Washington AG sues LuLaRoe, calls it a ‘pyramid scheme’

Washington AG sues LuLaRoe, calls it a ‘pyramid scheme’

Washington Attorney General Bob Ferguson is suing LuLaRoe, saying the women’s clothing company was engaged in practices that constituted a pyramid scheme.

The lawsuit also says LuLaRoe’s claims regarding sustainability, profitability and inventory refunds are unfair and deceptive.

Ferguson announced the lawsuit Friday, saying that from 2014 to mid-2017, the multi-level marketing business’s consultants received monthly bonuses based on how much inventory they and their recruits bought.

“The more consultants they recruited who purchased inventory, the higher their bonus checks would be,” said Ferguson.

A direct selling business becomes a pyramid scheme when its primary business opportunity is from recruiting rather than from actual retail sales to consumers. These schemes often charge steep startup costs or require minimum purchases on a regular basis.

The “onboarding” fee to become a LuLaRoe consultant ranges from $2,000 to $9,000, depending on the amount and type of inventory included. After their onboarding purchase, consultants cannot choose specific sizes or prints of the inventory they buy. Rather, LuLaRoe sells its inventory in 33-piece “pods” that include a random assortment of clothing.

In a complaint to the Attorney General’s Office, one Washington woman wrote, “[I] was told I could make 12,000 [dollars] a month by a Danielle who is my sponsor and never helped me.” The woman’s parents had taken out a $13,000 loan to help her start her LuLaRoe business.

LuLaRoe changed this bonus structure in July 2017 to provide bonuses based solely on sales to consumers. In a LuLaRoe webinar, Ferguson claims, a LuLaRoe executive explained the change came about because of the “need to get away from being a pyramid scheme.”

LuLaRoe advertised that consultants could make “full-time pay” for “part-time work,” Ferguson alleges, and at recruitment events and calls, LuLaRoe executives claimed consultants would make “60 to 75 thousand dollars a year working 20 hours a week.”

In reality, Ferguson says, the pyramid scheme structure ensured that the primary business opportunity from joining LuLaRoe was through recruiting, not retail sales.

Richland resident Andrew Kirk and his wife, Kara, work as LuLaRoe consultants. Andrew defends the company and its business practices.

“If the company is making money from other people signing up to sell, then governments often get concerned that it’s called a pyramid scheme — that you’re only making money from other people trying to make money from other people trying to make money from other people,” explained Kirk. “The way you know it’s a legitimate business is if a company is making money from customers who are continually purchasing the product through retailers that choose to sign up and then are paid a bonus for recruiting other people to sign up who also sell that product and also make money — the same way that any fast-food franchise works.”

Kirk says his family has benefited incredibly from LuLaRoe.

“As my wife grew more successful, we were able to buy a larger house for our growing family and in many ways bless our family. And then as we signed up other people in the Tri-Cities, we have seen their lives do exactly the same. They’re able to go on more vacations with their family, they’re able to get larger homes for their family.”

Kirk believes that as Ferguson investigates further, he will see the company in a more positive light.

The attorney general’s office says it will seek the maximum penalties of $2,000 per violation as well as costs, fees and other relief. He will also seek an undetermined amount of restitution.

More than 3,500 Washingtonians have become Independent Fashion Consultants since January 2014. Less than 2,000 of those consultants are still active. Ferguson alleges the majority of Washington consultants reported less than $10,000 profits in total and nearly one-third of consultants reported losses.

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