Multilevel marketing clothing company LuLaRoe is facing another lawsuit.
This time, it was filed by former LuLaRoe retailers Aki Berry, Cheryl Hayton and Tiffany Scheffer. The three signed up to sell the company’s leggings and other clothing items, but they now allege they and tens of thousands of others were tricked by the billion-dollar company.
They say in a class-action lawsuit filed Oct. 23 in California that LuLaRoe is a pyramid scheme and accuse company leaders of racketeering, false advertising, and using unfair and deceptive business practices.
A LuLaRoe spokesperson denied the allegations in an email to The Penny Hoarder.
“We take all litigation — regardless of its lack of merit — seriously,” the representative wrote. “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.”
According to the lawsuit, each woman paid between $5,500 and $6,000 to start the business and was encouraged to sign up as many new retailers as possible. Berry brought 12 new retailers into the company, and Scheffer recruited Hayton, the suit says, while neither Scheffer nor Hayton recruited anyone else.
All three women said they were promised they would break even within a few months.
Berry, Hayton and Scheffer all claim in the lawsuit they had no control over which patterns they received when they ordered new inventory and were paid bonuses based on how much inventory they purchased instead of how much they sold.
The lawsuit also said when retailers could not afford to buy new inventory, they were encouraged to borrow money, take out loans, pay with credit cards and sell their breast milk.
The women claim in the lawsuit that even when they were able to successfully sell some clothing, they were often encouraged to spend every dollar they made on more inventory.
The women also allege in the lawsuit that they were often presented with challenges that rewarded consultants who purchased the most inventory with prizes to further incentivize keeping huge amounts of inventory on hand, despite a lack of sales and inventory piling up in their garages, the lawsuit said.
When Is an MLM Really a Pyramid Scheme?
The lawsuit says even those who recruited others to join LuLaRoe only collected commission each month if they and their recruits purchased the amount of inventory the company required.
That, according to the lawsuit, is why the women believe LuLaRoe is an illegal pyramid scheme rather than a legal multilevel marketing company.
A pyramid scheme is a business model in which only the few at the top of the pyramid are able to make money. Those below them, who are unable to find new recruits, will never reach the income promised. Further, that fact is usually not apparent during recruitment.
To be classified as a pyramid scheme, the lawsuit said, LuLaRoe and its retailers must have done several things:
- Retailers must have paid LuLaRoe for the right to sell its products.
- Retailers must also have paid for the right to receive rewards for recruiting more people into the company. These rewards must be unrelated to the sale of the products to customers who would wear them.
Most retailers who do those things are generally be “doomed to failure” even if they are able to make some sales, the lawsuit says.
It’s not clear if this is how LuLaRoe operates, but the lawsuit says other businesses that practice this way are inherently committing fraud.
The lawsuit says Berry, Hayton and Scheffer are just three of tens of thousands of people who became LuLaRoe retailers since 2013 who “were never able to realize any actual profit and, as a result, they failed. They failed even though they were committed and put in the time and effort. They failed because they were doomed from the start.”
LuLaRoe: Pyramid Scheme or Target of ‘Predatory Litigation’?
The company said its bonus plan only rewards sales to consumers, despite what the lawsuit claims. It said its fast and overwhelming success, not its business practices, are the reason for the lawsuit.
“LuLaRoe has grown exponentially over the last four years,” the company said in a statement. “Our success has made us the target of orchestrated competitive attacks and predatory litigation.”
The suit seeks damages of more than $5 million. It’s too soon to say if a judge will agree that LuLaRoe is a pyramid scheme or if anyone will receive money from lawsuit.
Desiree Stennett (@desi_stennett) is a staff writer at The Penny Hoarder.
This was originally published on The Penny Hoarder, one of the largest personal finance websites. We help millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. In 2016, Inc. 500 ranked The Penny Hoarder as the No. 1 fastest-growing private media company in the U.S.
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