Herbalife Ltd. has gone far in fighting the old perception that it operates as a thinly veiled pyramid scheme. In recent years, it picked a high-profile Disney executive to be its chief executive, improved its diet and nutritional supplements, and changed the way it operates.

But it looks as if the L.A. company will have to fight again. A group of former top distributors in the midst of a nasty legal battle with Herbalife is renewing the claim that Herbalife operates as a pyramid scheme.

The allegation could be disregarded as a standard strategic countersuit – Herbalife earlier sued the group for allegedly poaching hundreds of its independent distributors to a competing business – except that the federal judge overseeing the case recently denied Herbalife’s request to throw out the pyramid scheme claim, instead ruling it should go to trial.

In fact, U.S. District Court Judge Gary Feess indicated that he sees the pyramid charges as serious.

“Herbalife’s entire business model appears to incentivize primarily the payment of compensation that is ‘facially unrelated to the sale of the product to ultimate users …’ rather than based on actual sales to consumers,” wrote Feess in his Aug. 25 ruling.

That’s significant because under federal law, multilevel marketing companies such as Herbalife must have policies that ensure distributors are selling most of the products to ultimate users and not just moving them down line to lower-level distributors.

If the claim is upheld by a jury, Herbalife’s own lawsuit against the distributors would be made moot. What’s more, the California Attorney General’s Office or local prosecutors could investigate. The company also could be forced to overhaul its business model.

“It would be a very bad day for Herbalife,” said William White, a litigator at L.A. firm Hill Farrer & Burrill LLP who is not involved in the case but reviewed the lawsuits at the Business Journal’s request.

“If found in court to have this illegal enterprise, at the very least authorities will require them to change the actions that were found illegal,” he said. “And the enforcement authorities would likely seek penalties, restitution and a number of other remedies.”

In a statement to the Business Journal, Herbalife contends that the eight former distributors are using the pyramid charges as retaliation. Herbalife claimed in a 2007 lawsuit that the former distributors violated their contracts with the company by using confidential information to recruit hundreds of Herbalife distributors to a competing company.

“The allegations are a smokescreen and are completely without merit,” said Herbalife in a statement, declining to elaborate on the suit.

On the other hand, if a jury finds that Herbalife does not run an illegal pyramid scheme, then Herbalife’s suit against the eight former distributors would continue.

“If Herbalife is successful in establishing that it is a legitimate business and its trade secrets were improperly used by the defendants, then that could conceivably lead to very high damages against the defendants,” White said.