Julietta Bisharyan
The Sacramento Bee
WWR Article Summary (tl;dr) As Julietta Bisharyan reports, “LuLaRoe was founded in 2012 by DeAnne Brady and her husband Mark Stidham. The company is based in Corona, California but has people selling their products across the country. Over 50 lawsuits have been filed against the company since 2016.”
Sacramento
Chris Jacobs is still trying to get rid of her LuLaRoe leggings.
Jacobs, a former seller of LuLaRoe products from Auburn, figured that the reason she had a hard time selling to her client base of mainly friends and family was because of the tacky prints she was being sent. Rather than give up on LuLaRoe, she decided to go to an in-person warehouse sale to pick out the items that she’d think her customers would buy.
She spent $1,500 in that trip but still wasn’t able to sell anything or return any of the unsold inventory. After that, she knew it was time to quit.
“We’re all stuck with all this inventory that’s worth pennies on the dollar,” Jacobs said. The inventory she’d buy would cost anywhere from $600 to $1,000 a pop. Retailers had to buy in increments of 30 items at $10.50 per pair.
They would then try to sell them for about $25 to $30 each.
In 2017, three women from Sacramento County filed a $1 billion class action lawsuit against LuLaRoe, a multilevel marketing company that specializes in women’s clothing and patterned leggings.
LuLaRoe was founded in 2012 by DeAnne Brady and her husband Mark Stidham. The company is based in Corona, California but has people selling their products across the country. Over 50 lawsuits have been filed against the company since 2016. The Sacramento-area plaintiffs filed their lawsuit in October 2017.
An Amazon Studios documentary minieseries , titled “LuLaRich”, was released last year and investigated accusations against LuLaRoe operating a pyramid scheme, bringing more attention to the company’s alleged unethical and unfair practices.
The California lawsuit, which has over 500 plaintiffs now, focuses on LuLaRoe’s violation of the state’s Seller-Assisted Marketing Plan Act, otherwise known as the SAMP Act, which regulates risky opportunity offerings. It also alleges that the company was running an “endless chain scheme” or pyramid scheme. The suit was initially filed with the Sacramento County Superior Court but later moved to Riverside County, where LuLaRoe is based.
The act applies to any and all offers made from California or to California residents, meaning that sellers who lived in another state could still make a claim against LuLaRoe.
“They (the consultants) failed even though they were committed and put in the time and effort. They failed because they were doomed from the start,” the lawsuit states.
LuLaRoe used to call their sellers “consultants” but since the company now employs social retailers rather than direct sellers, they now use the term “retailers,” according to the website of a current retailer.
LuLaRoe responded to the lawsuit when it was filed in 2017 in a statement claiming that the allegations are “baseless, factually inaccurate and misinformed.” The company did not respond to The Bee’s inquiry about the lawsuit’s allegations for this story.
Jacobs, who joined LuLaRoe in March 2017, wasn’t aware of the lawsuit at the time but said she would have joined had she known. She said she never made a profit as a consultant and barely broke even at times. After two years, she left the company.
How LuLaRoe tries to keep complaints out of court
Since multilevel-marketing companies, like LuLaRoe, often include a “mandatory arbitration” provision in their contracts with people like Jacobs, disputes are handled outside the court system by a neutral third party. Retailers may file a civil lawsuit, but they will have to go through the arbitration process before it can be heard by a judge.
In arbitration, both sides must pay for administration costs, which can be expensive. It costs anywhere from $5,000 to $7,000 just to go through mediation before even starting arbitration. Arbitration can add on another $10,000.
Arbitration can also prevent people from having collective claims, meaning each person has to file individually.
One of the attorneys who filed the California suit, Joshua Watson of Sacramento-based Arnold Law Firm, said arbitration has become an increasingly common process for companies. Many lawyers and judges have been skeptical about the process as it takes the case out of civil courts, he added. Even if a person is successful, they might end up spending more on legal fees alone than the money they end up winning.
The American Arbitration Association, however, adopted a policy in 2017 in which it will charge “independent contractors,” such as the LuLaRoe retailers, for arbitration in the same way it charges employees who initiate a complaint against their employer. In other words, when 25 or more contractors sue about the same thing, the association combines those claims and charges each individual $100 to start and $100 to go to an arbitration hearing if the matter does not resolve promptly. The rest of the arbitration costs would be paid by LuLaRoe.
If the retailers end up winning in the early stage of arbitration and undo the LuLaRoe contracts, which Watson alleges violate the SAMP Act, they may get the costs of the litigation fees back and end up back in the Superior Court in a group litigation. Watson said the goal now is to invalidate the contracts and return to court.
