New LuLaRoe lawsuit, led by lawyer who sued Trump University, calls leggings maker a 'pyramid scheme'

After a year of accusations of fraud, misleading business practices, and poor-quality clothing, the direct sales apparel company LuLaRoe is now, for the first time, being called a “pyramid scheme,” in a new class action lawsuit.

The suit, filed on Oct. 13, names four plaintiffs across the country, and seeks to represent a class of “thousands of consultants,” yet undetermined, who demand to take LuLaRoe to trial on six counts of misconduct under California law — including unlawful, fraudulent, and unfair business practices, advertising, and breach of contract.

The lawsuit’s primary accusation is that LuLaRoe rescinded its buyback policy after it led consultants— including the named plaintiffs: Stella Lemberg, Jeni Laurence, Amandra Bluder, and Carissa Stuckart— to believe they could continue to buy clothing risk-free, given the 100 percent buyback guarantee.

For the uninitiated, here’s how the company works: LuLaRoe, known for its maxi skirts and zany print leggings that cost $25 to $75, doesn’t have any employee-run stores. Instead, individuals sign up to sell LuLaRoe clothes as “independent retailers,” after they’ve been referred to the company by someone who’s already involved. Once approved, the independent retailer must buy a minimum of $5,000 worth of inventory to start selling LuLaRoe clothes to whomever they like for a price determined by LuLaRoe corporate.

In a statement to Yahoo Lifestyle about the new class action filing, LuLaRoe says:

“We have not been served with the complaint. We believe these allegations are wholly without merit and intend to vigorously defend against them. LuLaRoe will in good faith continue to abide by the terms of the Policies and Procedures — accepted and binding upon every Independent Fashion Retailer executing the LuLaRoe Independent Consultant Application and Agreement — which includes mediation and legal arbitration as the appropriate forums for addressing any disputes about the Retailer cancellation, return and refund process.”

LuLaRoe is no stranger to legal trouble and bad press, though the most recent filing appears to make the most damning claims. A change to the company’s “100 percent buyback” guarantee, which promised consultants they would be fully refunded for unwanted inventory should they choose to exit the company, was abruptly made in September, turning it into a “bait-and-switch” refund policy that cheats consultants out of thousands of dollars each, according to the lawsuit complaint.

“We’re focusing on the misrepresentation and breach of contract to the consultants,” Amber Eck, the lawyer who filed the class action suit with co-counsel Kelly Purcaro, explains to Yahoo Lifestyle. Most recently, Eck was co-lead counsel in the class action case against Donald Trump and Trump University, which settled for $25 million. “This case is reminiscent of that. [The Trump class action] wasn’t multi-level marketing, but it was an upsell scheme,” said Eck. “This case is reminiscent of that.”

LuLaRoe is now facing several class action lawsuits, all filed in the past year. The first alleged that inventory was defective; others suits claim that the company’s sales app charged retailers an erroneous tax. In just over a year, plaintiffs filed 17 civil suits against LuLaRoe. In addition, LuLaRoe has an “F” rating from the Better Business Bureau, and the Federal Trade Commission has recorded more than 300 complaints against the company since May, according to documents Yahoo Lifestyle obtained. The class action suit filed last week is only the latest in a long list of the company’s alleged infractions.

LuLaRoe had a quaint beginning. In 2012, founder DeAnne Stidham’s daughter — pregnant at the time — posted a photo on Instagram of a skirt that her mother sewed for her. The “likes” poured in — along with requests for skirts, which Stidham fulfilled. Soon Stidham was fielding so many requests that she outsourced the production to local seamstresses and recruited others to help her sell. When production reached a certain level, her husband Mark joined the company as its chief executive. Today, LuLaRoe has 325,000 Instagram followers, and the company name has been used as a hashtag more than 2.6 million times. It boasts 80,000 sales reps — independent retailers — who sell LuLaRoe apparel on their own.

