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- Multi-level marketer LuLaRoe just settled a major pyramid scheme lawsuit.
- As part of its settlement with the state of Washington, LuLaRoe will have to shell out $4.75 million.
- But experts say that the settlement doesn’t go far enough.
- Visit the Business section of Insider for more stories.
LuLaRoe’s longstanding legal battle with the state of Washington has come to an end with a $4.75 million settlement. The office of Washington’s attorney general Bob Ferguson filed suit against LuLaRoe on January 23, 2019, naming the controversial multi-level marketing company, founders Mark Stidham and DeAnne Stidham, and their son Jordan Brady in the suit.
Prosecutors alleged that the business – which hawks colorful leggings and other garments through a network of independent retailers – was functioning as a pyramid scheme in the state of Washington. LuLaRoe’s business model of requiring participants to purchase thousands of dollars of inventory directly from the company left many in debt.
“This was the first case my office has filed under Washington’s anti-pyramid scheme law,” Ferguson told Insider in a statement. “This significant monetary payment shows how serious the defendants’ conduct was, and most importantly, gets money back into the pockets of people who were deceived by LuLaRoe.”
The Washington Anti-Pyramid Promotional Scheme Act passed the state legislature in 2006. The nearly identically-named Anti-Pyramid Promotional Scheme Act was introduced in Congress in 2018, although it didn’t pass. Critics have argued that the national bill was crafted with support from the direct sales lobby, and its passage would narrowly define pyramid schemes in order to make prosecuting MLMs more difficult.
Despite the multi-million dollar settlement, LuLaRoe and its founders will not have to admit to any wrongdoing. And according to Robert FitzPatrick, an author who leads anti-MLM group Pyramid Scheme Alert, it's not enough. Even as LuLaRoe critics celebrate the settlement, FitzPatrick said this latest development from Washington is an indication that the US has no effective mechanism to combat predatory companies that exploit individuals looking to enjoy the American Dream.
'People who aren't guilty don't settle'
Many former consultants across the United States say the company lured them into financial ruin, by selling moldy or paper-thin garments, failing to pay refunds or handle inventory issues, and generally running a business that allowed early adopters to rake in thousands of dollar through recruitment while leaving latecomers flat. In the years since it was founded in 2012, LuLaRoe enriched its founding family - the Stidham-Brady clan- financing a lifestyle filled with expensive cars, luxury ranch getaways, and other conspicuous displays of wealth.
When asked for comment, LuLaRoe directed Insider to its statement on the settlement.
"Given the expenses LuLaRoe incurred in defending this lawsuit, it made sense for LuLaRoe to pay the settlement we agreed upon," CEO Mark Stidham said in the statement. "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."
In many ways, the case was unprecedented. The state of Washington had never enforced the anti-pyramid scheme law, meaning that prosecutors didn't have case law to draw upon. Powerful multinational law firm DLA Piper - the former firm of Second Gentleman Doug Emhoff - represented LuLaRoe in the litigation.
Still, in regards to the prosecutor's goal of providing financial restitution to those affected by LuLaRoe, the case is a clear success. LuLaRoe will have to shell out $4.75 million. Of that money, $4 million will go toward a group of around 3,000 Washingtonians "deceived by LuLaRoe's business practices," according to Ferguson's office. The rest of the settlement "will partially reimburse the Attorney General's Office for the cost of investigating the conduct and bringing the lawsuit," according to a statement from Ferguson's office. Washingtonians who worked as LuLaRoe consultants will have to take no action in order to access that money.
Many former LuLaRoe consultants have flocked online to criticize the multi-level marketing company, and the news of the settlement was met with much enthusiasm on Facebook groups and message boards. Washington-based former consultants expressed gratitude for the attorney general's efforts on the case, and excitement that they might receive some money back.
"I feel like people who aren't guilty don't settle," one former consultant told Insider.
'The lies and the loss'
As the prevalence of MLMs in the US grows, so does anger towards them. The anti-MLM subreddit has accrued 686,000 members since 2011, all dedicated to stopping the companies "from draining your friends dry."
But FitzPatrick, whose books on MLM include "False Profits" and "Ponzinomics", says that the US has dropped the ball on protecting consumers from at both a federal and state level. He said that in past decades, multiple states might have teamed up with the Federal Trade Commission to go after a company like LuLaRoe. According to FitzPatrick, the mechanisms and will to prosecute MLMs have drained over the decades, with extensive erosion of the FTC's capabilities occurring during the presidential administrations of Ronald Reagan and George W. Bush. The political power of MLMs , with former President Donald Trump and ex-Education Secretary Betsy DeVos having extensive ties to such businesses.
In FitzPatrick's view, the Washington case hasn't brought about much lasting change aside from returning some money to affected LuLaRoe consultants. He said that rather than requiring an annual income disclosure, LuLaRoe and other multi-level marketing schemes ought to be required to provide more illuminating data.
"What if they disclosed fully - since we were founded, here's how many people joined and here's how many people made a net profit?" he said. "Just one sentence. But they would never disclose that."
FitzPatrick said that nowadays, many states have laws written with input from direct sales lobbyists, allowing multi-level marketing schemes to flourish.
"They left alone the most egregious element, the reason there's all this MLM controversy right now," FitzPatrick said. "It's not over leggings that got wet. It's over loss. It's over lies. The lies and the loss are dependent on, based upon, driven by the proposition itself. And the proposition is in plain sight. There it is. You don't make money at this unless you recruit. And the people you recruit can't make money unless they recruit. You're recruiting somebody into a demonstrably worthless business."