Many people give up on seeking legal remedy once they reach the arbitration stage, and Watson believes that’s exactly what LuLaRoe is counting on. The Bee made an effort to speak with former LuLaRoe sellers who are a part of the lawsuit, but the plaintiffs declined to discuss the case as it remains in court.
“Everybody goes to arbitration and then they stop,” Watson said. “We went to arbitration, and we didn’t stop.”
The lawsuit is one of many that the company has been fighting in court over the past few years. Watson hopes that the arbitration process will wrap up so that the court may hear and resolve the case within the next year.
Despite this and the recent exposure brought on by the documentary, LuLaRoe has continued to operate and still reports about 17,000 retailers.
Deanna Vargas, a former consultant from Sacramento, had considered joining the lawsuit at one point but felt like she left the company before things could’ve gotten worse for her.
Since she had joined in 2015, when LuLaRoe was still fairly new, she was able to make some profit and even paid for her wedding with the money she made as a consultant. Once the company began to grow, it was harder to sell inventory as there was an over-saturation of consultants in her area.
She tried to sell the rest of her inventory after quitting but ended up donating most of the clothes. Her in-laws took some of the clothes with them to Mexico to donate to families there.
“I didn’t want to go into debt with that business,” said Vargas.
A win for the leggings sellers
In 2019, Washington State’s Attorney General filed a lawsuit against LuLaRoe and several of its executives, asserting that the company made unfair and deceptive claims regarding the profitability of working as a retailer.
LuLaRoe was resolved to pay $4.75 million in 2021 to about 3,000 consultants based in Washington who were deceived by the business practices.
“LuLaRoe tricked Washingtonians into buying into its pyramid scheme with deceptive claims and false promises,” Attorney General Bob Ferguson said in a statement.
Additionally, LuLaRoe was required to be more transparent with retailers to avoid future deception. For example, the company must now publish an income disclosure statement that accurately details retailer income potential on their website for everyone to see.
LuLaRoe’s founders remained defiant in the aftermath of this legal settlement.
“Given the expenses LuLaRoe incurred in defending this lawsuit, it made sense for LuLaRoe to pay the settlement we agreed upon. Even though we believed we would win the case eventually – whether at trial or on a subsequent appeal – the expense would be enormous and the amount of time senior management would have had to devote to the litigation during the trial would have been a distraction from our business,” Mark Stidham, LuLaRoe’s Chief Executive Officer stated in a news release, regarding the settlement.
Because the lawsuit was filed by Washington State, the office had enough money and resources to succeed.
Despite the many complaints filed with California’s attorney general, the office has never litigated it. Former sellers were therefore left to seek justice on their own.
“That’s the main difference that very few AGs (attorney generals) have had any interest in any of this,” said Becca Peters, an amateur investigator from Washington who has been following and tweeting about the LuLaRoe lawsuits.
California’s failure to hold MLMs accountable
California has consistently been weak-kneed in enforcing laws against multilevel-marketing companies, despite having an anti-pyramid scheme law in place, said Bill Keep, a professor of marketing at the College of New Jersey’s Business School.
In 1986, the nutritional-supplement company Herbalife settled a lawsuit filed by the California Attorney General’s Office. The agreement required that the company could no longer make “false or misleading representations” about how much money distributors could expect to make or false or exaggerated claims about its products.
The company never fully complied and continued to grow, reporting a market capitalization of $359.8 million in 2005.
In 2015, lawyers in the consumer law department of the attorney general’s office suspected Herbalife of violating the 1986 state order. The Federal Trade Commission also proceeded with its own investigation and suggested that there were sufficient grounds for such scrutiny. Nonetheless, California’s then-Attorney General Kamala Harris declined to investigate Herbalife without giving a reason.
“California is not interested, it seems to me, in enforcing its own laws,” Keep said.
LuLaRoe today
Since the numerous lawsuits have been filed against LuLaRoe, the company has made some changes to distance itself from the pyramid scheme narrative.
Start-up costs have been cut by 90%, and the company reorganized its compensation structure. There’s also an annual Income Disclosure Statement on its website. The last report from 2021 states that the average retailer gross profit was $10,073.41 while the median gross profit was $1,444.65.
About 52% of retailers made between $1 to $5,000 while only 6% made over $75,000, according to the report.
LuLaRoe used to also pay retailers for recruiting others into the program, but now retailers only get a cut from the sales made from the people in their team, Watson said.
The company’s online selling platform has also become easier now that it provides stock photos for sellers to use to promote their products rather than having to take photos themselves, Peters noted.
Even with the lawsuits and recent exposure of LuLaRoe’s unethical and unfair practices, Peters believes that people will continue to join the company, whether just as a hobby or as a full-time job.
“Their consultants are their biggest customers at this point,” Peters said.
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