In an interview with Yahoo Lifestyle in May, Mark and DeAnnne Stidham said that they take LuLaRoe criticism “very personally.” In addition to the daily tasks of running the company, the couple exhaustively tours the country promoting LuLaRoe to its consultant network. They also take a very active role in the lives of LuLaRoe retailers, participating in “incentive cruises” with them and even taking a trip to Hawaii, where they met a team of LuLaRoe retailers.

And while the legal woes mount, the comments on DeAnne’s Instagram page show no hint of that — her posts are peppered with retailers thanking DeAnne and expressing a desire to meet her in person. Retailers, many of whom have been with LuLaRoe since its earliest days, often refer to DeAnne and Mark as pseudo-parental figures.

Depending on your level of cynicism, you may find that endearing. Or you may think it’s cult-like. However you see it doesn’t change the fact that LuLaRoe is staving off new legal issues regularly, even as new consultants sign on with the company.

$1.8 billion in sales and growing

When the retail apocalypse began in 2016, apparel companies that spent years cultivating loyal customers began to sink. Some, like J. Crew, found themselves lost in a sea of sameness, their core customers having abandoned ship. Others found themselves not being able to keep up with the rise of online, instant everything.

But LuLaRoe thrived, in large part because of the community it created with consumers and its consultants. Customers flock to events at LuLaRoe pop-up shops, hosted by local women who invite their friends and neighbors to shop.

The rise of LuLaRoe happened to coincide with momentum in the direct-sales industry itself. According to its trade group, the Direct Selling Association (DSA), more than 20 million people were involved in the business in the U.S. in 2015, with estimated retail sales reaching $36.12 billion — a 4.8 percent increase over 2014. Some direct sales businesses are household names: Herbalife, Mary Kay, and Avon, each of which belongs to the DSA.

LuLaRoe is not one of DSA’s 170 members, and has no plans to join. Stidham says that’s because it’s “not aligned with [direct sales organizations] generally.”

How it works: the original social network

LuLaRoe retailers, many of whom are women, are recruited to sell LuLaRoe merchandise by existing retailers. More than 80,000 people now sell LuLaRoe in the U.S. By comparison, there were more than 4.5 million retail salespeople as of May 2016, according to the Bureau of Labor Statistics.

Independent retailers for LuLaRoe have four possible levels they can rise up to: consultant, sponsor, trainer, coach, and mentor. It’s that structure that leads the class action lawsuit to allege the company is a pyramid scheme. “If a consultant brings in additional consultants, she is elevated to ‘sponsor status,’ but must maintain additional inventory requirements monthly,” explains the new class action complaint. “If a consultant brings in 10 or more additional consultants, she is elevated to ‘trainer’ status” and so on.

But the company pays its bonuses based on sales volume, not the size of a sales team itself, which LuLaRoe says proves it operates legitimately and legally. Higher bonuses go to those in higher-ranking levels (meaning coaches and mentors).

The Federal Trade Commission declined to comment for this story, but its website reads: “If the money you make is based on your sales to the public, it may be a legitimate multilevel marketing plan. If the money you make is based on the number of people you recruit and your sales to them, it’s probably not. It could be a pyramid scheme. Pyramid schemes are illegal, and the vast majority of participants lose money.”

A hard-charging ethos from LuLaRoe leadership

Mark Stidham outraged many LuLaRoe retailers when, during a now-infamous webinar, he told retailers that were concerned about how defective clothes would affect their sales, “No, 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.”

When asked about these comments, Mark defends himself, saying people who were upset over his remarks just “don’t understand” them.

“It may sound harsh when I challenge people, but it doesn’t come from a harsh place,” he says. “It comes from my belief in their ability that they will break through their excuses, if they’re creative, to sell the product.”

For some consultants, like Meagan Parker, Mark’s tough love has been effective: Parker, who joined LuLaRoe three years ago — she was the 93rd retailer to join — has doubled down on her LuLaRoe business and recently purchased her own van-turned-LuLaRoe pop-up shop.

