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LuLaRoe Is Being Sued By Consultants Who Call It a 'Pyramid Scheme'

LuLaRoe’s comfortable, brightly-colored clothing is popular among women with chronic illnesses and chronic pain, and its “buttery soft” leggings and dresses have been named a favorite clothing choice by many in the Mighty community. But on Friday, the company was named in a class-action lawsuit that alleges the company is a “pyramid scheme” and utilizes unlawful business practices.

The lawsuit, filed in California, names four plaintiffs though it also seeks to represent “thousands of consultants,” and alleges six counts of unlawful, fraudulent and unfair business practices, advertising and breach of contract. The main complaint is focused on the company’s buyback policy, which allowed the “consultants” who buy and then resell LuLaRoe merchandise to return their inventory for a full refund if they wanted to leave the company.

The buyback policy was reversed in September, but the plaintiffs allege they were misled and thought the 100 percent buyback would continue. They say it helped encourage consultants to join LuLaRoe since they felt the risk was lower (consultants must buy the inventory they wish to sell — at least $5,000 in merchandise).

There are no physical LuLaRoe stores and the items are not sold on the website — you can only buy LuLaRoe through the consultants. Consultants typically hold “pop-up shops” and sell their inventory through Facebook groups.

“Consultants were encouraged to max-out their credit cards with inventory purchases, all of which would be refunded at 100 percent, plus free shipping, should the consultants decide to stop selling for LuLaRoe,” the lawsuit says.

According to a statement on the LuLaRoe website, the 100 percent refund was meant to be a temporary fix for the problem of retailers holding “going out of business” sales when they wished to leave the company, which the company claims was creating an “uneven playing field” for other retailers. The 100 percent buyback policy was in place from April to September. Then, it was reversed when retailers were, according to LuLaRoe, “abusing the program” by returning product in poor condition and providing “inaccurate claims,” as well as using it as a “temporary solution to struggles in their business.”

The policy reverted back to its previous iteration, which was that retailers who wished to leave the company got a 90 percent reimbursement on remaining inventory with some additional restrictions. But the lawsuit cites a notice posted on the LuLaRoe website that said the new policy does not have an expiration date or required timeframe the product must have been purchased by. The lawsuit also claims sellers weren’t sent return shipping labels for leftover inventory as promised.

The lawsuit also targets the company’s consultant structure, which allows sellers who bring on more sellers to move up from consultant to sponsor, trainer, coach, and mentor levels. Consultants in higher levels receive higher bonuses. The lawsuit alleges this is what makes LuLaRoe a pyramid scheme — an illegal business model that is based on the number of people you recruit, not the amount of product you sell.

However, LuLaRoe claims its bonuses are based on sales volume, not the size of the sales team, which would make its structure legal.

In response to the lawsuit, LuLaRoe shared the following statement with Yahoo yesterday:

We have not been served with the complaint. We believe these allegations are wholly without merit and intend to vigorously defend against them. LuLaRoe will in good faith continue to abide by the terms of the Policies and Procedures — accepted and binding upon every Independent Fashion Retailer executing the LuLaRoe Independent Consultant Application and Agreement — which includes mediation and legal arbitration as the appropriate forums for addressing any disputes about the Retailer cancellation, return and refund process.

This isn’t the first time LuLaRoe has encountered legal trouble. It currently has an F score from the Better Business Bureau and faces other pending lawsuits. One claims the company charges buyers sales tax even if the buyer lives in an area that doesn’t tax clothing. Another claims the clothing is defective.

Despite these troubles, LuLaRoe has grown to 80,000 consultants since it was founded by DeAnne and Mark Stidham in 2012, and many shoppers swear by the quality of the clothes. “I am addicted to LuLaRoe clothes. They are all super soft and easy to wear so I can look presentable and comfortable even when I’m in pain,” one Mighty reader said in an article about legging brands people with chronic illness recommend.

Mark Stidham told Yahoo that 90 percent of their retailers maintain their business today.

“There is no issue with people leaving the business,” Stidham said. “If this is not for you, I don’t need to trick you into spending your money and staying here.”

The Mighty reached out to LuLaRoe and has yet to hear back.