Lularoe facing class action lawsuit over pyramid scheme allegations

By

Cassidy Mantor

Published
Oct 25, 2017

Direct sales company Lularoe is facing a class action brought by former sales representatives in California who are suing the company for antitrust violations under RICO, the Racketeer Influenced and Corrupt Organizations Act.

The 27 page complaint was filed in California federal court on Monday by a group of former sales reps. The premise is Lularoe floods the market with too many sales reps and unpopular patterns to sell. Sales reps are paid and receive bonuses based on the orders placed by additional reps they have recruited for their own selling teams.

The complaint specifically alleges six counts of misconduct which include unfair business practices, misleading advertising and breach of contract.

Lularoe has operated for the past several years amidst rumors of the company being a pyramid scheme. It has found itself facing controversy for allegedly saturating the market, as it has seen quick growth over the past two years and new reps therefore must work with a limited market of customers who are not already buying from an existing rep. The company also received negative attention when its leggings were revealed to be poor quality with some orders arriving ripped from the factory.

When sales reps complained about their inability to sell undesirable product, CEO Mark Stidham said in a webinar, "You're stale. Your customers are stale. Get out and find new customers. If you bring a new customer in, then your inventory isn't stale. The problem is, you try to sell to the same group of people day after day after day."

The event triggering the lawsuit calling Lularoe a pyramid scheme was when the company changed its inventory buyback program in September. Reps, called "consultants" were lured into the company with the low risk promise that if they did not sell their product they would receive a full refund. In September, Lularoe changed the refund from 100% to 90%.

While some sales reps have reported success, many have gone into massive debt trying to keep up the business model of the alleged pyramid scheme. As a direct sales company, reps are referred by other existing reps to build a network of individual sellers direct to consumer.

Although there may have been a market for the direct sales model, it has become over saturated with reps trying to make their goals. In 2015 Lularoe had 2,000 sales reps. It reports it now has 80,000 reps.

After an initial investment of $5,000 or more, reps are tasked with selling inventory they do not get to choose. As reps recruit more sellers on their "team" and sell more product, they are promoted and receive larger bonuses giving rise to the pyramid model.

Lularoe has not yet responded to the lawsuit but its defense will most likely be predictable. The company has been informally accused of being a pyramid scheme before, and has pointed out that its compensation is based on actual sales, not number of sales people recruited.

While, on the face of things, that could be a legitimate defense, this statement ignores the underlying expectation that reps will recruit more sales people on their teams. Bonuses are available for the number of reps recruited and actual sales grow when more reps are added.

Additionally, the change to the buyback policy weighs against Lularoe. The company still capitalizes on adding sales reps even if they do not stay with the brand.