By: Brittany Locke
With the promise of working part-time, at home, for a full-time salary, many women (and men) known as “retailers” joined LuLaRoe, dollar signs flashing in their eyes. Founded in 2012 as a multi-level marketing company (“MLM”) selling women’s clothing, LuLaRoe reached 80,000 distributors by 2017. In 2016, the company, led by a husband-and-wife team, reported sales of approximately $1 billion. Anyone who had any presence on social media between 2014 and 2019 probably knew someone hawking colorful patterned “buttery soft” leggings, one of LuLaRoe’s signature items and their top seller.
Throughout this blog post, I take a legal look at both multi-level marketing companies and their close relation to pyramid schemes and Ponzi schemes. The prevalence of these types of companies is probably far more frequent than many realize, and one way to protect individuals from being a victim of MLM fraud is to educate.
MLMs are nothing new. Also known as direct marketing, or network marketing, this business structure is a “method of selling products directly to consumers using independent sales representatives.” Common companies that operate in this manner include Amway, Cutco, Tupperware, and Pampered Chef, among others. MLMs, in general, are not illegal. But, there is a fine line between an MLM and a pyramid scheme. A pyramid scheme is, to put it simply, a “scam.” The “harshest critics” are insistent there is “no difference” between an MLM and an illegal Ponzi scheme. However, according to the Federal Trade Commission (“FTC”), for an MLM to not be a pyramid scheme, it will “pay you based on your sales to retail customers, without having to recruit new distributors.” Pyramid schemes, instead, rely on “continuous recruitment of due-paying members to stay afloat.”
Even if not against the law, many MLMs are known for their “controversial business practices.” This has led to a handful of lawsuits. In Lemberg v. LuLaRoe, multiple plaintiffs from across the United States claimed that LuLaRoe misled its salespeople in what the complaint called a “pyramid scheme.” Seeking $1 billion, the suit alleged that LuLaRoe’s “primary goal” was not about selling “fashionable women’s leggings,” but instead to “profit from . . . [an] endless chain scheme to scores of unsuspecting women.” LuLaRoe claimed it would “vigorously defend” against the allegations, calling them “baseless, factually inaccurate, and misinformed.”
Washington state Attorney General Bob Ferguson sued the company in January 2019 and asserted that “LuLaRoe’s bonus structure and misrepresentations violated the Anti-Pyramid Promotional Scheme Act.” He further and boldly stated that “LuLaRoe tricked consumers into buying into its pyramid scheme with deceptive claims of high profits…” Ferguson’s lawsuit focused on the monthly bonuses consultants received from 2014 to mid-2017 as constituting a pyramid scheme. The bonus structure was changed in July 2017 to “provide bonuses based solely on sales to consumers.”
One LuLaRoe executive said the change was imperative because of the “need to get away from being a pyramid scheme.” In February 2021, LuLaRoe agreed to pay $4.75 million to resolve the consumer protection lawsuit, although they denied wrongdoing. This agreement prohibits the company from operating a pyramid scheme. It also required LuLaRoe to be more “transparent with retailers to avoid future deception.”
In a time of increasing lawsuits, exposé documentaries, and customer skepticism, where do LuLaRoe and other MLMs go from here? Despite a brief surge in popularity during the pandemic (which would make sense due to the lack of income for many and an increase in free time), it appears that the MLM industry is actually slowly dying out.
A December 2020 article by the former Dean of the School of Business at the College of New Jersey, William Keep, compared data from the Direct Marketing Association with all retail sales in the United States. What he found was that since 2002, the proportion of MLM sales have been in an “almost consistent decline.” MLM industry retail sales represent only 0.84% of retail sales in the United States, which puts the industry at its lowest mark since 1992. Based on these numbers, the future for MLM companies is bleak. Another worry for these companies is that the FTC is increasingly “cracking down” on the industry. From a $200 million fine against Herbalife in 2016 to $150 million against Advocare in 2020, the potential penalties are heavy. The FTC, along with 19 federal, state, and local law enforcement partners, also announced a nationwide task force against scams that “target consumers with fak promises of income and financial independence that have no basis in reality.” As it is for many MLMs, the verdict is out on LuLaRoe’s future, both in the legal sphere and public perception.
Brittany Locke is a second-year law student at Wake Forest University School of Law. Brittany graduated from the University of Georgia and spent five years working in corporate America before coming to Wake Forest. Upon graduating from law school, Brittany intends to practice labor and employment law.