Parker says she was the first person east of Utah to sign on to sell LuLaRoe, effectively making her a settler in uncharted territory. At the time, her husband worked as a regional manager for Petco, but he recently quit his job to join his wife’s LuLaRoe venture full-time.

Parker declines to disclose her income, but says “profit and income is based on you. When you work your business, that’s the cool thing about LuLaRoe … the harder you work, just like with anything, the more success you’ll have.”

Consultants Yahoo Lifestyle spoke with say that Parker’s success isn’t necessarily proof of the effectiveness of Mark’s hard-charging mantra as much as it is because she was early to the game. Now that many parts of the U.S. are saturated with sellers, some LuLaRoe consultants complain on forums that it’s too hard to succeed.

Parker now has more than 16,000 retailers operating under her, meaning she earns annual bonuses based on how many sales the people who she has brought on (and subsequently, the people they recruited) execute. But she says her “success isn’t dictated on team growth,” and that LuLaRoe isn’t a multilevel marketing company because its growth is facilitated through product sales, not recruitment.

Pep rallies and cruises

Here’s a sense of just how deeply attached LuLaRoe sellers are to the LuLaRoe community: Parker hosts regular Monday morning webinars; she writes a weekly LuLaRoe blog post, she hosts a LuLaRoe book club and she hosts “Sunday suppers,” where she and her husband cook for LuLaRoe peers.

There are LuLaRoe cruises, open to retailers and their spouses. There are “LuLaBros,” men who are brand devotees because of their LuLaRoe business or their partner’s.

LuLaRoe retailers wear matching triangle-shaped necklaces (or pyramid-shaped, depending on whom you ask), a shape repeated in LuLaRoe’s logo, and, some speculate, a reference to Mark and DeAnne’s Mormon faith. (They deny it’s a religious reference, noting in a statement: “No. LuLaRoe’s logo design is based on principles of color, geometry and style, and the design of the necklaces aligns with the shapes in the logo.”)

Indeed, the promise of a built-in community and a commitment to women’s empowerment attracts many consultants to the company. “LuLaRoe holds itself out to be champions of women with children, seeking financial freedom by working from home,” the Oct. 13 class action lawsuit says.

But to the more than half a dozen LuLaRoe consultants Yahoo Lifestyle spoke with, joining LuLaRoe means ingratiating yourself with a community where mean girl-style groupthink and potentially overwhelming financial risk may rule.

The risks of rushing into LuLaRoe

Amanda Goldfarb is a former LuLaRoe consultant who left the company in July after only a few months selling the apparel. A new mother, Goldfarb describes how she was lured in by the company’s promise of empowerment and financial freedom.

After an initial $6,700 investment, Goldfarb and her husband were selling $20,000 worth of inventory a month, and she recruited 16 women to work under her. Despite the apparent success, Goldfarb says the “horrible bullying” she experienced left her feeling “gaslighted.”

“The woman in my upline who made my life miserable — she’s a number two seller in the company,” Goldfarb says. “Anytime someone had a question on the team page or had a genuine concern, she was so rude and aggressive. It got to a point where everything she said was really negative and nasty. It would hurt people’s feelings.”

Goldfarb then describes trying desperately to find a new team to join, waiting hours on hold and talking through her tears with LuLaRoe’s home office only to be told repeatedly that there was nothing the company could do to help.

“They preach these high standards about morals and empowering each other, but they let one of their top sellers — which isn’t a coincidence — they let her tear multiple people down. And she knows she won’t be touched because she makes them so much money.”

Elena P., another former consultant, confirmed LuLaRoe’s “culture of bullying,” but says that she decided to exit the company after an abrupt change to the terms of the company’s electronic sales system — which she says transferred an unfair amount of liability and responsibility to consultants —confirmed in her mind that the company’s operations were “shady.”

Elena says she felt more comfortable resigning from LuLaRoe, despite having thousands of dollars in unsold inventory, because of the 100 percent buyback policy, a claim that the Oct. 13 class action filing also says is true of other consultants.

