Two class actions target the clothier’s sales structure, guarantees

Power to the Pencil Skirt

LuLaRoe markets itself as a movement, not merely a clothing line. The manufacturer of boldly colored, patterned skirts and dresses centers its business on its affiliate sales program: Individuals throughout the country – LuLaRoe Fashion Retailers – are the only channel for LuLaRoe products. Fashion Retailers buy chunks of inventory and then peddle the LuLaRoe line through “pop-ups” – in-home boutiques – where the Retailer invites friends and acquaintances to scoop up clothes. The line is also sold via online storefronts organized by the Retailers.

The pitch is a straightforward blend of entrepreneurial independence and empowerment. “Becoming a LuLaRoe Fashion Retailer can provide you opportunity to have the means, the time, and the flexibility to pursue your passions and to more fully enjoy the company of those you love,” maintains the LuLaRoe site.

Forever-ever?

But October 2017 was a dark month for the famously sunny clothier.

On Oct. 13, LuLaRoe was hit with a class action lawsuit originated by four plaintiffs, all Fashion Retailers for the brand. The four women claimed that one of the key platforms of the LuLaRoe affiliate structure – the ability to request a 100 percent refund of the wholesale cost of their inventory – had been pulled out from under them.

In the complaint, the plaintiffs describe LuLaRoe’s sales structure, which they maintain requires Retailers to purchase a typical presale inventory of $5,000 to $8,000. They also describe a tiered sales hierarchy, with Retailers encouraged to bring in new recruits to the enterprise. Retailers who attract new Retailers earn higher compensation and bonuses, but are required to maintain even higher levels of inventory.

The plaintiffs allege that LuLaRoe drew in a large number of Retailers on the strength of the company’s 100 percent buyback policy. The policy, initiated in April 2017, was attractive in a situation that was dependent on significant and expanding investment in inventory. Effectively, the policy guaranteed that Retailers could walk away without a loss of their investment should they desire to sever ties with the company. “[Retailers] and the public were assured through a variety of written and oral communications that this policy was never going to expire,” the plaintiffs claim.

Hemmed In

And then, the plaintiffs allege, in September 2017 LuLaRoe altered the buyback policy. Conditions were applied to the buybacks, including a one-year deadline for returns from the date of the original inventory purchase, and a 10 percent markdown of the product’s buyback value, essentially a restocking fee. Retailers would even have to pay shipping, which they had not done before. All these changes were effective retroactively for previous purchases.

This policy change was the center of the suit, which seeks redress for untrue or misleading advertising, and unlawful, fraudulent and unfair business acts and practices in violation of California’s Business and Professions Code; unjust enrichment; and breach of contract, among other charges.

This policy change was the center of the suit, which seeks redress for untrue or misleading advertising, and unlawful, fraudulent and unfair business acts and practices in violation of California’s Business and Professions Code; unjust enrichment; and breach of contract, among other charges.

If the first class action were not enough, a second arrived only 10 days later.

Three plaintiffs, also LuLaRoe Retailers, sued the company under California’s Endless Chain Scheme Law, the Racketeer Influenced and Corrupt Organizations Act, California’s Unfair Competition Law and the state’s Business and Professions Code.

This set of plaintiffs attacked the sales structure itself, claiming that LuLaRoe conned prospective Retailers into joining the sales program by promising “financial freedom,” “part-time work for full-time pay” and rewards including “large bonus checks and other lavish material possessions.”

But the plaintiffs maintained that the sales structure was nothing more than a scheme by which Retailers at various levels of the sales hierarchy were encouraged to bring in new Retailers who would need to purchase new inventory from the company. Actual retail sales were of secondary or no importance to LuLaRoe at all, they claimed, rendering the entire enterprise an enormous pyramid or endless chain scheme.

Among the charges brought by the plaintiffs is a false advertising charge under the California Business and Professions Code for misrepresenting the nature of the alleged pyramid scheme.

In response to one report on the lawsuits, LuLaRoe stated that “our success has made us the target of orchestrated competitive attacks and predatory litigation … We have not been served with the recent complaints, but from what we have seen in media reports, the allegations are baseless, factually inaccurate, and misinformed. We will vigorously defend against them and are confident we will prevail.”

The Takeaway

Multilevel marketing can be structured legally, but if care is not taken in developing the program and its requirements, tiered sales programs that reward recruitment risk crossing the line and becoming illegal pyramid schemes. Changing material terms of sale can also be problematic if applied retrospectively, and even prospective changes may present problems, depending upon what prior assurances had been made.