Washington state announced a lawsuit against direct-to-consumer business LuLaRoe, alleging that the company's structure constitutes a pyramid scheme, according to a press release from the Office of the Attorney General.
The lawsuit claims that the retailer's operations violate the Antipyramid Promotional Scheme Act and the Washington Consumer Protection Act.
LuLaRoe is a California-based, multi-level marketing company that sells apparel and leggings utilizing independent retailers who act as consultants. LuLaRoe did not immediately respond to Retail Dive's request for comment.
While direct-to-consumer brands are continuing to take larger portions of market share, LuLaRoe has a distinct story of skyrocketing revenues since its founding in 2013. The company works with thousands of "Independent Fashion Consultants" to sell its brightly-patterned apparel while recruiting additional sellers to the company. The brand claims to have helped its consultants earn $1 billion in 2017 alone.
Yet, the company has been mired in controversy over the past few years, with both consultants and consumers complaining of defective products. Thousands of sellers later claimed they were duped and coerced into purchasing items that they could not sell, according to a recent investigative report by Bloomberg Businessweek.
Attorney General Ferguson states that LuLuRoe's onboarding process requires incoming independent sellers to purchase up to $9,000 in products. Consultants are not able to pick their inventory, but are rather given a random assortment of apparel that they then must turnaround and sell.
"LuLaRoe tricked consumers into buying into its pyramid scheme with deceptive claims of high profits and refunds for unsold merchandise," said Attorney General Ferguson in a statement.
The court documents allege that consultants were incentivized to recruit new sellers and encourage them to purchase inventory because the bonus structure was based on the dollar amount of wholesale orders instead of sales to end-customers.
A pyramid scheme is defined as a company that gains its primary business from recruiting rather than product sales to consumers.