LuLaRoe, a personal apparel company founded in 2013, grew meteorically before dropping in popularity in the past few years. The MLM (multilevel marketing company) then faced legal troubles, accused of being a pyramid scheme. After resolving its legal troubles, is LuLaRoe still in business?
Cofounders DeAnne and Mark Stidham started the company that became known for its uniquely patterned leggings, and eventually added other types of apparel.
Is LuLaRoe a pyramid scheme?
In a pyramid scheme, higher-level members must constantly recruit new members. Most of a pyramid scheme’s profits come from the addition of new recruits, rather than revenue from the sale of actual products or services. Many MLM companies, like LuLaRoe, face accusations of being a pyramid scheme but insist they're not a scam because they sell an actual product.
The people who profit from a pyramid scheme are those at the top—they typically earn bigger kickbacks as more members are added. The business model is unsustainable, however, as the lower-level members can only benefit if they recruit more, and the supply of new members isn't infinite. There’s speculation that SafeMoon could be a type of pyramid scheme. Another infamous one was Bernie Madoff's Ponzi scheme.
LuLaRoe was involved in a lawsuit that began in 2019. In the case, Washington State attorney general Bob Ferguson alleged that the company violated the Washington Antipyramid Promotional Scheme Act and the Consumer Protection Act.
LuLaRoe’s business model requires recruiting independent sales consultants who promote the clothing and sell it to customers, often via Facebook and other social media avenues.
LuLaRoe's lawsuit, explained
The lawsuit claimed that LuLaRoe executives made “unfair and deceptive misrepresentations” about its sales consultants' earning potential. One claim noted in the court proceedings stated that “so many of our retailers are making amazing money doing this part time” and “a huge number of people” sell $15,000 to $20,000 per month.
The appeal of earning full-time income while working just part-time drew many consultants to the business. However, when many wanted to get out of the business, they were left with unsold inventory. LuLaRoe had promised 90 percent refunds to consultants but didn’t follow through.
Other problems with the company’s practices included requiring new consultants to buy a minimum amount of product to earn rewards, compensating higher-ups handsomely while lower-level members lost money, and pressuring consultants to buy more as the best way to make more money.
In Feb. 2021, LuLaRoe agreed to pay $4.75 million to resolve the pyramid scheme lawsuit. Several other requirements are being imposed on the company to improve its transparency and fairness to consultants.