LuLaRoe processed Elena’s resignation in July, before the company reinstated what it says was its original, 90 percent buyback policy. (LuLaRoe says the 100 percent buyback policy was a temporary waiver, only instituted from April to September 2017, but a document cited in the Oct. 13 filing says, “this policy does not have an expiration date, nor does it have a required time frame in which the product should have been purchased in.”)

She says she’d expected $5,500 back from her returns made to the company, based on the 100 percent buyback. After following LuLaRoe-outlined procedures for receiving refunds, Elena says she has still not been repaid.

But the overwhelming sense of community was enough to attract prospective consultants to sign on to the company, despite growing concerns about everything from defective inventory to buggy sales systems.

Julia (not her real name), a mother of two, became a LuLaRoe seller in spring 2016. “I got hooked,” she says. “I got caught up in the limited prints, and if you find something, you better buy it right away because you never know if you’ll find it in your size again.” She stayed up late, nursing her newborn in one arm and scrolling through LuLaRoe sales online with the other hand.

If that sounds excessive, Dr. Art Markman, a University of Texas Austin psychology professor, says it’s common for people like Julia to join a direct sales business when they’re searching for a community.

“One aspect of multilevel marketing companies is that they try to capture people’s aspirations. You have people who would like to be successful — particularly financially successful — and don’t see another route to that,” Markman says. “They tend to capture people who feel often like they don’t have lot of power in their environment, which is why a number multilevel marketing companies focus on women and minority groups. They harness the social element of it.”

Before Julia joined LuLaRoe, she had grueling night-shift hours, which stole time away time from her two young children. LuLaRoe seemed like a way out. A friend who was selling for LuLaRoe encouraged her. “She said she made $10,000 in sales in one month,” Julia recalls. “She kind of led me to believe that this was profit.”

Julia’s initial inventory buy-in was $8,000 (packages start at approximately $5,000) and she invested another $3,000 in supplies for her pop-ups, such as hangers and racks. She spoke to her sponsor, reached out to consultants she found on Facebook, and talked to fellow LuLaRoe sellers at a nearby church.

“There were all these success stories. … Everyone was saying how great and wonderful it was,” she says. “There was no negativity, no negative feedback. It was all positive.”

Tough love or debt trap?

It didn’t take long for Julia’s LuLaRoe business to spiral out of control. She had invested $11,000, and then couldn’t move all the inventory.

She attended a LuLaRoe convention (not free), thinking she’d learn how to be a more effective saleswoman. Instead, it “was a giant pep rally,” leaving Julia disappointed and without new information or tips on how to sell her inventory.

Critics in the closed “LuLaRoe Defective/Ripped/Torn Leggings and Clothes” Facebook group — the most populated group focused on LuLaRoe, with more than 45,000 members — echo the claims made in the Oct. 13 class action filing: that LuLaRoe touts itself as a women’s empowerment platform, freeing working moms from the merciless toils of corporate employment in favor of being your own boss. But the critics say the sacrifices constrict more than they liberate.

By the one-year mark, Julia says, she was in debt to the tune of nearly $30,000.

“Consultants were also encouraged to max-out their credit cards with inventory purchases, all of which would be refunded at 100 percent, plus free shipping, should the consultants decide to stop selling for LuLaRoe,” the Oct. 13 class action filing alleges.

“The consultants we have spoken to, on average, have $10,000 to $20,000 in inventory they are seeking to have refunded, but we don’t currently know the total amount of damages, which will be further ascertained through discovery,” says the class action litigator Eck.

Dozens of LuLaRoe consultants with LLCs filed for bankruptcy in the last year. And while that might seem like a small portion of the thousands of nationwide LuLaRoe consultants, those are just the ones that appear in the court records because they include LuLaRoe in the name, and only reveal the individuals who filed an LLC entity to protect their personal assets from bankruptcy should they go into debt selling LuLaRoe merchandise.

