How Defective Leggings Landed LuLaRoe in a Massive Lawsuit

How Defective Leggings Landed LuLaRoe in a Massive Lawsuit December 14, 2018

In the never-ending court battle between Providence Industries and LuLaRoe, declarations filed by Mark Stidham and owner of My Dyer Joseph Choi give insight to the root cause of their dispute. In 2017, quality issues of leggings led to millions of dollars of product destruction. The financial responsibility of the destroyed leggings came into conflict when Mark Stidham issued an ultimatum to My Dyer regarding how LLR would pay for the products.

In 2017, thousands of LLR customers reported that quality issues with leggings manufactured by LLR. Both retailers and consumers requested refunds for the damaged goods.

As a result of the poorly crafted leggings, a group called LuLaRoe Defective/Ripped/Torn Clothing formed. Over only a few months, the group size swelled to over 50,000. Women within the group shared photos of holes, rips, and complete butt blowouts of newly purchased leggings.

The story grew to become a national headline, and LLR was forced to deal with the problem. Customers wanted their money back. Retailers that purchased the leggings demanded refunds for receiving damaged products in newly acquired orders.

LLR scrambled to manage the negative press, handle the massive amounts of returns, and deal with the quality issues of the products. To rectify the situation, LLR changed their buyback policy for retailers. Retailers could return products for 100% refunds. Additionally, customers could return and receive refunds for their ripped leggings.

The legging fiasco catapulted LLR into a massive financial mess. During the time of the negative press, My Dyer was in the process of producing nearly 1 million pairs of leggings from Vietnam. Customers and retailers shared that defective products had production tags from Vietnam.

As a result, My Dyer and LLR worked to find new fabrics for the leggings. However, there were nearly 1 million pairs of leggings already ordered and manufactured that were no longer sellable.

According to declarations by former LLR executive Patrick Winget and Providence Industries, LLR ordered the destruction of more than $11 million in defective products. Through negotiations between the two parties, they mutually agreed to a reduced price of $8 million for the products.

Patrick Winget’s declaration stated that Mark Stidham understood the agreement and approved the destruction of the leggings.

Emails provided as exhibits in the disclosures show that LLR approved the destruction of close to 1 million pairs of leggings.

While My Dyer and Winget worked through the clothing quality issues, Mark Stidham decided to make changes to the buyback policies and bonus structure.

At the same time that LLR faced quality issues with clothing, they also faced accusations from retailers that they were running a pyramid scheme. Numerous lawsuits filed against the company merged into a massive $1 billion class-action suit alleging the company was requiring retailers to make huge start-up purchases.

In addition to substantial start-up costs, retailers alleged they were required to continue to make sizeable monthly inventory purchases despite not being able to sell the products. Retailers claimed that LLR provided incentives to buy large quantities of wholesale products to earn bonus commissions.

As the market swelled to more than 80,000 retailers, the retailers found their garages and homes packed with goods they could not move.

During this time, Mark and DeAnne Stidham denied the company was a pyramid scheme. Even though the Stidham’s denied the allegations, LLR changed the bonus structure shortly after the filing of the class-action lawsuit. Under the new bonus structure, retailers no longer received any bonus based on the purchase of wholesale goods.

Top retailers, like Tiffany Ivanovsy, say the change dramatically changed the income and bonuses of her business and the retailers beneath her. Retailers were unable to sell products to consumers due to quality complaints, lack of inventory, and oversaturation of products in the market.

When retailers stopped receiving bonus commission for wholesale purchases, the money stopped rolling in.  Within months more than 50% of the retailers exited the company. Due to the 100% buyback program set up by Mark Stidham, LLR was forced to honor returns from retailers.

The returns piled in and took months to process according to Winget. Additionally, retailers made fewer wholesale purchases to LLR which slashed their monthly revenue from $250 million to $100 million within months.

Even though orders were down, the Stidham’s continued to order massive amounts of products. By the winter of 2017, LLR owed My Dyer millions of dollars for products.

My Dyer attempted to collect the debt from Stidham over several months. By August 2018, the two companies came to an impasse when Mark Stidham gave My Dyer an ultimatum.

Either My Dyer allowed LLR to pay them back using a secured note throughout two years and take a loss on the destroyed leggings or LLR discontinues their sourcing agreement with My Dyer and LLR settles the debt under a normal course of business.

In the first agreement, LLR would pay My Dyer $38,854,005. The second scenario would net My Dyer $49,027,090.00. In laymen terms, LLR wanted My Dyer to take an $11 million loss. If My Dyer refused to accept the loss, LLR threatened to discontinue their sourcing agreement.

The two sides were unable to come to a compromise. Declarations filed by multiple people connected to the lawsuit all say Mark Stidham told My Dyer that he had no intention of ever paying off the debt. In statements submitted by Mark, he flatly denies those allegations.

As a result of Mark Stidham’s failure to pay, My Dyer sued LLR for nearly $49 million in products, services, and breach of contract.

After My Dyer filed their lawsuit, they requested an emergency seizure of assets because they feared Mark Stidham was a flight risk. However, last week the judge in the case determined he could not rule on the writ of agreement application and denied the request.

With millions of dollars on the line, the two sides were told to try to work out their differences privately. However, the dispute over the destroyed leggings has been on-going since Spring 2017 and appears unlikely to resolve outside of mediation or the court.

According to multiple reports on the health of LLR, the company appears to be on the brink of financial collapse. Hundreds of retailers are still waiting for LLR to pay them back for their returned goods. Additionally, multiple suppliers say the company owes them money.

The fate of the company will play out over the coming months. When the company will ultimately file for bankruptcy, remains to be seen.

*This article sourced from multiple declarations filed on behalf of a lawsuit against LuLaroe in Riverside Superior Courts

 

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