Women’s clothing company will pay $4.75 million to resolve pyramid suit
By: SSN Staff
Every Washington retailer who lost money under LuLaRoe’s pyramid structure will receive restitution.
—Bob Ferguson, Attorney General, Washington State
California-based direct seller LuLaRoe has settled with Washington State Attorney General Bob Ferguson to end a consumer protection lawsuit filed by the AG in January 2019. Ferguson accused LuLaRoe of violating the Washington Antipyramid Promotional Scheme Act and the Consumer Protection Act.
Ferguson’s lawsuit alleged that LuLaRoe’s bonus structure constituted an illegal pyramid scheme and that the company made deceptive income claims. The AG also targeted LuLaRoe’s repurchase policy.
In a Feb. 4 press release by the Washington State Attorney General’s Office, the office confirmed that “LuLaRoe will pay $4.75 million to resolve Ferguson’s consumer protection lawsuit.”
Specifically, the AG’s office reports that “Ferguson will provide $4 million to Washingtonians who were deceived by LuLaRoe’s business practices. The Attorney General’s Office estimates that approximately 3,000 Washingtonians will receive checks. Every Washington retailer who lost money under LuLaRoe’s pyramid structure will receive restitution. The remaining $750,000 will partially reimburse the Attorney General’s Office for the cost of investigating the conduct and bringing the lawsuit.”
LuLaRoe maintained its innocence in a Feb. 1 press release, emphasizing that none of the defendants in the lawsuit admitted liability or violation of any laws: “The defendants denied, and continue to deny, any wrongdoing, and the settlement releases any and all claims the State of Washington may have had against them.”
The company’s CEO, Mark Stidham, said in the release, “Given the expenses LuLaRoe incurred in defending this lawsuit, it made sense for LuLaRoe to pay the settlement we agreed upon. Even though we believed we would win the case eventually—whether at trial or on a subsequent appeal—the expense would be enormous, and the amount of time senior management would have had to devote to the litigation during the trial would have been a distraction from our business.”
DSA Sides with AG Fergusen
In its own statement, the Direct Selling Association (DSA) endorsed the legal action taken by Washington state and applauded the laws on which the lawsuit was based.
“The anti-pyramid statute articulated in the settlement is consistent with the legislation passed by Washington state in 2006 and supported by DSA. This action further demonstrates that a statute clearly distinguishing between pyramid schemes and legitimate direct selling companies is a vital tool for law enforcement. It also demonstrates the importance of truthful income and earnings claims by direct selling companies.”
The DSA statement goes on to advise that companies operating within the membership guidelines set by the Association would not be subject to these types of legal actions.
“LulaRoe is not and has never been a member of the DSA. If they had been, the company would have already had a similar inventory repurchase program as mandated under the settlement and consistent with the DSA Code of Ethics.”
Lessons for the Channel
Kevin Thompson, MLM attorney and founding partner at Thompson Burton PLLC, adds that “The settlement does not require LulaRoe to make any serious structural changes to its plan. When the FTC gets into settlements with companies, they typically require those companies to have serious retail sales requirements. That sort of obligation is not required here.”
When discussing lessons to be learned from this agreement, Thompson says, “The main takeaway that companies can learn is from the (settlement) section where the state requires LuLaRoe to prominently display the income disclosure document. Companies cannot put the IDS at the bottom of the screen; it must be on top. And as somebody enrolls in the business, they have to click through the income disclosure statement.”
He adds that LuLaRoe also will need to include a “more robust refund policy.”
According to AG Ferguson’s press release, LuLaRoe will be required to:
- Publish an income disclosure statement that accurately details retailer income potential
- Calculate bonuses based on retail sales, not on the amount of merchandise purchased by independent retailers
- Conduct random and targeted audits to determine whether sales are to genuine consumers, rather than an effort to manipulate the compensation system
- Allow new retailers to return all inventory for a full refund, including shipping costs, within 45 days of becoming a new retailer
- Return inventory not eligible for a refund to the retailer
- Prohibit certain types of deductions from refund requests
- Warn retailers when the inventory they are purchasing is seasonal or otherwise does not qualify for return and refund
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