loss leader" to bring in new business.

The settlement allows Jenny Craig to require customers with coupons to use them either for $100 worth of the company's video or audio tapes or to enroll in the Jenny Craig program and redeem the coupons for food products at the rate of $12.50 a week over an eight-week period.

New members would be a welcome boost for the company. Officials said in April that they would close 30 centers because of poor performance and acknowledged that new memberships were down 43% from a year earlier.

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