Embattled multi-level marketer to millennials LuLaRoe is facing new legal fights over its clothing products and payment processes.
A suit filed March 23 in a federal court in California alleges that LuLaRoe knowingly sold defective leggings and other apparel to the public. The law firm behind the suit is seeking class-action status for the complaint, whose lead plaintiffs are two LuLaRoe customers who started a Facebook Group that’s critical of the direct-sales company and now boasts 18,000 members.
Another suit, by a Utah payments processor called Complete Merchant Services (CMS), alleges that Corona, California-based LuLaRoe violated a contract that made CMS the exclusive supplier of credit and debit payments to LuLaRoe. CMS provided the point-of-sale system that LuLaRoe had blamed for wrongly collected sales taxes in states that didn’t charge it on clothing purchases.
LuLaRoe warned its more than 80,000 independent sales consultants last Friday that a judge had filed a preliminary injunction against LuLaRoe in the CMS case that prevents it from encouraging consultants to use other point-of-sale processors.
The timing of the new cases comes as LuLaRoe is facing heightened scrutiny over how it peddles its signature bright-colored leggings and other apparel at sales parties that are popular with millennial-aged women, among others. Current and former sales consultants have accused LuLaRoe of misleading them about the risks of buying inventory upfront and overstating the potential rewards of selling the company’s apparel line.
Thanks to its savvy use of social media, LuLaRoe has grown from an idea discussed at a kitchen table to one of the country’s largest multi-level marketers, or MLMs, like Amway and Herbalife where consultants are paid based on their retail sales and their ability to recruit new members to their sales teams.
In media interviews last year, CEO Mark Stidham said LuLaRoe and its associates were on track to generate $1 billion in sales last year, growing at an average rate of 25 percent for the previous 24 months. LuLaRoe has declined to comment on the company’s current sales.
Current and former LuLaRoe consultants have said earning a profit can be difficult given the required initial $5,000 minimum investment and the high amount of inventory that the company advises them to stock.
Company-distributed data provided to CBS MoneyWatch showed more than 70 percent, or 55,571 LuLaRoe representatives, sold less than $5,000 worth of retail goods in February. About 3,700, or less than 5 percent, reported more than $10,000 in sales. In addition, 6,579, or 8 percent, sold nothing and ordered nothing.
“I have represented consumers in class-action cases for about 15 years, and I don’t believe I have seen as many complaints about a consumer product as I have seen regarding LuLaRoe’s apparel,” said attorney Rosemary Rivas, a partner at Levi & Korshinsky, the law firm behind the lawsuit alleging poor product quality.
An invitation-only Facebook Group called “LuLaRoe Defective/Ripped/Torn Leggings and Clothes” has more than 18,000 members, up from 11,000 earlier this year. The page is administered by Julie Dean of Boston, who along with Suzanne Jones of Lafayette, California, are the lead plaintiffs in the defective products case. They each purchased leggings last year and found the quality to be unacceptable, they said in their lawsuit.
According to the court filing, Dean observed tiny holes develop throughout a pair of black LulaRoe leggings after only a few hours’ use. Another pair developed a hole so big that she could put her finger through it. One pair of leggings Jones acquired was so small that she couldn’t get them past her knees. Two other pairs developed holes in them when she pulled the leggings with her fingers.
Patrick Winget, LuLaRoe’s head of production, addressed the potential defects in a companywide email, saying the leggings may get holes “because we weaken the fibers to make them buttery soft. We have done all we can to fix them,” according to the court filing. CEO Mark Stidham, the husband of LuLaRoe founder DeAnne Stidham, advised consultants last year to resell damaged merchandise, the lawsuit alleges.
“Thousands of customers across the United States are now stuck with defective products because defendants will neither issue refunds or make exchanges for customers and instead steer customers to the fashion consultants to deal with defective or damaged products,” the court filing says. ‘Unfortunately ... defendants will not make refunds to fashion consultants for defective products and impose various barriers for exchanges. As a result, most fashion consultants will not take back defective products from customers.”
The Better Business Bureau has awarded LuLaRoe an “F” for what it describes as failing to address consumer complaints.
LuLaRoe denied the allegations in both cases. In a statement to CBS MoneyWatch regarding the defect lawsuit, the company said it “categorically rejects the fabricated and exaggerated claims of this suit in the strongest terms and believes it is completely without merit.”.
A separate class action is pending against the company regarding the errant sales taxes collected in states that don’t charge such levies on clothing purchases. LuLaRoe also has been sued for improperly using a design from a Hungarian artist on one of its leggings. The company has denied wrongdoing in both cases.
It wasn’t immediately clear when payments processor CMS filed its case against LuLaRoe. Christina Hinks, a former LuLaRoe consultant who has been critical of LuLaRoe’s business practices in her blog MommyGyver, said she learned of the case only after the company disclosed it.
Consultants can use other payment providers, although LuLaRoe may not “encourage or incentivize” any independent retailer to do so. LuLaRoe will no longer protect its more than 80,000 consultants from fraudulent claims after Feb. 17 because of the injunction. A spokesperson for CMS didn’t respond to requests for comment. LuLaRoe said it is confident it will prevail in the case.
“Independent Retailers are free to stay with their current platform or select a new platform, after assessing their individual needs moving forward,” the company said in a statement.