OLYMPIA — Attorney General Bob Ferguson today announced a lawsuit against multi-level marketing business LuLaRoe and several of its “home office” executives, alleging that the company’s former bonus structure constituted a pyramid scheme. The lawsuit also asserts that LuLaRoe’s claims regarding sustainability, profitability and inventory refunds are unfair and deceptive.
Ferguson’s lawsuit asserts that LuLaRoe’s bonus structure and misrepresentations violated the Antipyramid Promotional Scheme Act and the state Consumer Protection Act. Ferguson asks the court to require LuLaRoe and its executives to stop its unlawful actions. If the court rules that LuLaRoe violated the law, the Attorney General’s Office will seek the maximum penalties of $2,000 per violation, as well as costs, fees and other relief. Ferguson also will seek restitution for affected Washington consumers, but the total amount of restitution the office will seek is still undetermined.
“LuLaRoe tricked consumers into buying into its pyramid scheme with deceptive claims of high profits and refunds for unsold merchandise,” said Ferguson. “Instead, many Washingtonians lost money and were left with piles of unsold merchandise and broken promises from LuLaRoe. It’s time to hold LuLaRoe accountable for its deception.”
LuLaRoe is a California-based multi-level marketing business that sells leggings and other apparel. The company is made up of individual retailers who sell the company’s clothing, referred to as “Independent Fashion Consultants.” New consultants must be recruited and sponsored by existing LuLaRoe retailers.
The “onboarding” fee to become a LuLaRoe consultant ranges from $2,000 to $9,000, depending on the amount and type of inventory included. After their onboarding purchase, consultants cannot choose specific sizes or prints of the inventory they buy. Rather, LuLaRoe sells its inventory in 33-piece “pods” that include a random assortment of clothing.
More than 3,500 Washingtonians have become Independent Fashion Consultants since January 2014. Less than 2,000 of those consultants are still active.
LuLaRoe’s pyramid scheme
Multi-level marketing businesses often provide incentives for existing retailers to recruit additional retailers. A direct selling business becomes a pyramid scheme when its primary business opportunity is from recruiting rather from actual retail sales to consumers. Pyramid schemes often charge steep startup costs and/or require minimum purchases on a regular basis, as well.
From 2014 to mid-2017, consultants received monthly bonuses based on how much inventory they and their recruits bought. The more consultants they recruited who purchased inventory, the higher their bonus checks would be. Top consultants reported receiving monthly bonus checks that were seven to twelve times higher than their merchandise sales. This structure incentivized consultants to recruit more retailers to make inventory purchases rather than sell clothing to consumers for personal use.
In a complaint to the Attorney General’s Office, one Washington woman wrote, “[I] was told I could make 12,000 [dollars] a month by a Danielle who is my sponsor and never helped me.” The woman’s parents had taken out a $13,000 loan to help her start her LuLaRoe business.
LuLaRoe changed this bonus structure in July 2017 to provide bonuses based solely on sales to consumers. In a LuLaRoe webinar, a LuLaRoe executive explained the change came about because of the “need to get away from being a pyramid scheme.”
Ferguson’s lawsuit asserts that LuLaRoe’s bonus structure before July 2017 constituted a pyramid scheme, violating the state Antipyramid Promotional Scheme law. The antipyramid law, sponsored by Sen. Karen Keiser, D-Des Moines, passed the state Legislature in 2006.
LuLaRoe’s deceptive claims
The company made several deceptive claims regarding its business model’s sustainability and profitability to encourage more consumers to become consultants. For example, the company’s annual disclosure statements only include “active” consultants who have met minimum purchase thresholds, omitting consultants who have done worse.
LuLaRoe advertised that consultants could make “full-time pay” for “part-time work.” At recruitment events and calls, LuLaRoe executives claimed consultants would make “60 to 75 thousand dollars a year working 20 hours a week.” They also claimed, “This is a business that is going to bring in a lot of money for you, a lot of money, I mean a lot,” and often cited consultants who made $10,000 to $500,000 a month.
In reality, the pyramid scheme structure ensured that the primary business opportunity from joining LuLaRoe was through recruiting, not retail sales. A majority of Washington consultants reported less than $10,000 profits in total from their LuLaRoe business, and nearly one-third of consultants reported losses.
LuLaRoe required minimum inventory purchases — forcing consultants to buy large amounts of clothing that they could not sell within a reasonable time frame, if at all. The company taught consultants to “buy more, sell more,” convincing many consultants that the key to profitability was to put all of their revenue toward purchasing more inventory.
The company also packaged highly sought-after, limited-edition styles in pods, requiring consultants to buy large quantities of potentially unprofitable clothing to get one profitable style. Known as inventory loading, these practices ensured that the company and its top consultants continued to profit from sales, even if most consultants were struggling to sell merchandise to consumers.
Ferguson asserts that LuLaRoe’s profitability claims and inventory loading practices are unfair and deceptive, violating the state Consumer Protection Act.
LuLaRoe’s repurchase policy allowed consultants who wished to stop selling its merchandise to receive a 90 percent refund for unsold inventory purchased within the last year. In April 2017, LuLaRoe increased its refund policy to 100 percent plus shipping and waived the requirement that clothing was purchased within a specific time frame. The company represented that the new policy did “not have an expiration date.” Five months later, the company rescinded the 100 percent refund policy without notice, reverting to the 90 percent policy.
One Washington woman returned her unsold clothing under the 100 percent policy, including clothing purchased more than a year prior. While her shipment was en route to LuLaRoe, the company reverted to its prior repurchase policy. She wrote: “My boxes are on a UPS truck somewhere in the western US. I cannot get them back to repack the items. Their policy states if you don't follow the instructions, they KEEP the clothing and donate it. I have $16,740 in inventory in a truck on the way to their warehouse."
Despite LuLaRoe’s claims, many consultants did not receive the promised 90 or 100 percent, and some received no refund at all. The process was so complex, and the refund amounts were so arbitrary and unpredictable that consultants began referring to refund calculations as “LuLaMath.” Many consultants who have returned items have been waiting on their refunds for months.
One Washingtonian returned almost 300 items worth more than $3,500 to LuLaRoe in June 2018, but had not received a refund more than six months later. Another consultant was told that she would not receive a refund at all because she had swapped her merchandise with another consultant through a feature LuLaRoe made available on its app.
According to Ferguson’s lawsuit, LuLaRoe’s misrepresentation of and failure to honor its refund policies are deceptive, in violation of the state Consumer Protection Act.
Assistant Attorney General Tiffany Lee and Investigator Victoria Suner of the Consumer Protection Unit are leads in the case.
Consumers who have had a difficult time returning unsold inventory to LuLaRoe for a refund or have had other issues with the company can contact the Attorney General’s Office Consumer Resource Center at 1-800-551-4636 or file a complaint online.