In the past couple of weeks, multi-level marketing company LuLaRoe (the seller of weirdly patterned leggings) has been hit with two class action lawsuits and a whole bunch of negative publicity. The first LuLaRoe class action lawsuit was filed on October 13 in federal court in California, and the lead plaintiffs are Stella Lemberg, Jeni Laurence, Amandra Bluder, and Carissa Stuckart. The complaint has all kinds of words I like: scheme, bait, lure, and cheating.
The focus of this lawsuit is a promise LuLaRoe made in April 2017. The company said that consultants (who spend upwards of $5,000 to sign up and purchase an initial inventory package) could cancel their agreements and receive a 100% refund of the wholesale value of the inventory they purchased with no exceptions or conditions. Distributors would also get free shipping for the inventory they returned. The policy had no expiration date, but the lawsuit alleges that on September 13, 2017 the company changed the policy to offer a 90% refund (at most) with lots of conditions and exceptions, and no free shipping.
This policy was used to recruit new consultants. The inventory packages are very expensive, so it’s risky for women to sign up for LuLaRoe. But the ability to get a refund of 100% if it doesn’t work out is very enticing.
The change in policy in September allegedly has many catches that are damaging to consultants:
- Items returned must have been personally purchased by the consultant (so no returns of things you’ve traded or purchased from others)
- Items must be in resalable condition
- Items must have been purchased in the last year
- Consultants must pay their own shipping costs, and won’t get reimbursed
- Some consultants were not allowed to return ANY clothes
- In order to receive reimbursement for the clothes returned, consultants have to agree to stop all sales of inventory
- Some consultants never received return authorization numbers, so they couldn’t return their clothes
- Some consultants report that LuLaRoe claims they never received the inventory that was sent back
- Some inventory that is returned is “rejected” (but not returned to the consultants)
- Only a partial refund is given for some inventory items
The plaintiffs in the lawsuit are left holding thousands of dollars of inventory. $20,000 for Stella Lemberg, $12,000 for Jeni Laurence, $14,000 for Amandra Bluder, and $7,000 for Carissa Stuckart.
The second LuLaRoe lawsuit was filed on October 23, also in federal court in California. The lead plaintiffs are Aki Berry, Cheryl Hayton, and Tiffany Scheffer. This one is more fun because it alleges that LuLaRoe is a pyramid scheme. Like all mutli-level marketing companies, LuLaRoe encourages consultants to purchase more and more products, regardless of whether they are able to sell the inventory. The company allegedly uses the slogan “buy more sell more” to encourage continual purchasing of inventory, and consultants are encouraged to have $20,000 of inventory on hand.
The complaint refers to LuLaRoe as an endless chain scheme in which:
- Commissions/bonuses are not dependent on actual sales to customers, just on how much consultants order from the company
- Those who weren’t at the top of the pyramid were doomed to fail
- The market quickly became saturated
- Consultants were encouraged to continuously buy products even if they weren’t selling enough to justify those purchases
- The company essentially paid for recruiting and didn’t care whether the consultants were actually selling products
Like other MLMs, LuLaRoe is pay to play. In order to “qualify” for your bonus payment (commission on your downline), you are required to personally purchase a minimum number of pieces each month, AND your downline must purchase a minimum number of pieces each month. Pressure is put on new consultants to accumulate $20,000 in inventory (at wholesale value!) in order for the upline to qualify for their bonuses.
Also typical MLM manipulative tactics: the flaunting of wealth by the upline. People at the top of the pyramid post pictures of large checks, homes, cars, etc. And these tactics work, as evidenced by the amount of money put into LuLaRoe by approximately 80,000 consultants… who each purchased about $5,000 (or more) of inventory when they first signed up.
The heart of the pyramid scheme allegation against LuLaRoe is laid out beautifully in this paragraph from the lawsuit:
While retail sales did occur, Defendant’s illegal business model was not dependent on any actual sales. Defendants’ predominant and aggressive focus of attaining its revenue based solely on the purchase of inventory by consultants (rather than their sales) and by conditioning the bonuses paid to consultants on minimum inventory purchases (for both the consultant and their downline), the vast majority of consultants sitting at the bottom of Defendants’ pyramid were and remain destined for failure and unable to turn any profit. Some resulted in financial ruin due to the pressure to max out credit cards and to take loans to purchase inventory.
Grab your popcorn! This is going to be interesting!