Lawsuits mount against LuLaRoe, maker of colourful women’s leggings

Plaintiffs accuse multilevel marketer of running a pyramid scheme, which LuLaRoe denies

Former LuLaRoe retailer Amy Jo Reece in the basement of her Culpeper, Va. home, where she keeps USD 14000 worth of unsold merchandise

In early 2016, Amy Jo Reece became a retailer for clothing company LuLaRoe, paying USD 6900 for apparel to sell from her home in Culpeper, Va. Two years later, Ms. Reece says she is stuck with USD 14000 worth of LuLaRoe inventory sitting in boxes in her basement.

Ms. Reece was among the tens of thousands of women drawn to LuLaRoe’s message of financial empowerment and community, and loved the brand’s brightly patterned, buttery-soft leggings.

That dream has now soured. Accusations and at least a dozen lawsuits seeking class-action status are piling up against the company. Some allege the California-based apparel maker’s billion-dollar empire is essentially a pyramid scheme, with its founders and top recruiters raking in profits at the expense of the majority of the brand’s sellers.

Other lawsuits say LuLaRoe’s clothing proved defective, and that the company didn’t honor its return policy, leaving people like Ms. Reece—who is a plaintiff in one lawsuit—saddled with unsalable merchandise. Some lawsuits claim the company grew so quickly that retailers began to compete for customers in saturated markets.

LuLaRoe denies the accusations and is fighting the lawsuits. “LuLaRoe exploded in popularity overnight, and like other fast-growing businesses, our success has generated competitive attacks and predatory litigation,” the company said in a statement.

Beyond the legal claims, however, are broader questions about so-called multilevel marketing, in which companies derive revenue from a network of non-salaried salespeople, who make money by selling directly to consumers or, more commonly, through commissions for the work of “down-line” distributors they recruit.

The Federal Trade Commission has warned that some “MLMs”—also known as direct-sales companies—may have unfair and deceptive compensation structures. Consumer watchdogs including Consumer Awareness Institute and Pyramid Scheme Alert describe the businesses as exploitative schemes, in which they say just 1% of participants make money. In 2016, nutritional products company Herbalife Ltd. agreed to pay $200 million to settle with the FTC and restructured its business to avoid being classified as a pyramid scheme.

LuLaRoe said in a statement that it isn’t “negative on the MLM business model,” but said its brand “simply does not align itself with companies whose primary focus is on recruiting, as opposed to focusing on retail sales.” The company also said more than 80% of its 70,000 active retailers “focus exclusively on their own retail business” and don’t recruit other retailers or participate in the company’s bonus plan that rewards retailers for new recruits and a commission on recruits’ sales.

“I often say LuLaRoe works for you, you don’t work for LuLaRoe,” founder DeAnne Stidham said in a November interview with CBS News, adding: “I do not say it’s easy for everyone.”

Many of the company’s retailers are true believers. Amy Jo Reece said she owns 185 pairs of LuLaRoe leggings

Founded in 2012 by Ms. Stidham and her husband, Mark Stidham, LuLaRoe quickly gained a following, particularly among young mothers from suburban and rural areas.

By 2017, according to the lawsuits, upward of 100000 people across the U.S. had signed on as LuLaRoe retailers. New entrants had to initially buy inventory packages beginning at around USD 5000. The company provides suggested retail prices, typically at a mark-up of 40 % to 50 % from wholesale. While retailers can set their own prices, they aren’t allowed to advertise prices below the company’s suggested price.

To remain active, the company says, retailers must sell a minimum of 33 pieces each month. Ms. Reece and other retailers active in online forums said this policy meant they had to buy 33 wholesale pieces from the company each month, which the company denies.

Many of the company’s retailers are true believers. Ms. Reece said she owns 185 pairs of LuLaRoe leggings. Fans have their own code: “Unicorns” describe highly desirable, rare items such as leggings with the “Hipster Lion” print, which sell for more than USD 100 a pair on eBay—far more than the average price of USD 25.

Michala McWhirter, a mother of two, became a LuLaRoe retailer in April 2016 from her Katy, Texas home. At first, she and a friend each put in 40 hours a week, selling items at a mark-up of around 50 %. In 2016, Ms. McWhirter estimates she did around USD 54000 in sales, for a profit of about USD 20000, much of which she used to buy more inventory.

Ms. McWhirter estimated that she received bonuses of between USD 200 and USD 500 a month from LuLaRoe for sales made by her team of recruited retailers. “It really has done wonders for my family,” she said.

Amy Jo Reece said the merchandise in her basement couldn’t be returned to LuLaRoe because it was past the yearlong return date

Last spring, after months of rapid growth in LuLaRoe’s retailer network, complaints began to emerge in online forums and in lawsuits, some of which are consolidated in California federal court. Customers complained that the company’s leggings ripped like “wet toilet paper,” while retailers reported sluggish sales and delayed returns and refunds.

Other lawsuits say plaintiffs were drawn in by promises of flexible, part-time work, only to find that financial success with LuLaRoe required nearly full-time work and constant personal investment.

Nancy Jacoby, a 50-year old LuLaRoe retailer from Tampa, Fla., said the company has experienced “growing pains” and sometimes doesn’t communicate well with retailers, but enjoys the flexibility and challenge of the work. She said she sold well over USD 30000 of LuLaRoe merchandise since joining a year ago. “I know this is a growing business, and it’s going to take time and effort,” she said.

In 2017, LuLaRoe retailers generated more than USD 2.3 billion in retail sales, the company said. While LuLaRoe can’t track individual retailers’ losses and profits through direct sales, it does track pricing and gross margins, which the company says remain strong.

The average annual bonus paid to eligible retailers in 2016 was USD 2118, according to the company’s income disclosure statement. A select few, who represented less than 0.1 % of all retailers, took in average bonuses of USD 1.1 million.

Ms. Reece and her daughters—who introduced her to LuLaRoe and worked alongside her—grew disenchanted early last year, as they struggled to find new customers. Ms. Reece said she resigned from LuLaRoe last summer, but added that because of delays and lack of communication from the company, she hasn’t been able to return her merchandise, much of which is now past the yearlong return date.

Last fall, Ms. Reece joined a lawsuit challenging LuLaRoe’s return policy. She said she spent upward of USD 40000 on apparel and business expenses. In hindsight, she said, “I would not have done it at all.”