If those numbers still seem small, consider this, from a 2014 Al Jazeera report: “Among the victims of the 10 most common consumer frauds, those defrauded by pyramid schemes are by far the least likely to file a complaint, according to a 2004 Federal Trade Commission report.”

And the company’s publicly available income disclosure statement warns:

“Figures are not guarantees or projections of your actual earnings or profits. They do not include expenses incurred by Independent Retailers in operating or promoting their independent businesses. LuLaRoe makes no guarantee of financial success. … Your success will depend on whether you possess these qualities and, if so, how well you exercise these qualities.”

Trying to get out of LuLaRoe

Trying to leave LuLaRoe can be even harder than swallowing sunk costs. There are logistical issues, such as shipping back excess inventory and waiting months for refunds to arrive, assuming the changes to LuLaRoe’s buyback policy — which used to guarantee 100 percent of inventory in acceptable condition be refunded after return, but now offers up to 90 percent with numerous stipulations — don’t retroactively leave you stuck with hundreds of LuLaRoe items and no way to return them. (Once your exit from the company is processed, you no longer have access to internal resources or documents, the new lawsuit alleges.)

As an alternative, retailers looking to leave host going out of business sales — or GOOBS, as they’re frequently called on social media — pricing their inventory far below suggested retail prices to cut their losses.

But LuLaRoe prohibits its retailers from hosting such sales. When asked about the no-GOOBS policy, LuLaRoe said, “We encourage Independent Fashion Retailers who are going out of business to return their inventory to LuLaRoe.” LuLaRoe also asks its retailers to agree to a non-disparagement clause.

“They use bullying and scare tactics if you’re trying to get out,” Julia said. “It’s been very stressful trying to get out.”

As with the LuLaRoe Defective/Ripped/Torn Leggings and Clothes Facebook group, consultants with whom Yahoo Lifstyle spoke say there are other closed Facebook forums that operate as pseudo-support groups and safe havens for consultants looking to sell their merchandise quickly, and where they share stories about working as a LuLaRoe retailer.

The “Defective/Ripped/Torn Leggings and Clothes” Facebook group lists rules that include statements like, “Anyone caught trying to get a consultant in this group in trouble with compliance, their upline, whatever, will be banned from the group.” Yahoo Lifestyle confirmed with a LuLaRoe spokesperson that among the tens of thousands of members are LuLaRoe corporate employees who work as moles to monitor which consultants are breaking the rules.

Another closed Facebook group with nearly 20,000 members, called “Leave the Woe,” is focused on helping struggling, independent LuLaRoe retailers conduct GOOBS by connecting buyers with the LuLaRoe clothing they’re looking for.

Christina Hinks is a former LuLaRoe consultant who frequently writes about the company on her blog, Mommy Gyver. “If I’m offline for a period of time, not posting, people think LuLaRoe’s sent people out to kill me,” Hicks said to Yahoo Lifestyle in a May interview. She’s joking, but says LuLaRoe has sent her “veiled threats” of a legal nature to get her to stop posting on her blog. In September, LuLaRoe filed a petition for discovery against Hicks to compel her to reveal the sources who she cites in her own blog posts criticizing the company.

When asked whether it’s tough to leave LuLaRoe, Mark, during his interview with Yahoo Lifestyle in the spring — before the buyback policy changed — defended the company. “One of my absolute core philosophies is if we take your money, we owe you value.”

Detractors call LuLaRoe a pyramid scheme. They call the company evil, and they blame Mark and DeAnne. And yet, LuLaRoe says 90 percent of its retailers maintain their business today.

“There is no issue with people leaving the business,” Mark says. “If this is not for you, I don’t need to trick you into spending your money and staying here.”

As for Julia, she’s still trying to claw her way out. Somewhere along the way, her sponsor — once an enthusiastic LuLaRoe flag-waver — also left.

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Alexandra Mondalek is a writer for Yahoo Style + Beauty. Follow her on Twitter @amondalek.